Purchase Money Mortgage Balance Calculator
This calculator will help you figure out what the balance on your loan will be after a specific term. First enter the mortgage loan amount, annual interest rate, and your desired monthly payment. Finish up by providing a number of years before the loan is payable in full.
Click on “Calculate Balance” and you’ll see what balance will remain after the number of years you specified. For a printable schedule of payments, press “Create Amortization Schedule.”
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Today's Mortgage Rates
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Selling a Home: Seller Financing and Purchase Money Mortgages
One of the most difficult factors in purchasing a new home is deciding how you want to pay off the price of the house. The mortgage that you choose will affect you for as long as thirty years after you take out a loan. There are so many different types of mortgages and mortgage rates to choose from that it is important to find the one that is right for you. When reviewing different mortgages, consider your personal financial situation and where you think your finances will be in the future, towards the end of your loan term. One type of mortgage that often goes overlooked is called a purchase money mortgaging, or seller financing.
What is a purchase money mortgage?
A purchase money mortgage is a type of mortgage where the seller of the house issues a mortgage to the buyer. In this case, the seller becomes the lender, and the buyer agrees to pay them back. The seller goes to the bank and takes out a second loan note or finances all or a portion of the money that it would take to get a mortgage out for his home. The buyer then agrees to pay the money back in full to the seller as a type of mortgage. Both the buyer and the seller come to an agreement on the terms of this mortgage and the buyer signs a promissory note, agreeing to make the monthly payments.
A purchase money mortgage generally only lasts a very short-term and are paid off with an agreed upon interest rate. For example, a purchase money mortgage may have a 30-year term, but with a balloon payment due after the first five years. This is done to make sure that the seller gets paid in full as soon as possible. In this example, the buyer will have set payments on the purchase money mortgage that are due to the seller for the first five years. After this initial five-year term, the buyer must then decide if they are now in a financial situation to pay the seller the remaining balance in full or if they are going to finance the balance. So ideally after this initial five-year term, the seller will be paid back in full, whether by the buyer or through a mortgage that the buyer chooses to take out from the bank.
The seller is in the best position to offer this type of mortgage when they have completely paid off their own original mortgage. When the house is fully paid off and the seller is free and clear, they are able to finance a brand new loan, rather than having to take out a second loan. Having their mortgage paid off in advance also prevents the seller from having to get the new mortgage arrangement approved by their current lender. In a tight credit market, lenders are rarely willing to agree to such a risky investment and, therefore, will most likely turn down the entire arrangement.
Benefits of a Purchase Money Mortgage
The major advantage of taking out a purchase money mortgage is that a buyer who normally would not be able to get a loan is able to come to an agreement with the seller and finance their new home that way. If the buyer has a low credit score or a lot of other debts, they may be unable to get approved for a loan by another lender, such as a bank. This type of mortgage allows for this type of buyer to still continue to purchase a new house. A purchase money mortgage is structured similarly to a balloon mortgage, in that the buyer is able to pay a set monthly payment and interest rate for the first five-year term and then has the choice to pay the loan off or refinance the balance. This arrangement is beneficial to a buyer who was unable to take out a loan the first time. The buyer can use these first five years with their purchase money mortgage to build up credit and increase their income. So that when the initial five-year term is up, they are in a better place to finance the loan with a lender.
Advantages to the Buyer
Agreeing to a purchase money mortgage can also have some advantages for the seller. A seller who is having trouble selling their house on the current market may be looking for something to catch a buyers attention. This type of mortgage is not offered very often, so when it is, someone with a low credit score will take advantage of this. Offering a purchase money mortgage may make it easier for the seller to find a buyer interested in the house.
Advantages to the Seller
Another advantage to the seller of a purchase money mortgage is that since the seller is putting their credit at risk by financing the money in place of the buyer, they may be in a position to demand the full listing price of the house or even higher. Since the seller is doing the buyer somewhat of a favor, they could ask for more money for the house or agree to a higher interest rate.
One advantage to the seller that could improve their financial situation is the fact that since they are not getting a lump sum at the closing of the house, they will be receiving payments from the buyer. In the agreement, the buyer agrees to make monthly payments, including interest, to the seller as if they were the bank lending out a mortgage. Since the seller is now receiving these monthly payments, their total monthly income is increased, and therefore their own standard of living is increasing as well.
Why choose a Purchase Money Mortgage?
A purchase money mortgage has some great advantages for both the buyer and the seller. For one, it could help to improve the personal financial situation of both people involved.
Although it is a very risky situation for the seller to get themselves into, it does come with a lot of advantages. The seller increases their monthly income, by agreeing to receive monthly mortgage payments from the buyer, may be able to pay less taxes on an instalment sale, and would not have to pay for repairs on the house before the buyer moves in. In a purchase money mortgage agreement, the house is sold "as is", so all of the additional repair costs are eliminated.
The buyer may choose to take out a purchase money mortgage if they are currently in a rocky financial state. With an unstable financial situation, the buyer may not be approved for a traditional loan through a bank. This mortgage gives the buyer a chance to still purchase the house. It also gives the buyer a chance to improve their financial situation before having to take out a traditional loan.
A purchase money mortgage is an unusual type of mortgage and is not offered often by sellers. Because it is such a risky investment for the seller to agree to, they must be very careful when getting into this type of loan agreement. Although it is a risky mortgage investment, there are benefits for both the buyer and the seller. These benefits may make it worth the risks, but this mortgage is not right for everyone. Before making that decision, it is important to check your financial situation and project future finances to see if this is a mortgage that you would be interested in investing in.
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