Loan Question

[whodunit]

This in kind of a continuation of my previous thread about using my retirement to buy a house.

Opinions Please

We are looking at a 1000 square foot home with two bedrooms and one bathroom. It needs work but is livable as is. It is in town on a large lot. They are asking $45,000.

I am out of work right now, so our goal was to move and have a house free and clear to keep our cost of living low in case all I can get are minimum wage , pert-time jobs.

Initially we thought we might be able to get the sellers to lower the price to where we could purchase the home for cash, but the seller supposedly does not "need" the money (this is likely true, since the family owns many rentals, probably outright).

The real estate agent suggested we offer the following:

$22,500 down
6.5% interest for 10 years
Balloon payment in three years

According to him, our payment on the house would be $255 a month, which is less than half what we would pay in rent for the same sized house.

If we did this, I would have $10,400 left to supplement income if needed and to use to fix up the home. By April 2009, I would likely have another $9000 in tax return money.

I don't know much about this sort of thing. What do you all think?

[MELOC]

i'd say the interest rate seems a bit high considering the sizable downpayment and the balloon payment.

[whodunit]

Originally Posted by MELOC

i'd say the interest rate seems a bit high considering the sizable downpayment and the balloon payment.

One thing I had meant to add was that I am currently unemployed, so I doubt any bank would give me a loan despite my excellent credit rating.

What is the current interest rate? What purpose does the balloon payment serve when it's a 10 year loan?

[whodunit]

* bump *

[plowjockey]

I vote "pass".

No, surprise, your real-estate agent did not inform you that, this payment does not include home owner's insurance or property taxes. With these costs, the payment could be a lot closer to renting.

What's wrong with renting? Sometime renting is money well spent. Yoiu get a good job in another city, you load up the truck and go. The furnace costs $3000 to fix. Somebody else write the repair check.

You mentioned in the other thread, you said that it was difficult finding a job and that you thought you might have to live off credit? Not a situation to be considering home ownership, IMO.

If you take the tax hit and cash in the retirement, spend the proceeds on the house and have a very major family expense, then what?

If it were me (and is has been), I'd circle the wagons and hang on to the money.

Good luck with whatever you choose.

[Alice In TX/MO]

Never, EVER, sign a balloon note. EVER! Never. No. Nietz. Nada. Nein.

Don't do it.

It will bite you in the fanny.

Did I say NO?

[MELOC]

i see your point about the loan and being unemployed. i think i would be more at ease (personally if it were me) in spending every dime of the money if it would pay off the house entirely, but i wouldn't want to spread myself thin gambling on employment and having a mortgage, impending balloon payment, and like another said taxes and insurance...not to mention emergencies and repairs. like another poster said, a balloon payment is a bad idea. i'm just throwing out numbers, but i would guess it would cost you at least $400 per month to live in a house priced like the one you describe...without the mortgage payment...that being in taxes, insurance and utilities.

i was never keen on the idea of renting, but maybe it isn't such a bad idea.

[whodunit]

I later noticed the agent didn't include taxes and insurance, but this area has very low taxes and insurance is low, too. I can't guess on the taxes, but I seem to remember my insurance on my last house being in the $300 a year range.

I still don't understand the purpose of a balloon payment at the three year mark on a 10 year loan.

I guess our thinking was that if we limited our rent/mortgage and paid off our remaining debt, we would have just monthly living expenses that would be easier to cover with part-time work, if that's all I could get. Additionally, we felt that using my retirement for living expenses wouldn't justify taking the loss in retirement benefits. At least if we owned a house by the time I retire, then we will have some benefit.

The problem whether we are here in CA or in Idaho is that I likely won't be able to make enough to live unless I find work in my field. I have sincerely tried for over 9 months with no luck.

As near as I can figure, it takes $2800 a month to squeak by here and $1900 a month in Idaho. If I am forced to live off retirement money then it will last longer in Idaho.

[Tom in TN]

Who,

I'm just guessing here, but I think that maybe the term "ten-year loan" is just the basis for determining what the monthly payment would be at your agreed to interest rate to pay off the loan in ten years. But in this case, the lender would require you to pay this amount for three years, and then you'd have to pay the full amount of the remaining debt in the form of a one-time balloon payment.

I've never been in your place, so I can't say for sure what I'd do, but this whole plan seems really scary to me.

I'm 64 years old and I've never been unemployed since I was 15 years old. I've done some jobs I didn't like. I've done some that I knew were only temporary until I found a better job. But I've never been unemployed. I'd guess that you could find a job tomorrow if you tried. Retail stores are always crying for help. Temporary agencies can never find enough people to fill all of their jobs. Construction / lawn care / pest control always need help. Hospitals and nursing homes always need help. Two or three part-time, night-time, weekend jobs isn't an ideal situation, but it sure beats unemployment.

Not trying to be a smart-alec. Like I said, I've never been in your shoes.

Good luck.

Tom in TN

[whodunit]

Originally Posted by Tom in TN

Who,

I'm just guessing here, but I think that maybe the term "ten-year loan" is just the basis for determining what the monthly payment would be at your agreed to interest rate to pay off the loan in ten years. But in this case, the lender would require you to pay this amount for three years, and then you'd have to pay the full amount of the remaining debt in the form of a one-time balloon payment.

I've never been in your place, so I can't say for sure what I'd do, but this whole plan seems really scary to me.

I'm 64 years old and I've never been unemployed since I was 15 years old. I've done some jobs I didn't like. I've done some that I knew were only temporary until I found a better job. But I've never been unemployed. I'd guess that you could find a job tomorrow if you tried. Retail stores are always crying for help. Temporary agencies can never find enough people to fill all of their jobs. Construction / lawn care / pest control always need help. Hospitals and nursing homes always need help. Two or three part-time, night-time, weekend jobs isn't an ideal situation, but it sure beats unemployment.

Not trying to be a smart-alec. Like I said, I've never been in your shoes.

Good luck.

Tom in TN

I appreciate your thoughts and I don't take them as you being a smart-alec.

At the risk of sounding like a whiner...

I'm no stranger to work; I probably averaged 52 weeks throughout 2007.

Unfortunately in this area of California (both inside and outside of my field) there isn't much work. Every week in the local newspaper there are maybe 3-4 jobs listed. Most of those are in the $10 an hour range and they are part-time. It also appears they want anyone they hire to be available at all times, so I would think that would make coordinating several part-time jobs a nightmare.

Unemployment is frustrating because I have to report anything I earn. They just deduct it from the check, so I'm no further ahead if I work. I make over $11 an hour not working, but need about $18 an hour (based on a 40 hour week) to squeak by.

I chose to draw unemployment and concentrate finding work in my field, since had I been working I would not be able to do what is neccessary to get hired in my field. My field involves multiple testing, interviews, and background checks, etc. If I had to do all that and work around a part-time job, I would have gotten nowhere fast. I never anticipated being unemployed this long.

The more I think about it, I also think the plan sounds scary. If I could buy the house outright I would do it in a minute. Buying it without gainful employment is probably risky.

[rambler]

Originally Posted by whodunit

The real estate agent suggested we offer the following:

$22,500 down
6.5% interest for 10 years
Balloon payment in three years

According to him, our payment on the house would be $255 a month, which is less than half what we would pay in rent for the same sized house.

Ok, I got up at 5:30am Monday, was combining corn & so on, just pulled 4 wagons home at 2:45am Tuesday - so _don't_ take anything I'm saying to the bank.......

You know how loans work - you pay a lot of interest first, with only a little tiny bit of principle. Right?

So they are offering you such a deal...... Not.

They are offering you to pay them 3 years worth of a 10 year loan. (which is mostly all interest, very little principle - you would have little equity in the property yet.) Then you need to come up with the full amount of the remainder of the loan - at the end of 3 years.

The '10 year loan' is only to set up the payments; you do not have a 10 year loan. You have a 3 year loan on which you pay mega interest, and then you need to come up with almost all of the principle at the end of 3 years.

The assumption is that either you have a job in 3 years & you can swing getting a real loan for your property to pay them off fully. Or, you default on the loan, they get the property back, and you have made a lot of interest payments for nothing.

Seems like a real poor deal to me. But, in your situation, you will only get real poor deals. I'm not sure how you expect to buy a property when you don't have the cash and you don't have a job.

That just doesn't work. Unless you have a sugar daddy to give you a property, you are going to have to get a job & earn it. No free lunches. You need to rent for now, & get your priorities together.

--->Paul

[Callieslamb]

Do you have enough funds in the retirement acct to pay the home loan and the taxes on the early withdrawal?

I would leave my area of the country if there weren't enough jobs. Take some of your money and come to TN and buy that same house for $30K. I don't think I would buy a house in an area where I wasn't sure I could get adequate employment in the immediate future - as in tomorrow.

[mnn2501]

Originally Posted by whodunit

I still don't understand the purpose of a balloon payment at the three year mark on a 10 year loan.

.

If you don't understand it, then stay away from it.

the seller wants you to pay at a 10 year loan amount, but he wants out of the loan at the 3 year mark. You will have to come up with the remainder of the money - meaning if you don't have the cash you must borrow it from someplace else or lose the house -- this ain;t no deal, especially considering you don't have a job and banks are tightening up on who they will loan to.

Taxes you can find out from the county and insurance you can get on the phone with a couple insurance agents

I agree with the others, not a good deal at all -- i'd walk away from the 'deal'.

Get a job first, then look for a house, you'll get a much better deal.

[DAVID In Wisconsin]

How in the world are you going to make a payment in the $20,000 range when you aren't even sure about a job? Have you talked to an accountant about your $9000 tax refund? Your refund might not be as high considering you'll owe a huge tax bill due to taxes on the IRA.

As a seller, I think the 6.5% interest is about right or possibly even higher.. I've owner financed in the past. Owner financing usually gets premium interest because of the higher risks involved.

I believe that you're headed for trouble but I wish you the best!

[MELOC]

my point about the interest rate was that with a 50% downpayment and the great risk of a balloon payment, 6.5% interest is not very much incentive to take the loan. it sounds like the seller wants his cake...yada yada.