5 Things to consider with owner financing.
1. Interest Rate
The interest rate along with the term determines the amount you will pay over the life of the loan for your home. If you have a high interest rate combined with a long term (years), it is possible that you could pay 3 times the sales price for the home if you make all the payments until the loan is paid off. When owner financing, a rate between 8-10% is considered normal during typical market conditions.
2.Term of the Loan
The term or number of years you will finance the loan is also important. The shorter the term, the higher the payment will be and vice versa. The shorter the term means you will pay off the home faster. With a 30 year mortgage you pay almost nothing towards the principal in the first few years. I recommend selecting a 15-20 year term to make sure that you are paying off a significant amount of your loan with each payment. This one factor might be the single most important decision that you make when obtaining financing.
3. Fixed Rate
You want to make sure that you have a fixed rate mortgage. With a fixed rate mortgage the only way your payment can change is if the taxes or insurance go up or down. The interest rate stays the same and the amount you are paying for the home over time does not change. Adjustable rates are risky to say the least. It is certain that they will go up at some point and they rarely go back down. There is just too much risk involved with an adjustable rate mortgage. Try to avoid them at all costs.
4. No Pre-payment Penalty
This is important because if you ever want to refinance or sell the home before it is paid off, you will pay a penalty. There is no reason you should agree to a pre-payment penalty. The truth is that you have to question any lender that wants to charge such a fee because it appears that they don’t want you to ever sell or refinance the home. The decision to sell or refinance should be made by the homeowner based on their own unique circumstances.
5. No Balloon Note
A balloon note can be used by the lender to foreclose on your home. If for any reason you are not able to refinance or pay off the note after the balloon period expires, you are in default and the lender can foreclose on the home.