Loans To Avoid

Different loan arrangements work for different people, however three specific strategies that may work for one person may be wrong for everyone else. Three such mortgages include land contracts, roll over loans, and 40-year mortgages.

It’s hard to think of a less appealing idea than the land contract. In this sort of arrangement the borrowers have debt without title.

The downfall of the land contract is that a borrower makes payments on a loan but ownership is not transferred over until a specified amount has been paid. Since ownership has not changed over a buyer has only an equitable interest in the home. Also if the borrower misses even a single payment, they can lose the property, including the down payment, monthly principal reductions and all accumulated equity because the title is still legally in the name of the lender.

A land contract is also referred to as an installment contract, contract for deed, or a conditional sales agreement. This arrangement is commonly used in recreational land sales and timesharing purchases because the developer has many small units to sell. By using land contracts the developer is assured of either getting paid or being able to re-sell the property quickly.

Recreational land sales and timeshare purchases tend to be relatively small real estate deals so buyers should consider a personal loan rather than a loan contract.
Land contracts are completely different from a land lease or a ground lease. A land lease is an arrangement in which ground and improvements are owned separately.

After land contracts, the second most unappealing loan arrangement is a roll-over mortgage. Roll over contracts include interest at or near conventional rates, conventional down payments, short terms, and huge ballooning payments. With a roll-over loan a borrower get a mortgage for a specified amount and with payments figured on a 25- or 30- year term. However the loan only lasts 5 years.

After the 5 years there is a huge balloon payment to consider. Roll-over loans usually have a provision through which the lender guarantees to provide another five year note. This gives the lender a great opportunity to receive a premium rate because your only other options are to sale, foreclose, or find a new lender. Even if a second term is promised, a third isn’t likely.

When money is scarce it might seem like a great idea to stretch a 30 year loan to a 40 year loan, but all you have to do is the math to see why it’s a no go. Say you wanted to borrow $85,000 at ten percent. A thirty year note for the sum equals monthly payments of $745.94, while a forty year loan will have monthly payment of $721.77. That is a monthly saving of $24.16, however the forty year loan will require 120 additional monthly payments. The difference between the two loans will be $77,911.10 ($745.94 X 360 payments vs. $721.77 X 480 payments). This makes the additional monthly payments of $24.17- or $8,701.20 over 30 years-a borrow can potentially save over $77,900 or almost the entire amount of the original loan.