Mortgages may be loosely categorized into two: the various regular mortgage plans offered by the banks and other lending institutions, and the owner-financed mortgage plan you strike with the owner directly. In a regular house-buying arrangement, a buyer puts in earnest money, a lump sum of something like 10-25% of the total cost of the property, as downpayment. The balance is the final amount that will more likely be fulfilled by a mortgage loan that the buyer will amortize to the lender on a regularly scheduled basis. In an attempt to have mortgages explained, let us tackle them based on general terms.

Some financing companies offer a mortgage loan with insurance fees in exchange for a very minimal premium, often less than 5%, of the final mortgage amount. Depending on the loan company, this premium could either be added to the regular payments or be paid in full when the sale is closed. Either way, interest is a burden in this regular type of mortgage because you have to keep in mind that there is interest on interest that you don’t see or feel. For most borrowers, getting a loan to make a major purchase is the wiser way to go.

On the other hand, an owner-financed mortgage calls for the seller to shoulder part of the total sale. This means the seller shoulders the cost of the property, and the mortgage previously paid for by the owner/seller – things that the buyer will otherwise have to fully shoulder in a conventional mortgage.

You would easily spot an owner-financed mortgage if you find in the ad for the property the words "owner will carry" or "seller financing." These are magic words that are often translated to mean "owner is in a hurry to sell soon, so you better grab it now!" Many smart real estate buyers opt for owner-financing. The advantages for both buyer and seller are rather clear: in this sort of loan, the original owner of the house and the buyer come to an arrangement which would lead to more convenient and leisurely periodic payments than imposed by the regular type of mortgage. With owner-financed mortgage, a higher interest may be imposed by the seller, but it’s okay and the buyer wouldn’t mind if the monthly amortization agreed upon would be affordable and the seller is willing to get his sale completely sealed over a longer period of time. So it’s a win-win situation.

Who usually offers owner financing? Among the more viable candidates for seller financing are older people who wish to be able to trade their homes down for retirement funds or for investment on another venture. They do not need a large amount of cash at close of escrow. Senior citizens may already own their homes for free, and they may even avail of some tax financing incentives when they decide to sell their houses.

Another likely candidate is a seller who has not made a property sale for some time, but has sufficient equity and do not need more to buy another house. If you are unsure which sort of loan is best for your purposes, seek the assistance of a reliable real estate agent, who could assist in having your mortgages explained to you in layman’s terms.

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