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The seller continues to hold title to the property until all payments are made. Thus, you, the buyer, acquire no equity until the contract ends. If you fail to make a payment on time, you could lose a major investment.
These loans are popular because they offer lower payments than market rate loans. Land contracts are also being used to avoid the due on sale clause. The buyer and seller may assert to the lender who provided the original mortgage that the due on sale clause does not apply because the property will not be sold until the end of the contract. Therefore, the low interest rate continues. However, the lender may assert that the contract in fact represents a sale of the property. Consequently, the lender may have the right to accelerate the loan, or call it due, and raise the interest rate to current market levels.
Rate and payments are relatively low for first few years, then jump to reflect full rate in mortgage.
Buy-downA buy-down is a subsidy of the mortgage interest rate that helps you meet the payments during the first few years of the loan. Suppose a new house sells for $150,000. After a down payment of $75,000, you still need to finance $75,000. A 30-year first mortgage is available for 12 %, which would make your monthly payments $771.46, or beyond your budget. However, a buy-down is available: for the first three years, the developer will subsidize your payments, bringing down the interest rate to 9%. This means your payments are only $603.47, which you can afford.Rate and payments are initially low, then jump and may change throughout loan depending on changes in the index. There are several things to think about in buy-downs. First, consider what your payments will be after the first few years. If this is a fixed rate loan, the payments in the above example will jump to the rate at which the loan was originally made -- 12 % -- and total more than $770. If this is an adjustable rate loan, and the index to which your rate is tied has risen since you took out the loan, your payments could go up even higher. Second, check to see whether the subsidy is part of your contract with the lender or with the builder. If it's provided separately by the builder, the lender can still hold you liable for the full interest rate (12 % in the above example), even if the builder backs out of the deal or goes out of business. Finally, that $150,000 sales price may have been increased to cover the builder's interest subsidy. A comparable home may be selling around the corner for less. At the same time, competition may have encouraged the builder to offer you a genuine savings. It pays to check around. There are also plans called consumer buy-downs. In these loans, the buyer makes a sizable down payment, and the interest rate granted is below market. In other words, in exchange for a large payment at the beginning of the loan, you may qualify for a lower rate on the amount borrowed. Frequently, this type of mortgage has a shorter term than those written at current market rates.
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