Time to cover another important number, but first a regression to yesterday's topic.
As I said in part two of this series on contracts for deed, as the Seller of some fine Mankato real estate, I wouldn’t go for anything but a standard 30 year amortization schedule with a two or three year balloon unless there were special circumstances. But that doesn’t mean you, as the Buyer, shouldn’t make the attempt to negotiate the terms. There are no rules that state that a contract for deed needs to be written this way or that way. The thing about contracts is that they basically commit to paper what two people or two parties have agreed about. It’s conceivable you could buy a home on a contract and have the entire amount of your monthly payment go towards the house and not pay any interest at all! It would probably take some serious convincing on your part, or you might just be in the right place at the right time to find someone who is feeling extremely generous to buy from, or maybe you’ll buy from someone who should have spoken to their lawyer or financial planner before agreeing to your terms. But that is life. If you get a good deal, I’m not the one to say you shouldn’t take it. You have to be able to sleep at night, though, so think it through.
Now, having said that, we can get on to the topic at hand: the interest rate on your loan.
We’ll now assume that you, as the Buyer, will be paying me, the Seller, according to a 30 year amortization schedule with a three year balloon payment at the end. I want the interest rate on my loan to you to be higher than the going rates for a regular bank loan for a couple of reasons:
· I’m not a bank, and I don’t have systems set up to deal with losses associated with problem properties. I just have me and my bank account. That means that I will want to see more cash flow to allow me to protect myself if you should begin, for whatever reason, to stop paying your monthly payment. Banks have lots of money; I don’t, so I want to have more in case of emergencies.
· If you’re paying a comparatively high interest rate to me, it will encourage you to refinance with a bank or other lender to pay a lower interest rate. And when you do, I’ll be out of the deal.
Normally, I will want you to pay anywhere up to 3% more on our contract. (But that’s negotiable. Sound familiar?) You talk me down and we agree on 7.25%.
Next time: Down payments.