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How Do Private Mortgages Work?

For those who don’t meet the qualifications of traditional mortgages, private mortgages can be of assistance. A private mortgage is often provided by a person or business rather than being funded from a bank or another finance provider. They are especially helpful for individuals who’ve been turned away from traditional providers and are looking for a private lender that will look past their credit history to give them the money they need.

 

How different is it from a traditional mortgage?

There are 4 key factors that set private mortgages apart from traditional ones.

  1. Amortization – It’s a relatively short-term solution as terms tend to range between 1-3 years. However, some lenders may also offer long-term solutions with amortizations that reach up to 35 years.
  2. Interest Rate – While traditional lenders provide you with some of the most affordable mortgage rates, private mortgage interest rates range from 10-18%. Given that private mortgages are typically a last resort due to bad credit and the buyer is deemed to be of high risk, they often have to pay a higher rate to borrow money.
  3. Payments – When using a conventional mortgage, your monthly payments go towards both your principal and interest. However, with a private mortgage, only the interest is repaid and the principal never goes down.
  4. Fees – If you’ve used the help of a broker to get a private mortgage you might need to pay a commission to the broker on top of your monthly fees. Setup fees will also be part of your responsibility to pay for. You could end up with paying 1-3% of your loan amount in simply extra fees.

How are private mortgages calculated?

Let’s look at an example: Jane needs $200,000 to buy a property that the banks won’t qualify her for. A private lender decides to lend Jane the $200,000 via a private mortgage, and so she borrows the money at a 10% interest rate over a 2-year term. Her monthly interest payment would be calculated like this:

10%/100 = 0.1

Monthly interest: 0.1/12 months = 0.0083

Monthly payment: $200,000 × 0.0083 = $1666

Interest over term: $1666 × 24 months = $39,984

At the end of the term Jane will pay her private lender a total of about $40,000. She might then decide to transfer her $200,000 from a private lender to a traditional one so she can start paying down her principal.

*If there were setup fees/a commission, this would be added on to the $200,000 that she needed to borrow. For this particular example, the numbers are kept simple and we did not add any extra fees.

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