If I sell my house for $175,000 at 6% over 30 yrs...

[MichaeltheGreat]

Originally posted by Lancer
"How much interest will I make? Also, I don't really want it prepaid as it provides a portion of my retirement income, can you tell me how pre-payment penalties work?"

Damn good question guy! Too bad it seems nobody can answer it.

If you go with simple monthly interest (a pain if they're consistently a few days late, because there's no easy way to adjust the interest: $1,043.99 per month. If you go with daily compounding, $1,045.61 per month. There's no property tax, insurance, or anything figured in those - just a straight loan amortization.

Prepayment penalties in general work on the idea that if someone prepays the loan off, you have a lost earning opportunity on the balance - say they pay off at the halfway point, and then you can only get three percent earnings by treasury bills or whatever.

The first part is that whenever they pay off, you have to be able to figure exactly what the principle balance is. (One of you needs to figure principle and interest each year so they can deduct the interest portion.) Dirt simple if you have Excel.

The second part in general is you have to compare the "future values" of the two investment streams (a - they continue to pay at 6% for the life of the loan, and b - the three percent (by example) you get now that they've prepaid the loan, until the loan would have ended normally) The difference in the two future values is your opportunity loss, the ideal amount you'd like to recover. In practice, except in commercial financing, wordsmithing that mechanism into a private, personal loan agreement in a way both people understand is a pain in the ass. Most consumer loans that still have prepayment penalties just put in a flat percentage of the balance, but prepayment penalties in general are a pain in the ass, so they're less and less common, and less accepted by consumers as they've become less common.

[JohnT]

Originally posted by Lancer
MtG, these people I trust. They're not going to let me down.

You know, I actually thought the same thing about my parents.

Trust no one. Especially when it comes to your own money.

[Lancer]

Thanks MtG!

I'm trying to figure how much interest there will be over the term. With the info you gave it should be easy 'nuf.

[Lancer]

John, I wouldn't trust my father (until he died) or my brother, but these people I trust. I don't want to get into the history, and I don't know if that would convince you. I've been ripped off by friends, but this is different. Plus, it's a morgage, they have to pay it, right? I always figured that if a person didn't pay their morgage they lose the property. Not that I'll have to ever worry about thesevpeople being up front with me. If it was a family disaster, death in the family, like I said, we would work it out.

[MichaeltheGreat]

Originally posted by Lancer
Thanks MtG!

I'm trying to figure how much interest there will be over the term. With the info you gave it should be easy 'nuf.

The total? That's easy by hand once you know the payments. Year by year you have to calculate it out, since it's different every month.

[Lancer]

Damn, that'S OVER $375,000! Can that possibly be right?

[HershOstropoler]

Why do you want to chose this structure? It would be much simpler to sell it to them, and they take out a mortgage with a bank or another lender, while you invest the money. Any reason for that?

If you don't want it prepaid - would you have to accept prepayment as a private "lender"? You could exclude that here, but I don't now about the applicable state law.

As for trust - whatever the story, I wouldn't rely on trust or anything else for 30 years into the future.

Btw: If you want a mortgage on the house, you'll need a lawyer anyway, or?

[Lancer]

Damn, that'S OVER $375,000! Can that possibly be right?

Principal & interest...

$200,000 in interest.

I'm starting to feel guilty about this...

[HershOstropoler]

~6000 per year, x 30, yeah, 200k sounds right.

[Lancer]

Hersh, I'll be using my accountant plus a title company.

I want to be the one holding the morgage because I doubt I could get a 6% return that I feel confident in. Again, I do feel confidant about this...

[HershOstropoler]

I suppose you want a fixed income stream? That reduces your return rate, but I'd advice against the whole structure, no matter how confident you feel. If you have to go into foreclosure, it's a pain in the ass and a potential loss.

As for the 6 % rate, 30 year fixed mortgages are now at 5.3 or 5.4 %. IIRC.

[MichaeltheGreat]

Originally posted by Lancer
Damn, that'S OVER $375,000! Can that possibly be right?

Principal & interest...

$200,000 in interest.

I'm starting to feel guilty about this...

That's the consequence of dragging out payments over 30 years. If they pay you cash on the barrelhead, they have to cough up the whole 175 grand then and there. This way, they're (on average) only paying six grand a year in principle (way less at first, way more at the end), so they're getting the benefit of the 175 grand house, while paying off only six of that. That would suck for you, but be great for them, if they didn't have to pay any interest. So the interest payments are just a way of balancing the deal, to make it equally good for both parties. They get to not blow their savings, or work another ten years and spend nothing to save up the whole price, you get compensated for getting your money spread out instead of all at once, everyone's happy.

[Lancer]

I see that, the number just gave me a twinge. I'm over it.

Plus I get an apartment in the house for 10 years, for free. It started as a duplex and I added on two small apartments. That will allow us to either work here and save or go back to the Phils, at our whim. For 5 years we'll be working here to save for a place on the ocean over there, but that's really at our whim too. I just really want the ocean breezes, and if I don't do it I'll kick myself later on.

The ten years apartment is for a reduction in the true value of the place, plus selling it to them now instead of 5 years from now. Plus, if I don't have to look after the place I might just get another job for a while.

[Japher]

Don't feel guilty, especially if they are putting nothing down, they are the ones getting the deal since anywhere else they go they would be paying the samething. Only with zero down they would probably paying more when you figure in the fact that they would have to take a 100% loan or pay for mortgage insurance. In that case they would be paying something like 4-5% on the first (80%) and closer to 9-12% on the second, and that would suck. Especially if some weasel of a broker sticks them with a Balloon or ARM loan. So, really, you are the one giving them the out with a nice stable interest. They would be taken either way...

Maybe, you should raise that interest if they are putting nothing down... Teach them a real life lesson.

Still, I would make sure there is a "subject to" caluse in there, even if you do trust them. Most contracts already have it, I would just make sure... This is so if they decide to move, or have an emergency and need to retain their capital in the house they would be able to without you losing on it... CYA policy in effect.

[JohnT]

"Plus I get an apartment in the house for 10 years, for free."

Is that going to be in the purchasing agreement?