What is $80,000 mortgage at 6.5% annual interest accruing cummulatively over 7 years?

Ah, now that I understand the situation, this is what we call a "future value" problem. It's yearly interest of 6.5%, so the interest for the first year was $5,200. But this stacks onto the $80,000, so on year 2, the interest is calculated on the new principle of $85,200. By the end of year 7 (Sept, 2008) the principle balance will be over $124,000. by the end of year 11, (2012), the principle balance will have doubled to nearly $160,000.

Selling isn't your only option. Why not refinance the mortgage on the house, where his lien is paid ($80,000) and the previous (current) mortgage is paid. Then instead make RATIONAL payments monthly which include principle. That way you keep the asset, and also build additional equity. Get yourself a mortgage for maybe $130,000+whatever the current principle is on the #1 lien.

If this is not possible then it is a simple cost benefit analysis:

The question becomes: will this house gain $36,000 additional value between now and 2012? If so, then go ahead and keep it, yes you'll owe him but you should sell it in 2012, keep the additional equity and pay him off then. If your market is shaky or you don't think it will go up in value by 7% over the next 4-5 years, you should sell now. You also need to factor inflation into the analysis, ie a dollar is worth more today than it is tomorrow, etc. Find out what appreciation rates are, but frankly, again, the best deal would be a refinance that pays him today.

Lastly, I'm not sure where he's getting 140k from, either he does math like a gorilla or you've forgotten some clause in the fine print. Good luck to you!