Participation Mortgage

  

Categories: Mortgage

A typical mortgage has a clear separation between the two sides of the deal. There's a lender and a borrower. The lender provides money. The borrower uses the money to purchase some property. In return, the borrower agrees to pay the cash back over time.

For a participation mortgage, the lines between borrower and lender get fuzzier. The "participation" part indicates that the lender gets some of the revenue generated by the property purchased by the loan.

Instead of just getting paid back, the lender is, in effect, a partner in the transactions. These deals usually come up for income properties...apartment complexes, shopping malls, etc.

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Finance: What are the components of a mo...1 Views

00:00

Finance Allah shmoop What are the components of a mortgage

00:06

payment All right so here's a weird thing about mortgages

00:10

When you borrow say four hundred grand buy a home

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and say in a six percent fixed thirty year interest

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you'll end up paying way more than the four hundred

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grand just in interest Renting the money Think about it

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Well you'll have a monthly pay payment of twenty four

00:25

hundred bucks and by the time you've made thirty times

00:27

twelve per year or three hundred sixty payments you'll have

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paid some four hundred sixty three thousand dollars in interest

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charges Seems like a lot of money to pay out

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of your own pocket But since mortgage interest is usually

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entirely tax deductible well the rial cost to most home

00:43

borrowers is actually meaningful E less than that six percent

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interest maybe something closer to a three and a half

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four percent something like that So while yes on a

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total gross basis you will have paid out more than

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the amount borrowed over the thirty year course in the

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mortgage you'll also have been forgiven loads of taxes And

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for what it's worth over most thirty year time periods

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in history the market has gone up about eight to

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ten percent a year on average Compound did something like

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that So you feel the people mover floor moving fast

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underfoot with inflation pushing things around as you go along

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Well the money you borrow is the principal of the

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loan and that number usually declines by a small amount

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each month As you make a flat payment and it's

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usually gradually paid off Check out what the principal of

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four hundred grand looks like for the first twelve months

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of payments right here Note that the flat monthly payment

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is twenty four hundred dollars and see how the principal

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payed as part of this payment loan thing there goes

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from paydown of three hundred ninety eight dollars Teo Well

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four hundred twenty a year later right Like you're paying

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off principal little by little So you have less that's

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attributed to interest And Mohr that's attributed to principal pay

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down as you go along and note that this assumes

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Ah flat monthly payment here Right You're paying the same

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amount You're one you would You're thirty two thousand three

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hundred ninety eight dollars and twenty cents on this particular

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alone So after a year the amount owed an interest

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is well just slightly last Here in this example it's

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one thousand nine hundred seventy seven bucks down from in

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a two grand and note what it looks like at

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the end of each of the first five years That's

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a big shift from almost entirely interest do now Principal

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being ah meaningful part of it you got after ten

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years right here and then at the halfway point in

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fifteen years it's here So I noticed that the amount

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owed at this point is roughly half the total Why

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Because the lion share the pay down went to interest

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in the first half of the life of the mortgage

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AII those first fifteen years and well then in the

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back half way more will be attributed to a principal

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pay down than to interest Like check out what the

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very last month's payment looks like It's just twelve dollars

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of interest and two thousand three hundred eighty six dollars

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of principle All of this is principal until well then

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the balance is zero and we'll finally Then you will

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have fully paid off your mortgage and own your home

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