I'm currently working with a partner on a deal. We made a conventional financing offer on this property, but the Seller and/or their agent came back and said they will only take cash. Long story short, they just a quick sale.
I brought up the idea to my partner to use let use this HM loan as a bridge until we get a conventional loan. He liked the idea, but fear that we may default on the loan. I agreed that this is a realistic probability, but nothing to be fearful about. And very unlikely.
I suggested that because the HM I'd at 11%, 2.5 pt, interest only, 1 year term is approximately equivalent to a 4.75% fixed for 30 years. And this is pretty true for the first few years for conventional financing because interest payments are higher initially than the principal payment.
The partner is still a bit edgy about it. Any suggestions on calming his nerves?
- I went over Plan B, Plan C, etc. And still a no go.
Uh, I think your math needs some work:
I suggested that because the HM I'd at 11%, 2.5 pt, interest only, 1 year term is approximately equivalent to a 4.75% fixed for 30 years.
Monthly payment on $100K loan, 4.75%, 30 years would be $521.65. Monthly I/O payment on the HML loan would be $916.67. Conventional loans typically have a 1% origination fee, or $1000 for the $100K loan. The HML would take $2500 up front. Otherwise, both have similar fees.
You're right that you'll pay very little principal on the conventional loan in the first year. Only about $1542.07 on that $100K loan. But it is something. Take that out and after one year you would pay $4716.69 in interest on the conventional loan vs. $11,000 on the hard money loan. That's a long ways from "approximately equivalent" in my book.
Buying with hard money is still a financed deal, not cash. If the seller truly insists on cash, hard money won't do.
Jon Holdman, Flying Phoenix LLC
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