Dropping the interest on a seller-financed mortgage-what's in it for me?
January 27, 2015 1:06 PM   Subscribe

Is there any benefit to dropping the interest rate on a seller-financed mortgage note "just because"?

I'm getting a lot of pressure to refinance a seller-financed mortgage, and I'm having trouble determining if there is any benefit to me. The details:

Sometime in the early 1990s (I was very young), a close family friend passed away. Her daughter, whom we'll call Aunt Bea, initially leased the house. The leasing manager was a church friend of hers, and after some years, renting the house proved to be enough of a hassle that she sold the house to the leasing manager. The mortgage was seller-financed, with a set monthly payment of $500 a month and an 8% interest rate. I think she has about 14 years left to pay on the note.

Aunt Bea passed away in 2010. In her will, she designated my sister and I to be the recipients of the mortgage payments, so we each get $250 monthly. Things had been going mostly fine - leasing-manager-turned-owner continued to rent the house out, and she is reliable enough getting the payments in on time. About a year ago, she started to make noise about lowering the interest rate on the note. She wants us to change the note to decrease the interest rate to 5%. She typically makes contact through my father, so we've usually just been ignoring her request, and my father just tells her that he doesn't have financial power of attorney for us.

Today, I had to call her to ask to send tax information (since I have to pay taxes on the interest portion of the payments). She immediately launched into an aggressive appeal for us to self-refinance the loan, stating that it's "just ridiculous" that she is still paying 8% interest on the mortgage, when she is paying about 5% on the other 40 or so properties that she owns. I asked her if she considered going to a bank for a refinance, to which she responded that she "could go to the bank, or we could just refinance the note ourselves." And that we would get our money "faster" because dropping the interest would mean that we would be getting the principal back sooner. (This is true, but we would also be getting less money.)

I know that her only angle is to save money in the long run. And she would probably prefer to avoid refinancing through a bank to avoid closing costs. But I can't conceive of any real benefit to my sister or me in just dropping the interest rate, and I sort of feel like she thinks that she can take advantage of "two dumb kids" who would rather have faster money but less of it. My personal stance is that my aunt was a shrewd business woman who left us these payments as a gift, and that her wishes should be respected. If she were still alive, I doubt that she would consider refinancing "just to be nice," and that the original note was signed by two adults who knew what they were getting into.

Is there any conceivable benefit to refinancing the mortgage that I'm not realizing?
posted by honeybee413 to Work & Money (14 answers total) 1 user marked this as a favorite
Nope. Not to you, there is no benefit at all to you to drop the interest rate.

If she wants to refinance, she can refinance. If she wants to pay you out right for the remainder of the principle, go nuts.

You haven't missed anything.
posted by Ruthless Bunny at 1:16 PM on January 27, 2015 [8 favorites]

Nope. Banks don't refinance unless they have a way to make money on the deal or they have real concerns that they won't get paid at all. That doesn't sound like the situation here at all - there's no reason for you to make less money just because she feels like paying less. She can refinance with a bank and you will get your principal back, which you can invest in something else. (It sounds like you appreciate the revenue stream so perhaps a fee-based financial planner should be your next stop.)
posted by stowaway at 1:24 PM on January 27, 2015

posted by LonnieK at 1:33 PM on January 27, 2015 [2 favorites]

The only benefit would be that you would have an investment at a 5% interest rate, while if she refinanced and paid you off you would have the principal and would need to find another as-good investment. I don't think that's a downside unless you or your sister is bad at money management, especially since I doubt she's actually going to go to a bank.
posted by metasarah at 1:42 PM on January 27, 2015 [6 favorites]

If you have 14 years left on a 30-year note with $500 payments at 8%, you will receive $84000 in payments in that time, and the current principal balance is $50,437.89.

If she doesn't refinance, she'll give you $84k over the next 14 years. If she refinances with a bank, she'll give you $50k right now. And if you refinance her to, say, 6% over 14 years, her payment will drop to around $445 and she'll give you about $75k over the next 14 years.
posted by Hatashran at 1:46 PM on January 27, 2015 [1 favorite]

Exactly, metasarah has it - the benefit to you is that if you say no, she will go to the bank and refinance and you will get no more interest on the remaining principal, not even 5%.

What is worse for you and your sister - having the $500 / mo payments decline substantially, or getting ~$35K dropped in your lap and have to invest it elsewhere? I don't know your financial situation but personally reinvesting a lump sum seems more compelling than managing 15 more years of payments that are under $200/mo to each of two different people. In which case you should wish her the best of luck and let her go to the bank.
posted by Joey Buttafoucault at 1:52 PM on January 27, 2015 [4 favorites]

On preview I see my math disagrees with Hatashran's; I will admit I didn't use the most sophisticated mortgage calculator. My point stands but I do hate being wrong on the math. Anyway, you should have an accountant vet the specific numbers before you make any decision.
posted by Joey Buttafoucault at 1:54 PM on January 27, 2015

The theoretical benefit to you is that if you refinance the note you will continue to earn interest on the investment at the new interest rate, when if she refinances with someone else, you will have your principal returned and it will earn whatever it earns if you invest it. If you were in the business of lending money this would be a rational decision, but you're not in the business of lending money.

If her decision is between "refinance with you" and "continue to pay the note" then, no, there is no benefit to you to refinancing.

If I were in this position I'd tell her that you'd prefer if she refinanced with a bank. That way either you can get the principal out of the sale and invest it, which is an okay outcome, or she stops asking about this and you continue to make 8%, which is a good outcome.
posted by MoonOrb at 2:11 PM on January 27, 2015 [6 favorites]

Look at it this way: The 3% differential compensates you for the risk of default and for the bother of having do silly things like call her and ask her for the paperwork needed to do taxes. She is a businesswoman, managing properties for others and 40 of her own, but she doesn’t know enough to send the proper 1099 form automatically each year?
posted by megatherium at 2:15 PM on January 27, 2015 [3 favorites]

I was in a similar situation. in my case, the mortgagee didn't have the income/credit rating/financial wherewithal to get a conventional lender to refinance. They decided to be angry with me when I did not chose to lower their interest rate.
What is the reason your mortgagee won't simply refinance with another lender? Yes, she'd have some up front costs [appraisals etc] which SHOULD point her in the direction of the financing fitting her situation. WAG here--> she can't get conventional financing. That's not your problem.

In my situation I offered to buy back the property+I did.
BUY-BACK may be another choice to offer your mortgagee IF you're so inclined. Dealing with an aggressive mortgagee who'd placed herself in an untenable situation was difficult.
posted by Twist at 2:38 PM on January 27, 2015

in addition to my comment above I'll say: Don't hesitate getting a lump sum if mortgagee pays off the mortgage. The stock market may yeild a similar ROI.... WITHOUT the phone calls and aggression.
posted by Twist at 2:44 PM on January 27, 2015 [2 favorites]

If she owns 40 other financed properties, she may not be able to get a bank to refinance that loan. I am willing to bet that if she could do it, she would have.
posted by brownrd at 8:48 PM on January 27, 2015 [1 favorite]

If she owns 40 other financed properties, she may not be able to get a bank to refinance that loan. I am willing to bet that if she could do it, she would have.

This. Until I read in-depth, I was assuming we were talking about someone who might have owned the home they lived in or something. Somebody who's very experienced with this process, I'm thinking, why was this seller-financed in the first place? I think there's a non-zero chance that this individual is not actually credit-worthy to carry as much debt as they're carrying.

If she refinances with a bank, yes, in the long run you don't get the income, but you would get up-front a chunk of cash that you could do something real with. As far as you're concerned, there's no difference here between interest and principal. You didn't buy the house, so you gave up nothing. Getting the principal back at a different rate means precisely nothing to you. All this will do is either lower her monthly payments or accelerate the payment schedule and neither benefits you. Let her go to the bank, if she's that credit-worthy. If she's not, there's probably a good reason for it to stay at 8%.
posted by Sequence at 1:37 AM on January 28, 2015 [2 favorites]

I find it very suspect that she is claiming 5% on non-owner occupied (NOO/investment) properties for a 30 year term. If she was actually getting that rate and term, I assume that she would turn around and refinance this property ASAP. Investment property loans are higher rate, shorter term, usually ARMs and often have a balloon payment. She's *already* getting a sweet deal from you. A fixed rate NOO is crazy difficult to come by. Do a little research at the financial institutions where the house is, and I'm sure you won't find a note with as favorable terms as she's getting from you.
posted by stoneweaver at 11:27 AM on January 28, 2015 [1 favorite]

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