Rates Have Officially Hit 8% Here Are Tips To Save Money

Most people, realtors included, don’t understand Owner Financing opportunities. 

Owner Financing gives guaranteed equity to both buyers and sellers when rates go down in the future. 

Here is the context: interest rates right now for mortgages are at 7-8%. Most sellers right now have a low fixed interest rate with their existing mortgages, anywhere from between 2% and 4%. They also likely have a lot of equity in their home. That is to say, they bought their homes at, for example, $400,000. And that same home now is worth $600,000.

With seller financing, the seller creates a new mortgage with themselves as the bank. They may say that, for example, if a  buyer gives them $100,000 as a down payment, the seller will finance $500,000 ($600,000 minus $100,000 down payment) at say, 5.5% fixed rate, for the next 3 to 5 years.

So now there are two mortgages:

1. The original mortgage at $400,000 and let’s say a fixed rate of 3.50%. The monthly payment is $1,796.18 (this is a principal and interest payment, which is also called an amortized payment).

2. The new “seller finance” mortgage at $500,000 and a 5.5% fixed rate. The monthly payment is $2,838.95.

So the seller is making an extra $1,042.77 per month. In three years’ time, the seller will make an extra $37,539.72. In five years’ time, they will make a total of $62,566.20 (basically another $25,000).

In three years, the buyer will refinance, and the seller will receive another $100,000 ($500,000 minus $400,000), plus an extra $2,490.77 (because the amortized balances of a $400,000 loan versus a $500,000 loan decrease at a different rate that is advantageous to the seller). In five years’ time, the seller will still get $100,000, plus an extra $1,023.96.

But here’s the kicker. Homebuyers typically purchase the monthly payment, not the purchase price.

So in the scenario above, let’s look at the difference between the 5.5% seller financed rate and the 8% market rate for a home priced at $500,000.

1. 5.5% $500,000 = $2,838.95.

2. 8% $500,000 = $3,668.82.

That’s a big difference.

Here’s the last thing. If Buyers truly do purchase the monthly payment versus the price, then a buyer who can afford $500,000 at a 5 1/2% interest rate, can afford to pay only $386,000.