Posted by Tim (Atlanta) on January 28, 1999 at 13:02:57:
What Carleton is counting on is that :
You bought the house at a price that is much less than the appraised value OR
The house will appreciate and you will pay off some of the debt in the 5 year time span.
This means that at the end of 5 years, you will have paid down the first mortgage as well as the second mortgage by an amount sufficient to refinance the entire outstanding balance of both loans. This can and certainly does work, but you must be careful how you structure the deal. Don’t amortize the second over 30 years, you will accumulate no equity.
Pay off the sellers required down payment and any existing mortgages with the new first mortgage
Give the seller a 2nd mortgage for his remaining equity usually for five years.
If you do this you will make a profit on paper
for 5 yrs.
However: How does one refinance the entire debt (quoting Sheets) at the end of five years in order to pay off the 2nd mortgage, when the house may have a high loan-to-value ratio? Is there a way out of this without using your own money? Is there a better way to buy property?
Well the point is this: Supposing you buy no money down and properties are going up at 5% a year (which is the figure he quotes). That means if you bought a $100,000 home that in 5 years it should be worth $125,000 which would give you owing 80% of what it’s worth (called loan to value, or LTV). Most lenders are comfortable with 80% LTV if you have good credit and income.
Personally I say take no chances. Aim for 7 year balloon.