Can you get a mortgage for a short period of time?

Factual Questions
1

My brother lives in bloomington with me, but he wants his own place. I was looking up real estate in my town for other reasons and while checking i found that 1 room condominiums only go for 12-50k in this town. My brother is comfortable with a small apartment and has considered renting a 1 room in town so i think a 15k condo would suit him fine.

Is there anyway he could take out a mortgage that would only last 1-2 years or so so he could get one of those? he has 10k saved up, and i doubt that he wants to buy one, but im sure he’d like to rent one for 1-2 years but i dont see any rentals. If he put down a down payment like 5k would he get that back if he quit his mortgage in a year? is there any type of mortgage designed just for people who only want to live for 1 year or so in a house?

2

They’re called 30-year mortgages.

If you wanted a real 2 year mortgage, the payments would outrageous. What you want is to keep the payments as low as possible, knowing you’ll just be selling soon. (IMO)

The mortgage industry is well aware that people move often. In fact, the average mortgage only lasts under five years. They’re just fine with that, as it puts cash back in their pockets, and generates new fees for making new loans.

You might have him ask about an adjustable rate mortgage (ARM), which can keep the payments really low for the first few years.

3

What about the down payment, he will lose that i take it? if so, maybe he should just put down 5% or so if possible.

I guess he can call the owner of the condo and ask if they’d be willing to rent it out instead of sell it.

4

You don’t get to “quit your mortage”. You borrow $X to buy a place, then pay back $Y/month, of which some fraction goes to pay back the principle and some other fraction to pay the interest.

In two years, you sell the house for $Z. You typically give at least 3% of that to a real estate agent. The bank gets back ($X - principle paid back). You get the rest. That amount may be more or less than your down payment.

Putting your numbers in: Say your brother pays 20% down on a $15K condo, his down payment is $3K. There are other costs associated with buying a place, he may wish to get it inspected ($200), there may be closing costs and other fees charged by the bank he’s dealing with, and he may decide to buy a lower interest rate by paying “points”. Let’s round that all off and say $800 in extra closing costs.

So he’s out $1.5k for the down payment plus $800 in closing costs for an outlay of $3.8K. He borrows $12k. By the end of 2 years, he’s payed back $500 of that principle (making minimum payments on a 30 year note, you’re mostly paying interest the first couple of years).

Then let’s take 2 selling scenarios. First, he sells it for $20k, because property prices have shot up. He pays $600 to the realtor (3%), $11.5K to the bank to take care of his mortage ballance, and pockets $8.9k. Take out the $3.8K he started with, and his profit on the transaction is $5.1K (results not typical).

For the second scenario, he sells for $15k, because property prices are stagnant. He pays around $450 to the realtor, $11.5k to the bank, and pockets around $3k, which is less than the $3.8k he put into the place. (Of course, over the course of the two years he’s gotten some extra money back from the government by writing off the interest he’s been paying).

All numbers other than yours are estimates, and your brother has to do his own research to fill in the blanks.

The real advantage of knowing that you’re selling in 2 years is that you can get a 2 year adjustible rate mortage (where you and the bank agree that they can raise your interest rate in 2 years time), which will typically be a much lower rate than a 30 year fixed rate, and you know that you are never going to have to actually pay that increased rate because you’re going to sell. The disadvantage is that you can end up losing money if the market hits a short-term peak.

-lv

5

Ditto and ditto.

Your brother will not lose his down payment, because he will recoup it by selling to the next suck— lovely homeowner. True, in the meantime he’s out the $2k or whatever, but you can’t expect the bank to make these loans without getting something down.

The reason they need it is that now you owe say $48K on a $50K condo, and they’re pretty sure that if you skip to Brazil they can get their money back by selling the place for you.

The fees associated are what you’re “out”, although the way some real estate markets have been moving up, they’re almost an afterthought in the grand scheme, because you sold for so much higher than you bought.

I hope this all made sense. Ask more questions if not.

6

A Balloon Mortgage is a good thing to check into. Lower interest rates now is the key.

7

Here in Massachusetts anyhow, i believe there is nothing to prevent you from paying off a mortage anytime you want, either in lump sum or by just making bigger payments each period.

However, some loan institutions do impose an additional penalty for early payoff.

The above response does not address the financial pros/cons of various loan payment strategies (it looks like others have already done that. )

I just responding to what I believe was the literal interpretation of the OP - sure, you can make any mortage into a 2 year mortage.

8

Everyone else has already given lots of good information. One thing I thought I’d mention, though, is that your brother needs to carefully evaluate the housing market in Bloomington if he’s thinking about purchasing for such a short time period. If housing in Bloomington isn’t rapidly appreciating in value, buying could actually end up costing him money. It costs a few thousand dollars to buy/sell a home; you usually need to live in a house for several years before the home’s value will have appreciated enough to cover (if not exceed) the transaction fees you’ll pay when buying and later selling it.

9

Of course, if the alternative is paying rent, don’t forget to count saved rent when considering selling in a couple of years. Heck – if I sold my house today for exactly what I paid for it, I’d be more or less happy. The accumulated payments are less than rent would have been.

10

Thats a big factor too. In bloomington the cheapest rent on a studio is about $340/month, however the mortgage on a 1 room condo (assuming its 25k) is about $140/month & $40/month insurance & property taxes, so the savings are about $160/month. The only problem is unloading it when he or I (if i take it over) don’t need it anymore. Maybe it can be rented out to some student who lives in poverty and really wants his own place for $180/month or so.

11

There are many mortgage products that your brother could benefit from. Any of those mentioned could be good. Also, he might look into an “interest only” mortgage. If he is planning on selling in a few years, he definitely should make sure that the mortgage he gets does not have a prepayment penalty. Also, he should try to minimize settlement costs. This is an obvious point, but I will say it anyway: The cheaper the money, the better.

If he is paying points, yield spreads, discounts, and other such costs of financing, that money is spent. He will not get it back.

The opportunities available to him will depend primarily on his credit score. If it is good, he will be able to write his own ticket. If it is not, well, not.

Lenders look at other factors, too. Like the ratio of debt to income, and the ratio of loan amount to value. Prior mortgage history is important, but it usually only matters if it is bad.

Good luck

12

Just want to point out that for a mortgage this small, you can pretty much forget about deducting the interest. You can only deduct interest if you itemize deductions, and if you itemize you lose the standard deduction. For 2004, standard deduction is $4850 (single or married filing separately), $9700 (married filing jointly), $7150 (Head of household).

For most people the things you itemize are mortgage interest, state/local/property taxes and charitable donations. Mortgage payments of $140 per month can’t have more than $1680 in interest (and it will be less, because there will be some principal in that $140). That leaves a lot of state/local/property taxes and donations until you reach the standard deduction threshold (especially if you are married).

Anyway, just remember before you get sold on something because the wonderful real estate agent tells you how much you’ll save because your interest is deductable that you have to work out the numbers for yourself to see if the savings are real.