The dream of most people is to own their own home. But sometimes, the buyer cannot access a traditional bank loan. The applicant will have to go through several processes to qualify for a mortgage loan when this happens finally. This is truly tedious, infuriating and demotivating.
Owner financing may be the best option in cases like this. It guarantees a series of competitive benefits that will facilitate the purchase process and improve the quality of life of those who need to obtain a home. This mechanism includes a series of conditions and interest rates discussed below.
Owner financing interest rates 2020
From 2020 until now, owner financing has become an excellent alternative. It allows a person who wants to buy his house to obtain greater liquidity simpler and faster.
However, it has a higher interest rate than a conventional lending company.
In cases such as these, the property owner who has agreed to the financing assumes a significant risk in lending the money. It can increase its interest rate as a compensation mechanism for the same reason.
This fee can be between 4% and 10%, depending on the case. But the figure can vary according to the seller’s criteria, so it can go up to 15% if he thinks it is necessary.
But what is owner financing?
It consists of the partial or total financing that the property owner offers to a potential buyer directly. This is done after the interested party pays an initial contribution for the property.
It is an arrangement that is similar to a traditional mortgage loan. The difference is that with owner financing, the homeowner also acts as the debt owner.
To become effective, the buyer must pay up to 15% down. The amount is essential because such financing is not subject to the beneficiary’s credit history or monthly income.
How does it work?
In the agreements related to owner financing, the seller registers a mortgage on a certain property. The property will be sold by deed transfer to a buyer.
The owner lets the buyer occupy the property most of the time, even if there is no mortgage involved. Before you move in, you will have to pay the down payment.
The buyer will sign some promissory notes agreeing to pay the corresponding amount every month. But to reduce the risk rate, the seller will keep the title of the house or property in question.
Payments are made on a strict amortization schedule. A fixed interest rate is agreed upon, which can be as high as 15%.
The mortgage will not last more than ten years. After this time, the mortgage is converted into a balloon payment, which the property owner structures. If the balloon payment is possible, the buyer purchases a refinance mortgage, including a much lower interest rate.
Types of owner financing
There are several types of owner financing. Choosing the right one will depend on the interests of both the buyer and the seller. Here are the most common ones.
1. Second mortgage
This is offered by the seller of a real estate property. It occurs when the buyer cannot access traditional credit for the purchase of his own home. A second mortgage is characterized by guaranteeing much shorter terms and higher interest rates.
2. Land contract
This agreement obligates the buyer to periodically pay fixed amounts to the owner of a property. After the buyer completes the payment schedule, he will receive title to the property. Normally, land contracts do not involve banks or financial institutions.
3. Balloon Mortgage
The integral mortgage is another type of owner financing. The buyer uses a mechanism when he still has an outstanding mortgage on his property. The owner of the property agrees to the sale. The buyer is obligated to pay the down payment and monthly payments. Now, the owner uses the money to pay the mortgage.
4. Lease with purchase alternative
This type of contract is one of the most valued nowadays. The owner leases his real estate to a person. He will do so for a certain period. After that time, that person will be able to buy the property for a previously established amount.
Lease-purchase requires the buyer to make an initial deposit before occupying the property. If you later change your mind and decide that you will no longer purchase the property, you will lose that money completely.
Advantages and disadvantages of this type of financing
Now that you know what owner financing is and the interest rate applied in this mechanism, you should know its advantages and disadvantages.
1. Main benefits
- All expenses concerning bank transactions are avoided. They also exclude any commissions.
- It is a good option for those who cannot access a traditional loan.
- Payments are much more flexible. This means that there are no minimum or maximum amounts at closing the deal.
- The procedure is much faster and safer. You will not have to wait for the decision of the legal departments. You will not be tied to the studies made by bank loan representatives to know if you are eligible for financing.
2. Most notable disadvantages
- Definitely, the interest rate is much higher than the one imposed in conventional financial institutions.
- Balloon payments are an indispensable requirement in owner financing. It is done after 5 or 10 years of enjoying the benefit. If you cannot pay it, the risks of losing all the money invested in the property are enormous.
- The seller may agree to the owner’s financing but may refuse the request to become the lender.