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Unformatted text preview: ation clause on the existing encumbrance. (Rarely the case today except for FHA and DVA financing.) The property is purchased subject to existing loans. The seller pays off existing first trust deed payments with payments made by the buyer on the AITD. Market – The AITD is frequently used in a tight money market or when interest costs and loan charges are high. It may have more price and sales flexibility, due to the built–in financing terms. Title – Legal title is conveyed by grant deed and is insurable by a policy of title insurance. Default – If set up with a trustee handling all payments and holding the trust deed, both buyer and seller can be protected from default. If it is a purchase money transaction, deficiency judgments are not applicable. It retains favorable loan terms on existing loans in the event of foreclosure. Lock–In – An AITD can be used where an existing note contains a lock–in clause which prohibits prepayment of a loan. Example of AITD Financing
A property is sold for $150,000. The existing first trust deed is $50,000 payable at $450 per month including 10% interest. There is also a second trust deed on the property for $30,000 payable at $350 per month at 11½%. The purchaser made a down payment of 10% of the selling price. The entire AITD of $135,000 ($150,000 minus $15,000 down payment) has a monthly payment of $1,494 including 13% interest. Calculation of seller's effective interest: AITD:$135,000 x 13% annual interest = $17,550 Exiting loans 1st TD 2nd TD Total $17,550 $50,000 x 10% = $30.000 x11 ½% = $80,000 AITD annual interest
Dynasty School (www.dynastySchool.com) 9-39 $5,000 annual interest $3,450 annual interest $8,450 REAL ESTATE FINANCE
–8.450 $9,100 $135,000 –80.000 $ 55,000 Existing loan's annual interest Seller's net annual interest received AITD loan amount Existing loans Seller's equity Seller's Net /Seller's Equity =$9100 / $55,000 = 16.545% =16.55% = effective interest Seller makes a profit on the existing l...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10