Financing Options: Discount Points and Contract for Deed

Discount Points

Sometimes on a mortgage, a lender would charge the borrower with discount points. Discount points are simply charged so the borrower can receive a lower interest rate than normal. If a borrower chooses to pay the discount points, the discount points are always based on the loan amount, not the sale price. Also, remember that a point equals 1%, so if a lender charges one point, that's 1%. If a lender charges two points, that's 2% and the percentage is always based upon the loan amount. Some lenders also charge what is called a loan origination fee. This is simply the cost involved in initiating the loan, paying for the loan processor and all the people that put together the entire loan commitment. And finally, a locking commitment is where a lender will lock a borrower in on two specific things: the interest rate and the discount points. So, if a borrower applies for a loan with the lender, a lender may lock the borrower in for two months at a 4% interest rate with one discount point. That will be locked in no matter what happens in the next two-month timeframe.

Contract for Deed

What happens when a buyer walks into a real estate agent's office and says, I’d like to buy a house, but I have no job and no money. At that point, regular financing won't work, so we have to look at some alternative financing, like seller financing only, which means there will be no regular lender involved. We call this document either a contract for deed, an installment contract or a land contract. Any of these three terms mean the same thing, which is owner financing. The terms involved are as follows- the seller is called a Vendor, which is the seller or the giver, whereas the buyer is called the Vendee or the receiver. When a contract is signed on a contract for deed, let's assume it's a 10-year contract for deed, the buyer will make payments to the seller over the entire 10 years. During that entire timeframe, the seller or vendor retains the legal title because the seller keeps the deed the entire time that the payments are being made. Likewise, the vendor or buyer at the time of the signing of the contract receives what is called an equitable title or equitable interest. Equitable title simply means that the buyer has the right to get the deed later on after the entire payments have been made. So, let's assume that over 10 years, the buyer makes all the payments to the seller.  Then after 10 years, the seller will finally give the deed to the property to the buyer. The buyer will then have legal title. So equitable title is what is conveyed through a contract, whereas legal title is what is conveyed through a deed.

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