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How to Calculate a Mortgage for Owner Finance

by Tim Plaehn

Calculating the payment amounts for an owner-financed mortgage just involves plugging the details of the loan into any handy mortgage calculator. The important factors with a non-conventional mortgage are the terms agreed to between the buyer and seller. Seller financing allows the two parties to be more flexible than with a bank mortgage concerning the length and interest rate of the loan.

Determine the basic terms of the loan, including the portion of the purchase price to be carried by the owner, the interest rate, and the length of the loan. The loan amount is the result of the sales price, but the rate and the length of the loan are negotiable. The goal is to find a payment that works for the buyer, and a repayment and earnings result that is acceptable to the seller.

Plug the agreed upon mortgage terms into an online or spreadsheet-based mortgage calculator. The calculator will provide a level monthly payment amount for the loan and an amortization schedule that shows the breakdown of principal and interest for each payment. As an example, enter a loan of $150,000 for 20 years with a 6 percent interest rate into the calculator. You should get a monthly payment of $1,074.65. Print out a copy of the amortization schedule for each party to be included with the loan agreement.

Add together the yearly property taxes on the home and the cost of an annual homeowners insurance policy, and divide by 12 for a monthly rate. The new homeowner is responsible for covering the taxes and insurance, but the seller needs to be sure they are paid. For the example, the annual property taxes are $1,800 and insurance costs $600 for a total of $2,400. Dividing by 12 gives a monthly amount of $200.

Add together the loan payment plus the monthly cost of taxes and insurance to get a total house payment. For the example used, the total payment would be $1,274.65 per month.

Tips

  • The use of an escrow company to handle payments is optional with an owner-financed home purchases, but putting a third party in charge of the money ensures that the taxes and insurance are timely paid. Using escrow protects both the buyer and seller.
  • Longer loan terms equal lower payments. On the flip side, a seller may accept a lower interest rate on a shorter term mortgage because he will get the principal paid off sooner.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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