Walking tightrope with underwater buyer

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

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by CareyBot

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