How to Calculate Interest Only Owner Finance Payments

Calculating the payment needed to cover just the interest on an owner-financed contract or promissory note is simple. Just follow three easy steps and avoid two common pitfalls.

Follow 3 Easy Steps

Step 1: Obtain the current principal balance and interest rate from the land contract or promissory note

Step 2: Times the balance by the interest rate

Step 3: Divide by 12

In fact it is so simple you don’t need the best financial calculator, any standard calculator will suffice.

Here are the steps in action:

Step 1: A seller-financed note has a balance of 100,000 at 8% interest

Step 2: $100,000 x 8% (or .08) = $8,000 (interest for the year)

Step 3: $8,000 divided by 12 = $666.67 (monthly interest only payment)

What It All Means

If the buyer pays just the interest every month then the balance stays the same and does not decrease.

If the buyer makes a payment that is more than the interest only portion then there is a principal reduction and the balance goes down.

Unfortunately there are two common mistakes people unknowingly make with interest only payments.

Big Mistake #1 – No Balloon Mortgage Date

When a note calls for interest only payments the balance does not amortize. This means the repayment terms must state a date in the future when the full balance will be all due and payable.

If it fails to include the balloon date then the note would never pay off! Sellers and note buyers alike want to know that the buyer will eventually have to pay for the property they purchased.

Big Mistake #2 – No Equity Build

Since the payment is only covering the interest the buyer is not building equity through amortization. A buyer without equity or “skin” in a property purchase has a much higher likelihood of both delinquency and foreclosure.

This high risk factor can be offset when a buyer makes a large down payment at closing. On the flip side the risk is increased when a buyer makes a low or no down payment with an interest only repayment plan.

If values decline it can quickly lead to the buyer being underwater, owing more than the property is worth. In the current market an amortizing payment is preferable to the majority of note investors.

Are you a buyer looking to purchase property with seller financing?

A seller that wants to offer owner financing for a fast sell?

A finder that wants to earn money referring deals to note investors?

Be sure to grab your copy of the Complete Money Making System to Buying, Referring, Creating and Holding Real Estate Notes!

About Tracy Z

Tracy combines her knowledge of cash flow notes with the power of marketing online to help grow your business! She can be reached at Tracy@NoteInvestor.com 1-888-999-7905 or at Exposure One Marketing.

Comments

  1. I am buying a home and the owner is financing, it’s selling for 80000 and I’m giving 10000 down what are the tax rates , or can the owner charge any tax rate they want

    • Hello Josephine,

      Congrats on your pending home purchase with seller financing. There are real estate taxes charged by the county (and also the city in many places). To find out the current annual real estate taxes you can contact the county tax assessor. You will want to also ask if there are any past due real estate taxes, special assessments/liens, or exemptions. If you use a title company and closing agent they usually check this and prorate at closing. The seller does not set the real estate tax rate however they might ask that you pay 1/12th the amount each month to set aside in an escrow/reserve account to pay the real estate taxes when they come due.

      For the terms of repayment (like the interest rate charged on the note) the seller can request what they want, provided the rate does not violate any usury laws. Ultimately those items can be negotiated between the two of you as part of the purchase offer and then incorporated into the Note and Mortgage (or Note and Trust Deed).

      Be sure to use an attorney, title company, and/or closing agent for the purchase. The seller may also use a servicing agent to collect and track the monthly payments after closing.

  2. Will Kaeble says

    Hi Tracy:
    I am thinking about buying the rental property I live in. I want to make sure all my ducks are lined up when I propose this to my landlord. We have discussed this in the past and she seemed open about it as she would like to have a monthly stream of cash. I would appreciate any information you may have that will help. I will be happy to cover your costs for this information if it helps.

    Thanks.

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