Buying a house in this weird situation?

Hi all,

So I don’t know if this is something that I would actually do right now, but I wanted to get some opinions from the EXTREMELY SMART people here. :slight_smile: What are the options (if any-- well, you’d think there would be some) for buying a house when the buyer will have a lot of money in a few years, but doesn’t now? I have a big annuity payment due in seven years. But it clearly isn’t here yet… is there any kind of balloon payment option for mortgages? If so, would it ever be a good idea?

Thanks in advance! :slight_smile:

You could look into getting an adjustable rate mortgage with an interest only payment.
For the first several (usually 5) years, the interest rate would fluctuate with prime and the payment is much lower then a normal payment because there’s no principle included in the payment (though you can pay extra if you want).

This is, if my understanding is correct, the type of loan that got so many people in trouble a few years ago. They used this type of loan to buy more house then they could afford and didn’t realize that had to (pay attention: HAD TO) refi in a certain amount of time. Not only that, they didn’t realize that they would have no money put towards the house. Also, since at that point (and this would likely happen for you as well) the prime rate had gone up so the had to refi at a higher rate. Of course, bankers were also offering them to people who couldn’t afford them, so there was that also.

These types of loans are still available, so something like that might be just what you’re looking for. Just be careful, and if you get one that will force you to refi in 5 years make sure you’ll be able to refi at a higher rate and still be able to afford it.

Are there *any *conditions or circumstances, no matter how remote (like a total stock market crash) that might affect your future windfall? I would not recommend doing this without very near to 100% certainty.

Possibly this is more of an IMHO than a GQ.

You can sell your future annuity payment for money now, but you will probably pay a decent amount to do that.

Get a mortgage without a prepayment penalty. Pay it off when the annuity falls due.

Get an adjustable-rate-mortgage (ARM). You’ll get a lower rate now and they can always be paid w/o penalty when the rate is adjusted or when the term is up.

I do recall payment plans on my mortgage were somewhat flexible, meaning if I had wanted to and been able, I could have increased my monthly payments and paid off the entire mortgage in a significantly shorter time frame than the 25 year amortization that I was paying.

This is something I would discuss with someone at your bank. A mortgage can always be paid off, you just need to pay whatever penalties the bank charges.

The OP is looking for opinions, some of which may be factual answers.

Moved from General Questions to IMHO.

samclem, Modertor

Well, yes-- which is why I won’t do it. :wink: Nope, there’s nothing that could keep this annuity from being paid out. Unless the entire financial system of the U.S. collapses, rioting in the streets, dogs and cats living together… and then I think that annuities would be the least of our worries. Also, if it helps, I probably wouldn’t refinance in seven years-- I’d pay cash. I don’t know. Maybe I’ll just wait and THEN pay cash.

I would advise against an adjustable rate mortgage. Interest rates are incredibly low right now. In five years (or two or three) when the rate resets it will be higher. Your best three options would be:

  1. Buy a home you can comfortably afford on your own income with a traditional 30 year fixed rate loan. There will be no surprises with the loan. You owe what you owe monthly until you pay it off, whether that’s 30 years or 7.
  2. Buy a home with a 30 year fixed rate loan with an interest only option. You will pay interest only for a predetermined term, likely 10 years. You can make extra principal payments at any time, and can pay the loan off early. At the end of the interest only term, your payment is reset to reflect amortization at the original interest rate for the remainder of the term.
  3. Wait it out. Home prices may go up, they may waffle around a bit, they may go down. In the next seven years you’ll pay 25-30% of the purchase price in interest alone, and I seriously doubt prices will go up that much in that time frame.

Bottom line is that regardless of whether you’ll be able to pay off the balance in 7 years, you’ll need a down payment, income, and credit rating to qualify for a regular mortgage now. Your future payoff won’t figure into the bank’s consideration at all. If you qualify for an FHA loan, your down payment might be as small as 3%, plus closing costs.

Any chance you could scare up a private ‘rent to own/for 7 years’ deal? It’s a hairy time in Real Estate, sometimes it pays to seek out the rarities!

What is the likelihood, you’ll want to be living in the same kind of house you can afford now, when you get that windfall? If you intend to immediately move on up, then don’t bother, just rent, till then. Go through the hassle of mortgage, etc, only once, and when it will all be much easier for you.

Don’t fall into the trap of buying more house than you really want just because you’ll have the money. Even if your house is paid for it’s no fun paying high property taxes and high upkeep charges on a house so large you only use half.

How common are prepayment penalties?

Most have a certain amount of prepayment you can do (mine is an additional 20% of the original value of the loan every five years).

I know of no one who can just pay off the entire value of their mortgage in one shot with no penalty.

Actually, in the USA, it’s pretty standard to have no prepayment penalty of any type, especially for a vanilla fixed-rate 30 or 15 year mortgage.

[hijack]So in Canada, if you can’t prepay without a penalty, how do you sell your house or refinance? Or are those exceptions to the prepayment penalty clauses?[/hijack]

Wait until you have the money in your hand. There is so much that can happen in seven years to significantly change your living situation and you may need that money for something besides paying off a mortgage (you could be in a horse show and fall off your horse at a jump and then not only can you not get into that great house, you kinda wish you had the money for your massive medical expenses, not to look at the grim side or anything). There are just too many variables to consider over that length of time. One year, sure, take a chance; two years, probably. I don’t think it’s a good idea to commit that money so far in advance. But, JMHO.

Umm, we did. Rather, we paid it down very, very quickly.

In addition, when people sell their house or refinance, they are de facto paying off their mortgage early and I’ve never heard of anyone being assessed a penalty for that.

All in all, I think this is probably the best solution (remind me not to compete in a horse show! :wink: I certainly have the down payment right now; what I don’t have is the amount of income that I think someone should have before committing to buying a house. The income really is the weak link, and I think that’s how some people got into trouble with mortgages-- their income wasn’t any better than mine, but they tried to buy a house anyway.