Which bank offer would you take?

17 years ago

We are in the process of purchasing a commerical property. The bank has offered us two options. The first option is an ARM at 7.625%. They are willing to put a 12% ceiling and a 7% floor. Here is the language:

Borrower will pay this loan in accordance with the following payment schedule: 60 monthly consecutive principal and interest payments in the initial amount of $1389.77 each, beginning January 15, 2007, with interest calculated on the unpaid principal balances at an interest rate of 7.625% per annum; 119 monthly consecutive principal and interest payments in the initial amount of $1389.77 each, beginning January 15, 2012, with interest calculated on the unpaid principal at an interest rate based on the Five Year Treasury Securities Index adjusted for Constant Maturity (currently 4.580%), plus a margin of 3.000 percentage points, resulting in an initial interest rate of 7.580%; and one principal and interest payment of $117,771.42 on December15, 2021, with interest calculated on the unpaid principle balances at an interest rate based on the Five Year Treasury Securities Index adjusted for Constant Maturity (currently 4.580%) plus a margin of 3.000 percentage points, resulting in an initial interest rate of 7.580%.

I am not completely clear on this, but I think what it is saying is that there will be one adjustment, then a balloon payment. However, I thought they said it would adjust every 5 years, so I do not know why there is no language about 2017.

The second option is a 10 year fixed arrangement at 7.49%.

With the first arrangement, the monthly payment is $1389.77; with the second, the monthly payment is $2220.

Comments?

Sort by:Oldest

Comments (7)

chrisdoc
17 years ago
I'm not an expert in Mortgages by any stretch but I do have a couple observations from your post:

You cut an pasted bank verbiage about the 1st loan instead of retyping it in a simplified form. That indicates that you don't completely understand it. DON'T SIGN SOMETHING YOU DON'T UNDERSTAND. I would tell them you need to have it broken out into a table or something. (That's what I would do before making a decision.)

The first option says "one principal and interest payment of $117,771.42 on December15, 2021". That seems like it would be difficult to come up with.

12% ceiling and 7% floor on an ARM. Could you really make the payments at 10%? How about 12%? Have them tell you what that would do to your montly bill.

Option 2 costs about 50% more / month than option 1. Are you really considering both? Most people can barely afford their payment let alone one that is 50% higher.

The first option appears to go longer than 10 yrs. Why did you compare it to a 10 yr fixed? What rate would they charge you on a 30 yr fixed? I bet the monthly bill would be a lot closer to the first option if you did that. (As a matter of fact if they kept the rate the same it would only cost you about $1,300/month)

As a general rule, I wouldn't consider an ARM but especially not now as the only direction rates are likely to go is up.

Find out if there are any pre-payment penalties associated w/ either mortgage.
mfbenson
17 years ago
It depends on how much income the property will genenerate, but if it makes more than enough for either option I'd definitely take the second. For the first, you're paying for 5 years, then paying a higher payment for another 10 years, and then you need to cough up a balloon payment that's going to be at least $117K and even more than that if interest rates rise (which they most likely will).

For the second option, you pay 10 years, then you own it free and clear.
Related Discussions
Refinance with Bank of America taking F-O-R-E-V-E-R
Q
Comments (11)
At least talk to some other banks. Last Oct I applied for a HELOC with Wachovia and got this answer and that answer and by early Jan they wanted my documents again and to run my credit score again because it had been so long...all their doing! Granted, this was while they were being taken over by Wells Fargo. Coincidentally, I was updating my homeowners insurance with my insurance company (USAA) when they did their "while hanging up sales pitch" of "are you interested in home improvements?" Well, as a matter of fact yes I am, tell me more. I was approved within 48 hours and just had to wait out a mandatory 14 day (IIRC) waiting period to get the credit line. And approved for twice as much. Not a true apples to apples comparison, but it does illustrate that it really can vary from bank to bank.
...See More
Bank made counter offer!!!!!
Q
Comments (28)
An offer (or counteroffer) can be conditional upon a subsequent act (final approval, for example), but the offer must clearly state that. An addendum to the bank's counteroffer that merely says "the bank is free to accept offers from anyone" does not clearly state that final approval is required. What it means is that the counteroffer does not prevent the bank from accepting another offer, and that's something quite different. The bank can accept another offer but only up and until the buyer accepts the counteroffer because that act creates a legal contract between the parties. At that point, the bank can no longer accept another offer. I don't mean to be argumentative either. Without seeing all the documents, it's not possible to know whether there's a binding contract or not. But I don't think it's a good idea just to assume that the bank has covered all the bases without running everything by a lawyer. After all, we know from the forum that some banks are trying to foreclose on houses when they have no documentary proof that they own the mortgage. That's a lot bigger bluff than anything that may be going on here.
...See More
Should we take this offer - owner financing?
Q
Comments (11)
Hi Margaret, There are many ways to do this... and an outright sale with seller financing is probably not the best way for your interests, in my opinion. 1st off, you are being under-compensated in the terms... undeveloped land financing requires 20-50% down, and has 9-12% interest rates with 2-8 points in closing, standard. HOWEVER, then again, you have a ready and willing counterparty (which could go away, and leave you with no counterparty for another many months, potentially...) Eviction is generally much quicker, cheaper, and more painless for you than a foreclosure to execute... SO, I would suggest instead of an 18 month sale note, go with an 18 month lease with an option to purchase. Make the lease, and the option contract, two seperate and unrelated agreements (actually the option can reference the lease, but do not have the lease contract reference the option at all. It is the difference between equity laws and landlord laws, and you want the lease contract to be enforceable without regard to the option agreement.) You definitely want guidance on this if you haven't done it before, I would suggest. Find yourself an experienced real estate investor as a coach... check with your local real estate investor club for who comes recommended. Luck! Dave Donhoff Leverage Planner
...See More
Roses as Rorschach tests - which bouquet would you take home?
Q
Comments (38)
Thanks for your patience everyone (particularly Lisa). You've actually timed me pretty well and it's time to put everyone out of their misery with...the ANSWERS. The bouquet I would have picked and the one the primary woman being honored picked was the single overlap (knew she was a woman after my own heart)... Neon Lights of Broadway. I really thought I gave that one away in my descriptions since I mentioned neon at least three times in describing the various bouquets, but since there's lots of neon everywhere there were a lot of choices. When Cori Ann nailed my choice immediately I figured that would be that, but fortunately everyone had their own perceptions and that made it more fun. For the rest of her family members, as soon as I said they could all take a bouquet (or all of them) home, one of the other ladies made a beeline for Oddballs and kept a death grip on it for the next half hour daring anyone to challenge her for that one. Go for it! The other two chose Pastel Princess and Apricot Galore, which showed agreement with many of you. As we were setting up the bouquets, one of our male computer experts that was helping mentioned casually, "These are nice but I really like THAT one". Somehow I didn't even have to turn around to know he meant Prairie Harvest. When I asked if that was indeed the one, he said yes and added that they were "guy flowers" (his words, not mine). I heard the same comment from multiple guys at the party, including a male member of the family as they were gathering up bouquets. When he was reminded that he could take that one home, he looked at us like we were crazy and shook his head with a "what would I do with flowers" look on his face. When I scrolled these photos past my twins and asked what they would pick, my son immediately responded, "The purple one". Hmm. Since everything had purple spiky things in it, I told him I needed some help here. He had me scroll past the bouquets and singled out "The Pit of Despair". My daughter immediately chimed in "me too". The surprising orphan in all these selections was Seasons in the Sun, which I'd unofficially say was the majority favorite among you chiming in. Perhaps the gentle harmony of this one didn't draw the eye as much as the brighter bouquets in person, where you who have more time to contemplate things liked it more. I'd have to say among the rose bouquets it's the one I would least pick (granted, I like them all) because I like pizazz and this one is, well peaceful. It's like my yard - most people like the shade bed best because it has harmony and gentle colors that tie everything together, but I like any other bed that has something vivid in it even if it is spotty overall. Just my taste, but I can appreciate and even create things with harmony when I try. The selections left me with my second favorite - Ow My Eyes Hurt. The bouquet lasted a surprising eight days on my desk, only pulling out a few stragglers here and there. Maybe there's something in the caffeine of the Mountain Dew (smile). I'll see if I can find the picture I took after a week or so. I would stare over at Milestone and sigh happily into its neon depths (not a rose that usually blooms that neon for me, BTW). I also discovered that something in that bouquet had a scent but I have to say I didn't find it overwhelmingly positive (smelled musty to me). Everyone that came in my office commented on how nice it smelled though, so it's just my odd nose. Prairie Harvest went out into a table in our office bloc since a friend in that area had donated it, and the computer tech that liked it is also in our bloc. My secretary picked The PIt of Despair for her desk. Our clinic managers picked Seasons in the Sun, and Big Bertha sat proudly in a corner of the clinic for the week. So every bouquet got appreciated, and for those of you who liked that bouquet someone appreciated it sincerely. Thanks for playing everyone and I appreciate each and every one of your comments. Cynthia
...See More
lyfia
17 years ago
How long are you planning on keeping the property? Also what does your income potential going to cover the first 5 years.

I'm assuming this is some sort of business venture. Do you have an accountant? What do they say what will be most beneficial in terms of taxes etc.?

There is a lot more to take into account than what you have presented. Does the property already generate income or will a lower initial payment be good to get started. Are you keeping it for a while or would you be likely to sell in 5 years. What options would you have for re-financing after 5 years if the rate was too high? What is better for taxes? etc. etc.
emb7
17 years ago
That's not much of a difference. IF the ARM was 6.5 maybe. but I'd go with the fixed since they are so close.
swanoir
Original Author
17 years ago
Thank you all for your input. To address some of the issues that were raised, I didn't cut and paste the information in my original post - I typed it exactly as it was printed so that I could get accurate feedback. The two options I noted were the two options we were given - the bank we were working with does not offer a 15 year fixed rate. A 30 year fixed rate is not available for commerical properties.

We plan to keep the property for a minimum of 15 years. The property will be the site of our new clinic and since we have been in practice for almost 11 years, the property will generate income as soon as we move there.

Yes, we have an accountant. I asked the question before meeting with him in order to be able to bring a more informed position to the table. We discussed the issue and decide to increase the down payment and go with the 10 year fixed. And yes, Chrisdoc, we can afford the increased monthly payments. It would have been stupid, and a waste of everyone's time, to ask the question if that wasn't already a possibility.
C Marlin
17 years ago
"You cut an pasted bank verbiage about the 1st loan instead of retyping it in a simplified form. That indicates that you don't completely understand it."
I certainly didn't see that indication.
Commercial loans are very different than residential. Fixed rates are rare, rates are higher, loan to value is lower.
sparksals
17 years ago
If you ever get to the 12% ceiling rate, how much higher would the payment be and what would be the amount paid over the entire course of the loan compared to having the 10 year fixed? I'm not a risk taker and I think with the way interest rates are going, an ARM would be a very dangerous situation. There's just too many unknowns and at least with a fixed rate, you know your payment will never increase.

Which bank offer would you take?

Comments (7)

chrisdoc

mfbenson

Related Discussions

lyfia

emb7

swanoir
Original Author

C Marlin

sparksals

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

Which bank offer would you take?

Comments (7)

chrisdoc

mfbenson

Related Discussions

lyfia

emb7

swanoirOriginal Author

C Marlin

sparksals

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

swanoir
Original Author