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Owner-Financing: A Guide On Interest Rates, Taxes, and Other Things You Need to Know

Posted by admin on March 19, 2021
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If the dream of property ownership has been on your mind, chances are there’s never been a better time to buy than in today’s hot real estate market. And while there are great opportunities available out there to help get your future charted, property buying is a big step, and you’ll want to go into it with as much information as you can.

Understanding Interest Rates On Owner-Financed Property

If you’ve decided to purchase an owner-financed property, you probably know there are several benefits to doing so. From offering more flexibility to streamlining the closing process and lower closing costs, an owner-financed property offers a quick and efficient way to land ownership.

While owner-financed loans can carry a higher rate of interest than traditional loans, with rates not uncommonly falling between 4% – 10%, states have regulations governing the maximum interest rate that can be charged on such a loan.

In addition to varying interest rates, several repayment terms are available, including:

    • Fixed-rate loan: The interest rate and payment remain the same throughout the entire term. The principal balance on the loan is gradually paid down with regular payments.
    • Adjustable-rate mortgage (ARM): The interest rate adjusts periodically.
    • Interest-only loan: The buyer only pays interest for a set period, then makes a large balloon payment toward the principal.

Among these, fixed-rate interest loans are most common given the ease of record keeping. An adjustable-rate mortgage will fluctuate over time, and may lead to changes in the principal and interest being miscalculated or missed if not actively monitored. Interest-only loans are most commonly used with investors, most likely for fix-and-flip loans.

Property Taxes and Owner-Financing

Property taxes and how they apply to owner-finance options can be explained in straightforward terms. While a traditional mortgage lender will require property taxes and insurance premiums to be rolled into a single mortgage payment, owner-financing will require the borrower to pay taxes directly to the relevant agency and insurance premiums to their insurance company.

However, buyers and sellers can use the owner-financing agreement to negotiate how these payments will be handled.

Typical Owner-Financing Documents

Once a buyer and seller have negotiated the terms of the owner-financed property, either the buyer or seller will need two forms of paperwork —a promissory note, and a mortgage document, or something called a deed of trust, which serves to provide security for the loan.

A promissory note is quite simple to understand. They include the promise to repay the debt and will offer the following information as it relates to the agreement:

    • Amount of debt
    • Term of repayment
    • Interest rate
    • Repayment schedule
    • Frequency of payments, such as monthly or quarterly
    • Payment amount, including whether it is principal and interest, or takes another form
    • Identifies if a balloon payment is involved and describes specifics

A promissory note will detail items such as penalties for late payments, prepayment penalties, and whether the loan balance becomes due if the property is sold (or due-on-sale clause). In the event of a seller finance transaction, it’s not uncommon for a buyer or the seller to hire an attorney to draft the promissory note, or rely on the help of an online legal service.

Mortgages and Deeds of Trust are two documents used that serve the same function. How you determine which one is used over the other comes down to identifying where you are buying, and what serves as the customary form for the particular area.

Both documents are used to offer security for the seller, to the extent they serve as a lien on the property, and offer remedies should a buyer default on payments. These documents are filed at the local courthouse to ensure legal record exists.

Santa Cruz Properties Offers Affordable Land Purchasing Options For Edinburg Buyers

With an affordable cost of living, top-rated schools and universities, and ideal Texas climate, it’s no wonder Edinburg is seen as a great place to settle down in the Rio Grande Valley.

Whether you’re a first-time buyer or have just begun exploring opportunities for land ownership, Santa Cruz Properties has incredible land options available to meet your needs.

Offering easy and convenient owner-financing options, Santa Cruz Properties has worked to make land ownership possible for over 20 years. Contact us today if you’re ready to make your dreams of property ownership a reality!

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