The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: RysChristensen on July 09, 2015, 06:07:38 PM

ETA (ETPreface?): Nevermind. Contract language turns out to be totally confusing, and I'll only be confident as to what the answer really is after the first payment. I'll bump this up then if necessary...
I’m hoping one of the more spreadsheethappy math addicts can help me out! I’d like to optimize payback of my soontobe land loan, which is for $45,500 at 5.5% (360 day basis, simple interest), fixed for 5 years, at the end of which it’s refixed for another 5 years unless I object, in which case it becomes an ARM. Current 5 year period P+I is calculated at $315.10/ month. Though I’m going to be working on building up a side gig, I’m calculating based on my current information (and very carefully not doing anything new and different to rock the underwriting boat…).
Because I’m self employed, I never know quite how much I will make each month, but calculating on my “safe” baseline number, I can pay the required amount of the mortgage, plus another $300/month. Beyond that, the amount I could have ranges from $0 $1500, or so quoth YNAB reports. I also want to put in at least a greenhouse (future income source, very rough cost estimate of $25k) and a small house (very rough estimate of $45k plus foundation for the finished shell). Depending on what the forester I hire says, I may be able to offset some costs with timber sales (it was harvested in 2013, and I don’t have a timber management plan yet). And yes, like others here, I'm willing to live in a temporary dwelling and build the house last, if needed...
The fly in the mathematical soup comes in here:
If Bank’s loan is prepaid within the first five (5) years, or within any future Fixed Rate Period, <as defined above>, a prepayment premium will apply to the amount being prepaid. The prepayment premium will be 5% of the prepaid amount in the first year of any Fixed Rate Period, 4% of the prepaid amount in the second year of any Fixed Rate Period, 3% of the prepaid amount in the third year of any Fixed Rate Period, 2% of the prepaid amount in the fourth year of any Fixed Rate Period, and 1% of any prepaid amount in the fifth year of any Fixed Rate Period.
This is one of those situations where I know that as soon as I think I have all the logic and calculations down, I’ll find out that I missed something critical. Also, I’m a spreadsheet ninny. Help? Please?
Rys

If Bank’s loan is prepaid...
Sorry to nitpick, but getting the correct answer depends on asking the correct question(s), so...
...does "Bank's loan is prepaid" mean "Bank's entire loan is prepaid", or does it mean "any portion of the Bank's loan is prepaid"?
In other words, could you prepay all but $1 without penalty or does every extra $1 paid above the minimum monthly amount get penalized?

If Bank’s loan is prepaid...
Sorry to nitpick, but getting the correct answer depends on asking the correct question(s), so...
...and as soon as my loan guy answers that definitively, I'll update this? I read it as every dollar over the scheduled payment, but we'll see what he says.

Ok, never mind then. It's apparently far more bizarre than even those two options. The explanation I got back was this: You will only get charged a prepayment penalty in the event that you refinance this loan in the first 5 years with a different bank. If you pay an extra payment each year or add a few dollars to every payment there is no penalty. If you win the Lottery and pay it off there isn't a penalty. If you were to refinance us with another bank in year 1 the penalty would be 5% of the remaining principle balance of the loan, refinance in the 2nd year the penalty drops to 4%, etc.
In this case, I'll just test it out by paying extra the first month and see what I get. If this holds true, then it acts like a regular loan... It still seems like a weird system and nothing like what I thought it said. (Still way ahead of the place that offered me 6.3% and has a loan person who is impossible to actually get in touch with!)