Walking tightrope with underwater buyer

Raising borrower's interest rate could violate rules
Published on Dec 7, 2009

DEAR BENNY: I hold a $175,000 second trust on a house I sold five years ago. It has been payable "interest only" monthly at 5 percent. It comes due early next year and although I need the principal I have a feeling the debtor will want an extension of the loan. How much can I increase the interest and yet avoid it being usurious. I do not know how much of a first mortgage he has.

Also if he offers to pay it off but at a discount, how much should I discount it? I sold him the house for $475,000, but it is probably worth only $350,000 at present. --Doug

DEAR DOUG: Different states have different usury laws, so you should ask your attorney for the laws in your state. But clearly, whatever the usury laws are, I don't think you want to increase the rate too much or you will scare off your borrower. More importantly, you want to make sure that he is able to make his monthly payments; the last thing you want is to have him default on your loan.