Aunt Fiona has decided it’s time to downsize and move into one of those trendy 55-and-over communities. We’d love to buy her house—it’s been in the family for generations—but there’s no way we could get approved for a home loan that big. Happily, Aunt Fiona wants to keep the house in the family too, so she’s agreed to something called a purchase-money mortgage, or PMM.
A “purchase-money mortgage” happens when the seller of a house offers mortgage financing to the buyer of the house. Yes, that’s right: we’re securing a mortgage from Aunt Fiona herself. On the plus side, this allows us to “qualify” for a loan we’d never have qualified for otherwise. It’s just like a bank loan, but instead of sending our payments to the bank, our down payment and monthly mortgage go straight to Aunt Fiona.
And it isn’t only relatives who can get in on the PPM action, FYI. Whenever a seller has a buyer who doesn’t quite meet the qualifications for the loan needed to complete the purchase, they can opt to go the PPM route, either for the whole purchase amount, or just enough to bridge the gap between the amount of the bank loan and the home’s sale price.
Is this still a legally binding, credit-score-impacting kind of arrangement? It is indeed, and this is where the potential drawbacks come into play. PPMs usually come with higher interest rates than standard home loans, since the borrowing terms are a lot less strict. This means that we’re likely to end up paying more in the long run for the family home than we would have if we’d bought it conventionally. Also, though PPMs usually come with super-flexible payment terms—i.e., we can make a full payment this month but make an interest-only payment next month, etc.—those super-flexible payment terms can make it really easy to make small payments when money is tight…and then realize later that we haven’t been paying down the principal amount of the loan nearly as much as we should have been.
Related or Semi-related Video
Finance: What is Interest Only Mortgage?17 Views
Finance allah shmoop what is an interest only mortgage Well
simply put it's when you only pay the rent on
the dough you borrowed you don't pay down the principal
you owe like if you have a three hundred thousand
dollars mortgage at six percent interest you're paying eighteen grand
a year to rent that money in six percent times
three hundred rands eighteen grand a year But the principal
you borrowed is likely due in thirty years So in
theory anyway if it were a normal mortgage you'd want
to pay down the principal little bit a month as
you go along like averaging ten grand a year in
principle pay down over thirty years That's times ten grand
right three hundred grand their total owning your home at
the end yeah yeah priceless that's what holmes work So
why would you want an interest only mortgage Well for
one thing the monthly payments or less so maybe you
could afford morehouse If on a thirty year three hundred
thousand dollar loan at six percent you're paying interest only
while you're writing a check each month for eighteen thousand
divided by twelve or fifteen hundred bucks maybe that's all
You can afford well the extra five hundred bucks arm
or you'd right toe pay down your principles Just not
something you can really do right now Maybe after three
years of scrimping and saving well you'll be able to
start paying down that principal reducing risk and making life
easier all the way around But right now you can't
afford it so the only thing you can do is
do the interest only dance Well the other reason you
might want an interest only mortgages that interest costs are
tax deductible Principal pay down costs are not so if
in a given mortgage payment of say eighteen hundred bucks
a month where three hundred of it is principal pay
down and fifteen hundred of it is interest well on
ly the fifteen hundred is tax deductible That three hundred
of pay down is not And if you're a forty
percent taxpayer the government is essentially picking up the tax
savings on the fifteen hundred times a forty percent at
six hundred dollars in interest You're paying such that they
quote feel unquote like the fifteen hundred is really only
about nine hundred a month in cost to you the
three hundred bucks and principal paydown feels like a full
three hundred dollars So some people seeking tio optimize their
tax deductions live in the world of interest only mortgages
and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it
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