another $$$ ?

Discussion in 'Homesteading Questions' started by marvella, Jul 16, 2006.

  1. marvella

    marvella Well-Known Member

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    here's the what the bank offered me for a construction loan.

    my current mortgage is 5 1/2% fixed 20 year.

    i can either combine the existing mortgage with a construction loan and finance it at more or less 7%, for 30 years depending on where the rate is at the time.

    or i can take a second mortgage at more or less 7% for 30 years.

    the kicker is... all of the loans are balloon loans, due every 5 years. so, i may lose the 5 1/2% when the balloon on the first comes due in 2 1/2 years. it may be that the rate is higher or lower at the time. of course if it is lower i can combine all of them at the lower rate.

    in the meantime, what should i do? the payment comes out to within a few dollars of each other, no matter which way i do it. either i make one payment, or two.

    TIA!! y'all.
     
  2. CatsPaw

    CatsPaw Who...me?

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    Take the second. There's no sense in refinancing the primary amount at 7% and kicking it out to 30 yrs along with the second. That way you'll have part at 5 1/2% and part at 7%. Just make sure the second is tax deductible. It may actually need to be a home equity loan.

    Since they're all balloons you have to takes your chances one way or another on one loan or two.

    Whatever you do, make sure you trust who you're dealing with. If things aren't the way you thought they were supposed to be at closing, don't sign. Mortgage scams are getting more common every day. The bad thing is, what they do isn't illegal. It's all the hokus pokus (like "Hey, we can roll that right into the mortgage. It will only add a few dollars to the payment" and the ever popular "No upfront costs!"....LUV that one!) My brother is a mortgage banker and attends everyone of their closings (guaranteed no one else at the closing knows much about the actual mortgage except the mortgage company.)
     

  3. marvella

    marvella Well-Known Member

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    thank you. i am leaning in that direction. money makes me nervous. :help: :)
     
  4. Mike in Ohio

    Mike in Ohio Well-Known Member

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    Why not explore more options.....what sort of rate would you get if you refinanced to 20 years combined?

    Personally I would tend towards going with the fixed. If you have a balloon on the current mortgage in 2.5 years then you have a fair amount of interest rate risk. Interest rates are not going down and it is likely they are going up higher than 7%.

    Based on your description it sounds more like an adjustable rate mortgage, not a balloon. With a balloon you would have to pay it off in 5 years, not readjust the rate.

    As usual, just my 2 cents.

    Mike
     
  5. goatlady

    goatlady Well-Known Member Supporter

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    No, no, MIke - with 5 year balloons it's a local bank in-house loan and they want to roll-over the balance due at the higher rates they know will be in place aver 5 years. The rate IS FIXED for the 5 year period. Adjustable rate mortages can have the interest rate "adjusted" anytime during the loan time period based on the Prime rates at the Fed. Reserve Banks - just like credit carde rates go up periodically based on that same prime rate.
     
  6. Mike in Ohio

    Mike in Ohio Well-Known Member

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    Going to have to disagree Goatlady. You can have ARMS that adjust every 5 years over a 30 year term. (5/30 ARM). You could have one with a cap as well (for example, maximum 10 point increase over life of loan). There are all sorts of ARMs with all sorts of terms.

    If it truly is a 5 year balloon loan that the bank reissues at it's descretion I would be running from it AND the bank. Talk about putting yourself at the mercy of the bank.

    I would consider a 5 year balloon (or something similar) in situations where:

    a) I don't have any alternative but really really really want the property;
    b) It is an income producing property with proven cash flow;
    c) Interest rates are falling (not the case these days);
    d) I plan on reselling the property in no more than 3.5 years (property is considered a non-liquid investment and you want to allow time to sell it).

    Mike
     
  7. marvella

    marvella Well-Known Member

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    well, this is interesting.:)

    goatlady is right in her description of these loans.

    i'm not sure why this bank does businesss like this. all their mortgage loans are like this. i am assuming it is because they are the hometown, locally owned bank, that has been in business for many years. they are struggling to compete and are assessing fees, or collecting points, where they can? the bank is in an appalachian town, pop. +/_ 8,000. it's so big, it's the county seat.:)

    mike, i don't know what you mean by re-issues at their discretion. every 5 years, the ballon comes due, and i go in to refinance. last time, the interest rates were really in my favor. who knows about next time. i am free to go elsewhere at any time. i've had an account there for 30 years and like to do business locally where i can. they are my neighbors.
     
  8. rambler

    rambler Well-Known Member Supporter

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    If you truely have five year ballon loans with no long-term structure to the loan, that _is_ scary.

    At the end of 5 years, they can ask you to pay up or they keep the deed. Period.

    It is up to you to find a way to pay off the total balance owed.

    Should you run into job layoff, medical issues, etc., no one else will loan to you, & they will own your property. At the least, you will have a very short amount of time to get a loan from somewhere, at whatever rate you can find - you will hold no cards at all, & can be raked over for much more that current rates.....

    I really hope you have something different than a 5 year ballon loan as you are stating. You carry very much risk upon yourself if you do. That would be scarry, couldn't sleep at night.

    --->Paul
     
  9. Mike in Ohio

    Mike in Ohio Well-Known Member

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    Rambler gets what I'm saying. I don't care if it is a local bank or not. Relying on the goodwill of the local bank for renewing (multiple times over the years)a 5 year balloon loan is an awful lot of risk on your part. That is more risky than an ARM.

    As usual, just my 2 cents.

    Mike
     
  10. rannie

    rannie Well-Known Member

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    I was a loan officer and a 5 year ballon is very high risk for consumer, the small home town bank can decide that mortgages are not what they want to do our home town bank did this and when different peoples loan s came to term there were some in bad situations and at the mercy of mortgage companies which charge points and lots of other fees. the bank does not have to renew / reloan the contract it ends in 5 years you have to go through the whole loan process and go through all the sell pitches of let's add in those credit card balances and so on. Banks are a business just like any other business they are out to make money. with the same token banks are out to lend money to make money not go into realestate. i would crunch all the numbers and make sure before I made a decision. And a loan officer can crunch the numbers to look good but what happens is you can end up paying a lfe time on a 20 yr loan. I'd talk to a cpa good luck rannie
     
  11. goatlady

    goatlady Well-Known Member Supporter

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    "with 5 year balloons it's a local bank in-house loan" That's how banks deal with "nonconventional" home loans, MIke especially mobiles/modulars with no foundations and/or additions! Believe me, sweetie, I would really LOVE to have a conventional 20 year mtg but no way can I get one of the property I wanted and finally bought. It is scary, but I can look elsewhere at roll-over time but I only have 2 other financing institution choices in my area so I take the best of the 3 and keep on trucking with my homestead.
     
  12. bare

    bare Head Muderator

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    I think it would help to remember the whole situation that marvella is dealing with.

    As I understand it from previous posts, she has a piece of property with an existing home which is under contract for 20 years at 5.5%. She wants to build another home on the property and is looking at different financing angles.

    I think she should have the property surveyed and split away from the existing home keeping the original loan. Then apply for a new loan on the newly split off piece and if necessary take out a new mortgage at 7% for 30 years.

    My line of reasoning is that if anything goes wrong down the line, she still has the original home to live in.

    If everything works out, she could pay out the original 20 year mortgage then turn around and put what she was paying on that to the 30 year mortgage and try to reduce it to 20 years or whatever.
     
  13. Michael W. Smith

    Michael W. Smith Well-Known Member

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    It makes NO sense to "cash in" your 5 1/2% mortgage interest rate to go up to 7%!!!!!!!!!

    I would also be cautious about taking out a "balloon" loan. You need to shop around for a fixed rate mortgage. 3, 5, or even 10 years from now I would almost guarantee that interest rates will be higher.

    I would either find a fixed rate loan, or just start saving for the construction and do things as you get the money. I've known several people who build the basement first and lived in it for several years before adding on the other floor!!
     
  14. mightybooboo

    mightybooboo Well-Known Member

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    Yep,the very same loans they are pushing here.Must say I wasnt interested in that!

    BooBoo
     
  15. Qwispea

    Qwispea Well-Known Member

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    I'd like to ask how a 5-year balloon works on a 20-year mortgage? Is the mortgage guaranteed for 20 years ..but the rate gets adjusted every 5 years? Because to me ..that sounds like an ARM!

    Typically ..under a traditional balloon-type mortgage ..the balance is due when the balloon is due! And the bank is not under obligation to remortgage.


    What am I missing? Is your bank obligated to refinance your mortgage when the balloon is due? Or could something awful happen to your credit and they refuse to refinance? Sounds very risky to me.

    I think I'd opt for the sure 7% for 30 years ..and make extra payments on the principal if possible. That way ..your rate would never increase above 7% ..you'll never have to refinance if you didn't want to ..and thus you'd never be able to lose your home solely because you might not be able to refinance at 'balloon' time. Plus ..you could still pay it off in 20 years or less if you so desire by making extra payments on principle.
    Later ..if the rates did ever go down ..you could refinance then!
     
  16. rambler

    rambler Well-Known Member Supporter

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    If I am re-reading your original message correctly _this_ time,

    ( ;) )

    you now have a 20 year fixed morgage at 5.5% interest. That is truely a fixed rate, no ballon stuff?????

    KEEP THAT. Do nothing that will get rid of that good moragage. Rates are going up, inflation is coming, there is unrest. We will see 10-12% interest again.

    I would do anything I had to, including not building more, to keep that fixed rate loan.

    The bank would _dearly_ love to get you to cash it in on something else. They _dearly_ would.

    You on the other hand want to keep it! :)

    I misread your message perhaps. You talk about 20 year & 30 year loans. But then you said they all were actually 5 year balloons, which kinda makes it all fuzzy. You can't really have a 30 year morgage that is due every 5 years - either it is a 5 year, or 30 year deal.

    Anyhow, a fixed rate 20 year 5.5% is gold to you right now, keep that if that is what you have.

    --->Paul
     
  17. marvella

    marvella Well-Known Member

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    now i am really confused. if i understood this stuff i wouldn't have asked the question. :baby04:

    more history- as i said, this is an impoverished area. i went to the next county over, (where i work) to the farm credit services. this place is registered as a farm for tax purposes, under the greenbelt program. in short, a farm.

    farm credit has a good reputation, and i have good credit. they turned me down because 1. the property is in this impoverished area that they don;t want anything to do with. 2. i am currently in a double wide, which my daughter will be renting after i build. they would not loan money on anything with wheeled housing on it. period.

    my community and the mobile home are what make this loan "undesirable" to most conventional lenders.

    you should have seem the hassle when i mortgaged a hundred year old farm house, with a woodstove, and gravity flow water supply. i got turned down because it had a tin roof. i got turned down because it was on a gravel road. i got turned down because i also had propane for heat. i can't remember all the excuses that were used to NOT lend me money, all having to do with living in a remote, very rural community.

    the local bank took it. in short, they will lend money to local people, on local land, that others won't lend on.

    as you probably know, most of us who live in the country don't neccesarily live in conventional housing.

    bare- splitting it up is way too much of a hassle.... this shouldn't be this complicated.... if i fall down and get hurt, so be it. i am well-insured. won't be the first time i've been left with nothing. i'm good at making do. :)
     
  18. Qwispea

    Qwispea Well-Known Member

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    Can't help but LOVE that kind of attitude. Bravo!! :) :) :)
     
  19. CatsPaw

    CatsPaw Who...me?

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    ARMs have a fixed term. 15,20,30, whatever. Their interest rate is adjusted at a period predetermined at the beginning of the contract. Balloons are usually shorter terms loans (as in 5 years). However, the mortgage payment on a balloon is based on a long term, such as 20 or 30 years. Otherwise you could never afford the payment on a 5 year note. They're basically saying we'll lend you the money at a normal rate but we'll only do it for a couple of years, then you have to go find a real mortgage.

    You may want to just start buying materials as you can afford them and store them. When you have enough to do a weathered in shell, build it. then finish off the inside as you can afford it. No extra mortgage needed. The amount of a monthly mortgage payment can buy alot of materials every month.

    Of course, you can't pull a blanding and tear down the original structure enough to destroy the value of the house relative to the mortgage while you're doing it.
     
  20. rambler

    rambler Well-Known Member Supporter

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    Yea, 'unconventional' housing isn't even allowed in my county, only if you are in a permitted park or used to be if you were a farm worker but that is closing up too. And, I'm in a rural county. But anyhow.

    The 5 year ballon loans are a real risk on your part. If you're fine with it, guess you didn't need to ask us what you need. :) :) Not totally sure if you do have a locked in 7% loan, or a locked in 5 year balloon loan? I would sharpen pencils & work how I could to keep a 7% locked in 20 year loan in the current business climate. If it is a 7% 5 year balloon loan, then it's not such a big difference I guess.

    I'd sleep a lot easier just putting the loan amount into building materials every month, as someone else mentioned. Same payment, all yours, not 9/10th intrest to the bank. Might not fit your time schedule and so on, so not the best advise for all folks - I know.

    We are in a business climate where those types of short-term, high risk loans are really going be a bad deal soon, and will hurt. Both you & the bank, and as the bank gets hurt, they will cut you off. Which of course - hurts you. Was maybe a good deal for you back when the intrest rates were going lower, or flat. But now that they are rising - be very, very careful.

    Just my opinion of course, everybody is different. :)

    --->Paul