Owner financing property

[Alecia S.]

I have a property I am thinking about owner financing to buy. I am not sure how it works. I offered 10000 down payment with 300 a month payment and a balloon payment at the end of two years with4 percent interest rate. The property he is selling for 32900. Can someone help me with how much interest I would be paying. Is it 4 percent of total purchase price? Confused. Thank you.

[Mitch Messer]

Hi @Alecia S.! OK, let's break this down:

1. Your seller is asking $32,900. Let's assume you agree to pay what he's asking as the purchase price.
2. You are offering $10,000 down. That means at closing he'll get the down payment, so you'll only need to pay him $22,900 ($32,900 - $10,000) over the next two years.
3. That $22,900 is your initial principal balance.
4. You'll pay that 4% interest on this $22,900. Assuming you agreed to make interest-only payments, that works out to $916 in interest per year ($22,900 x 0.04), or $76.33/month.
5. Now, if you agreed to make a $300/mo payment, then each month $76.33 of that payment would go to interest, while the rest ($223.67) would go to reduce the principal balance ($22,900).
6. After two years of payments, you'd have made 24 monthly payments and reduced that principal balance by $5,368.08 ($223.67 x 24 months).
7. So, after two months, you'd owe a balloon payment of $22,900 - $5,368.08, or $17,531.92.
8. For the record, over the two-year period, you'd have paid $1,831.92 ($76.33 x 24) in interest.

For the record, unless the seller is demanding $300, I'd look at reducing that monthly payment to improve monthly cash flow, assuming your plan is to rent this property.