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Question about receiving early loan payments and keeping track
Old 08-17-2009, 12:50 PM   #1
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Question about receiving early loan payments and keeping track

We are going to loan a friend (almost my sister except she isn't related) $43,000 at 5% interest with a 15-year amortization. Other than my mother, she is the only person we would do this type of deal with. It was my idea when she told me it was time for her to pay a cousin who had refinanced his home 6.8 years ago with a 7-year balloon mortgage so several family members could purchase the cabin and waterfront lot which adjoins the family-owned (over 50 years) waterfront cabin and lot on Whidbey Island.

She and the other family members bought the new property well-below market because they'd known the neighbors for many years and bought it directly from them. Also, the cabin needed a ton of work to be inhabitable. The cabin is all fixed up (they did it themselves slowly over time) and was rented for awhile to a local school teacher and to another family member. Now it's mostly used by various family members as a vacation property.

The loan will be written up by a lawyer and recorded as a lien against her primary residence. We will be in third position behind the first mortgage and the HELOC. She lives in Seattle (Shoreline) and owes about $65,000 on a home which is conservatively valued at $350,000 even after all the craziness that has gone on. She has never had a HELOC on the property but is getting one now because she doesn't need it! If we should need our money back, she will draw from the credit line to repay us. We will be obligated to give her a 90-day notice and we can give that notice at any time. She could just take the money off her HELOC to pay her cousin but why should she pay the CU 5.75% (HELOC's are expensive in Seattle, mine is 3% in corn country) when she can pay us 5%?

She will be allowed to pay ahead which is where my question comes in. What is the best way to keep things straight if she wants to pay ahead? Do we say she has to pay the extra principal when she makes a "normal" PI payment and the amount of the additional principal payment has to be the next amount(s) off the amortization schedule?

I will be claiming the interest on my tax return. I will provide her information at the end of each year which says how much principal and interest she has paid for the year.

I know this is a lot of detail but I'm thinking you guys would have asked a ton of questions if I didn't tell the whole story.
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Old 08-17-2009, 01:13 PM   #2
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I don't know the answer to your questions. Wish I knew more about this stuff!

I am not sure, but would this mortgage calculator help in any way? It allows lump sum payments but I think they have to be along with the regular monthly payment, unfortunately. It was very helpful to me when I was paying off my house, and Chase Mortgage's computations regarding lump sum payments matched the output of this calculator.
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Old 08-17-2009, 02:20 PM   #3
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I am carrying the paper on a large land sale contract. Figured the best way to keep everything straight was to use a professional escrow service- in this case a local community bank that still provides this service. Let them hold the note, record payments, issue statements, etc. Mine only charges me $10.00/month.- deducted off the top of the payment deposit. Both the buyer and seller get a receipt (an actual carbon copy in this case!) and an account reconcilation every time a payment is received- lists the total payment amount, the escrow fee, the amount credited to principal, interest, and the outstanding balance. No way for anything to get out of hand- unless payments are delinquent, in which case the course of corrective action for both buyer and seller is clearly spelled out in the escrow agreement- including the deed release back to the seller in the event of buyer default.

I have a copy of the escrow instructions the bank gave me whe we set up the account. I can send it to you as a pdf- PM me if you are interested.
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Old 08-17-2009, 02:30 PM   #4
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I hate extra paperwork, so I'd vote for the KISS method (but that's just me).

The simple thing would be to tell her she can make the extra payments once a year, on the anniversary of the mortgage. That way, you could just run a new amortization table for the new amount going forward. You would only need to do that once a year. If she really wants to do something sporadically, tell her to just "make the payment" to her savings account until the date comes around.

Unless someone knows of software that makes this super simple, and doesn't have a big learning curve, that is what I would do. You're already doing her a favor, why complicate your life on top of it?

OK, I see westernskies has a $120/year solution. So now it's a question of is that worth it to her to have the option of pre-payments?


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Old 08-17-2009, 03:03 PM   #5
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1st: I agree with the idea of having a mortgage company (call a title company for suggestions) do the amortization schedules and book keeping. Costs range from $4 to $6/month for us for borrower and lender, or have the borrower pay all costs. A big advantage is they have to defend how they handle figuring the interest to the borrower. If the borrower is a friend you really want to be uninvolved and have a neutral third party doing the math. Better for the friendship.

2nd: That said, this is the only free program I found that would sorta kinda handle odd payments each month. I had loaned a few thousand to a friend who made random amount payments at irregular intervals. F&I Software and Menu Selling Software for Dealerships by Quantech Software

Pain in the rear.

Just saying, and it's your money to do with as you see fit, but if you are happy with 5% I would at least urge you to put a balloon payment date in there - you don't want to be getting 5% for years and years after interest rates have gone back up to 8 or 12% and the dollar is worth 1/2 what it is now....... Money right now is hard to scare up and worth more than you might think.
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Old 08-17-2009, 03:51 PM   #6
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Quote:
Originally Posted by calmloki View Post
1st: I agree with the idea of having a mortgage company (call a title company for suggestions) do the amortization schedules and book keeping. Costs range from $4 to $6/month for us for borrower and lender, or have the borrower pay all costs. A big advantage is they have to defend how they handle figuring the interest to the borrower. If the borrower is a friend you really want to be uninvolved and have a neutral third party doing the math. Better for the friendship.

2nd: That said, this is the only free program I found that would sorta kinda handle odd payments each month. I had loaned a few thousand to a friend who made random amount payments at irregular intervals. F&I Software and Menu Selling Software for Dealerships by Quantech Software

Pain in the rear.

Just saying, and it's your money to do with as you see fit, but if you are happy with 5% I would at least urge you to put a balloon payment date in there - you don't want to be getting 5% for years and years after interest rates have gone back up to 8 or 12% and the dollar is worth 1/2 what it is now....... Money right now is hard to scare up and worth more than you might think.

We get to terminate the agreement at any time with 90 days notice. It was her idea to put that in there so if rates started to go up we could either issue a new note to her for a better interest rate or we could take our money elsewhere. Neither one wants to trap the other in a bad situation as she is allowed to pay us off in full at any time.
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Old 08-17-2009, 03:55 PM   #7
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Maybe you could try to shop for a better HELOC instead. I know rates can be 5% or more for folks with LTR of 80%-90%, but she's got much more equity than that. With LTR under 50%, around here adjustable rates are 3% or less. Could save a lot of family strife if things don't go as planned in either of your lives.
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Old 08-17-2009, 04:07 PM   #8
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Maybe you could try to shop for a better HELOC instead. I know rates can be 5% or more for folks with LTR of 80%-90%, but she's got much more equity than that. With LTR under 50%, around here adjustable rates are 3% or less. Could save a lot of family strife if things don't go as planned in either of your lives.
We've actually done one deal where things went south and there was absolutely no effect on our relationship. She gave me $10,000 to invest in the start up I was part of which went bankrupt. We had nothing in writing between us. I returned about $3,000 to her because that was the tax benefit I got from writing off the $10,000 investment. We have a good history to build on.

I don't want her to find a cheaper HELOC. I want 5% on my money with the flexibility to rewrite the terms or exit the deal when there's something better out there and that's what I am getting!
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Old 08-17-2009, 04:11 PM   #9
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We bought property once on a contract and would make extra principal payments. I kept track and also reported to the lender how much interest we paid each year. The lender kind of bowed out and trusted me to do that work. I had an amortization program at work so it was easy enough.

If you can't find a program, one option is to provide that even if extra principal payments are made you will only re-amortize yearly based on the new lower principal amount. For example, on December 31. She ends up not getting the benefit of the early principal payments until it is re-amortized, but it would be easy.

Here is one possible calculator: http://www.calcofinancial.com/mortga...calculator.htm
I bet there are others on the net.
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Old 08-17-2009, 04:18 PM   #10
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Originally Posted by Martha View Post
We bought property once on a contract and would make extra principal payments. I kept track and also reported to the lender how much interest we paid each year. The lender kind of bowed out and trusted me to do that work. I had an amortization program at work so it was easy enough.

If you can't find a program, one option is to provide that even if extra principal payments are made you will only re-amortize yearly based on the new lower principal amount. For example, on December 31. She ends up not getting the benefit of the early principal payments until it is re-amortized, but it would be easy.

Here is one possible calculator: Mortgage Payment Amortization Calculator
I bet there are others on the net.
I hate to sound stupid but why would I re-amortize the loan if my mortgage company doesn't do that when I make early payments...or do they?
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