Owner financing is a great option available for people who wish to buy a property instead of going for a traditional mortgage. However, it is important to understand that there are some benefits and drawbacks to owner financing. One of the biggest drawbacks that you can find in owner financing is the relatively high interest rate. You will need to keep this fact in your mind before you pick this option of financing. From this article, we will help you to get a better understanding of the average interest rate associated with owner financing. Based on that, you can make sure that you are not being ripped off by your lender.
What exactly is owner financing?
Before taking a look at the interest rate of owner financing, you will need to understand what exactly it is. Owner financing is also known as seller financing. This is a proven method available to go ahead and finance a property. In here, the property owner will hold the loan of a buyer. Due to the same reason, you can even call owner financing as seller financing.
Owner financing is pretty much similar to bank financing. However, you will be making the monthly payments to the seller. You will need to continue making payments for an agreed duration of time. The rate of interest will also be determined between you and the seller. It is possible for any property buyer to proceed with owner financing.
Even though owner financing is not the most prominent financing option, there are numerous reasons to go for it. For example, if you are not in a position to secure a traditional mortgage, you may take a look at owner financing. However, it is important to be mindful of the interest rate that you have to pay to your seller as well.
The interest rate associated with owner financing
As mentioned earlier, the interest rate of owner financing is relatively high when compared to other financing options available out there. The main reason why you have to pay a higher interest rate is that the seller is taking an added risk to lend the property to you. Due to this risk, you will have to spend more money. The higher interest rate would be reasonable to offset the overall risk.
The average interest rate associated with owner financing is between 4% to 10%. However, there can be instances where you will have to spend more than 10% on owner financing as well. It is important to note that different states have their own usury laws. These laws are regulating the maximum interest rate that can be assigned to a loan. Therefore, you will have some protection to refrain from paying extremely high-interest rates. On the other hand, you will also notice that there are different repayment terms available out there for you to consider with owner financing as well. The interest rate you have to pay would vary on those factors. This is why you should be aware of what those factors are.
Fixed-rate owner financing
When it comes to fixed-rate owner financing, the payment amount and interest rate would remain the same throughout your loan. Then the principal balance would be paid off regularly along with time. This is the most common owner financing option available out there to consider.
In an interest-only loan, you will be making only the interest period for a defined duration of time. However, you will have to make a big balloon payment at the end. It is important for you to be ready to make this balloon payment. Otherwise, you will miss out on the home as well as the interest amount that you have paid so far.
Adjustable-rate owner financing
As you can guess, the interest rate in adjustable-rate owner financing would change along long with time. This will usually be agreed upon between you and the seller at the beginning. However, there will be regular reviews, which would determine the interest rate.
If you are trying to make an option out of these, we strongly encourage you to take a look at the fixed rate owner financing options., Then you will be able to clearly define everything at the beginning and proceed along with time. However, you should stick to regular payments along with time. Otherwise, you will miscalculate the interest rate.
Understanding the balloon payments
When you take a look at owner financing, you will figure out that most of them come with the option called balloon payments. You should have a clear understanding of this concept of balloon payments as well. This is referring to the lump sum, which you are paying after a certain period of time. Some of the buyers will have to make this lump sum payment after five years or ten years. Or else, you will have to make the payment at the end of your loan term.
You will usually have to go ahead with making regular monthly payments against your loan. Likewise, there are multiple options available for you to make the balloon payment as well. If you are purchasing the property for investment purposes, you can sell it at a higher price and settle the balloon payment. Or else, you will be able to settle the balloon payment with your savings. You may be able to go for refinancing or even apply for a mortgage by building equity.
Now you are aware of the interest rate associated with owner financing. Keep this in mind and make sure that you clearly define the interest rate that you will have to pay. Then you will be able to overcome headaches that you will have to deal with, as you go ahead and make repayments on your owner financing. This will deliver some outstanding returns to you in the long run as well.