Usually done in situations where the buyer cannot qualify for a mortgage through traditional lending channels, this kind of mortgage is also known as a seller or owner financing, Rather than obtaining a mortgage through a bank, the buyer provides the seller with a down payment and gives a financing instrument as evidence of the loan. Both parties are protected from future disputes when the security instrument is typically recorded in public records. If the seller has a clear title, the buyer and seller agree on an interest rate, monthly payment and loan term. Payment from buyer to seller’s equity takes place on an instalment basis. Payment options such as fixed-rate, amortization, less-than-interest, balloon payment are available. Depending on a borrower’s needs and seller’s discretion, payments may mix or match, and interest rates may periodically adjust or remain constant.
During a process of purchase-money mortgage, the seller may receive full list price or higher for a home. In case of an instalment sale, the seller may also pay less in taxes. Payments from the buyer may increase the seller’s monthly cash flow, providing spendable income. It is highly likely that sellers may also carry a higher interest rate than in a money market account or other low-risk investments.
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