OfflineOk I know what assumption of mortgage in general means but this other topic on assumption of mortgage in dean's book really confused me.
So here it is, the whole topic from the book:
"Be A Real Estate Millionaire"
Chapter 14 "Buying Real Estate With No money Down"
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Page 188
Assumption of mortgage with seller-carried second and bonus:
Next to using seller financing, assuming a mortgage is probably the most cost-effective way to own property because you pay no loan costs as part of the transaction. Let's say you found a property with an assumable first mortgage, but you have little or no cash available for the down payment or closing costs. You can assume the first mortgage (meaning you take over payments on the existing mortgage or promissory note) and nogotiate with the seller to take out a second mortgage for their equity in the property, as explained in the previous section, "Seller-carried second mortgage."
As an enticement to the seller to accept your offer, you can agree to pay an additional amount of interest over and above what the seller is currently paying on the first mortgage, as well as nogotiating the second mortgage interest rate to accommodate the seller's needs.
For example, suppose a seller has a property with a value of $140,000. The property has an existing first mortgage in the amount of $102,000at 6% interest with a monthly payment of $612 that you can assume.
When you nogotiate the purchase, you would ask the seller to carry a second mortgage in the amount of 8% (interest only) and agree to pay the seller an additional amount of 1% of his or her first mortgage (for the same time period of the second mortgage) as a bonus for carrying the second mortgage, because it is an incentive to the seller to get creative with the financing. The benefits to the seller are as follows:
$38,000 second mortgage at 8% / $253 monthly
$102,000 at 1% (bonus) / $85 monthly
$102,000 assumption / $612 monthly
Total payment / $950 monthly
The effective rate on this type of financing technique for the second mortgage becomes 10.68%. An easier way to accomplish this loan would be to just write the second mortgage for the higher interest rate. Incidentally, all the mortgages and the bonus you are paying go away when you refinance the property.
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Now I did not understand the whole point of this topic. If someone can simplify this for me in the simplest way possible, then that would be great. Thanks in advance.
"Open minds backed by knowledge, wisdom, persistence, and determination equals unstoppable excellence"
- wrecklessKane
Well I guess I'm just gonna assume no one else knows what "Assumption of mortgage with seller-carried second and bonus" means since I haven't gotten a response.
"Open minds backed by knowledge, wisdom, persistence, and determination equals unstoppable excellence"
- wrecklessKane
Dean does an excellent job of explaining this strategy. I will try to simplify:
Owner has an assumable mortgage - (this is the key, owner must have this type of mortgage)
You take over the mortgage and get the owner to back the remainder of the purchase price. As a bonus to the owner you pay a little extra to them.
Example:
Purchase price $100,000 (agreed to prior to financing options)
Owner's assumable mortgage = $80,000
Leaving $20,000 to make the deal happen. You ask the owner to "carry-back" the remainder as they have at least $20,000 in equity. For them agreeing to do this you pay a "bonus"
I don't know if this helped at all. Again, try reading over it a few times.
nsherrick
I'm assuming it means you are paying $140K for the property. (anyone read it differently?)
You make payments on their first mortgage. They take out a second mortgage for the balance of what you owe them (at whatever interest rate),and you pay them at 8% interest. The bonus would be that you ALSO pay them 1% above the interest rate on the first mortgage they have. So the incentive to the seller who is not in a position to seller-finance is that they STILL can make money from this agreement. And you don't have to get financing to purchase the house.
Drawback: It may be hard for an owner to access the extra equity at this time with the strict lending regulations in place.
That's my interpretation, anyway.
Thoughts, anyone?
Rina
"Obstacles can slow you down, but they can only stop you with your permission." Dean Graziosi (BARM pg 101)
"For I know the plans I have for you," declares the Lord, "plans to prosper you and not to harm you, plans to give you hope and a future." Jeremiah 29:11
For a little about me, welcome to the site, and a few tips for new DG family members, click on this link: http://www.deangraziosi.com/user/3249
(we must have been posting at the same time)
I think I missed something. Where did the $100K come from? Or were you using a different example?
Rina
"Obstacles can slow you down, but they can only stop you with your permission." Dean Graziosi (BARM pg 101)
"For I know the plans I have for you," declares the Lord, "plans to prosper you and not to harm you, plans to give you hope and a future." Jeremiah 29:11
For a little about me, welcome to the site, and a few tips for new DG family members, click on this link: http://www.deangraziosi.com/user/3249
Trying to simplify it. Different example.
nsherrick
I have to admit it is a little confusing. Hope to hear from someone who's tried it. What do you think about it working in this market?
Rina
"Obstacles can slow you down, but they can only stop you with your permission." Dean Graziosi (BARM pg 101)
"For I know the plans I have for you," declares the Lord, "plans to prosper you and not to harm you, plans to give you hope and a future." Jeremiah 29:11
For a little about me, welcome to the site, and a few tips for new DG family members, click on this link: http://www.deangraziosi.com/user/3249
The above example Dean illustrated for those don't have the means for a down payment. However, as Rina stated that it's very tough to get that kind of financing from a seller given the state of our economy it is now, but then again, we will never know unless we ask.
I'll try and simplify this example for you Wrecklesskane.
Amount of the total loan $140,000
First loan is $102,000. You would assume the payment of $612.00 which is 6% interestn of the existing mortgage.
Second loan is $38,000 but instead of paying at 6% interest, Wrecklesskane will be paying 8%. The 2% interest was added to the 6% as an incentive to the seller for financing the deal for you.
The 1% of $102,000 is a bonus for the seller for financing the loan. Add the $612.00 $253.00 and $85.00 gives you the amount you will have to pay every month which is $950.00.
So, instead of paying a down payment for the loan 1, ($102,000) & loan 2 ($38,000) $140,000, you will be paying $338.00 per month for incentive and bonus for having the seller financing the down payment for you, $253 + $85.00 = $338.00
Given the example above, you have to do your due dilligence and do the numbers to make sure you can affort such payment, if not, then re-think of a difference strategy, but this is an example of using creative financing without putting $$ for a down payment. I hope this helps!
Lloydsap
Well, The other problem that your gonna have is....These days Mortgages are NOT Assumable any more, Of course, You could take the 1st Mortgage "Subject To"(Basically the same thing without formal Assumption) SULLY
YOUR HERO, SULLY
Finally! Thanks to all your responses I think I got a good idea on what this topic means now. Of course I can't conversate as easily as all you guys can on it. I can only just sit and watch lol.
Thanks again guys, really helped me out!
"Open minds backed by knowledge, wisdom, persistence, and determination equals unstoppable excellence"
- wrecklessKane