Owner Financing vs. Lease Purchase

[JulieKim]

I am researching owner financing and Lease purchase and have found myself asking the following questions:

What are the differences?

What are reasonable terms?

What portion of your monthly payment goes towards my equity in the house?


For easy explination lets work with the following numbers:

$150K Home
$8 K Down Payment
$1400 Per Month

Under owner financing would I still be able to deduct the principle interest? I understand that under lease purchase I would not, as the owner would still be the title holder?

Also, I have heard mentions of a "new law" in Texas regarding these situations, is anyone familiar with what these might be?

Any help would be greatly appreciated.

Wondering In Texas

 

[wpriske]

Julie,

Owner finance is definitely the way to go if you want the best tax relief. However, lease options (depending upon how you arrange them) can be used to pay down a much larger portion of the principle each month. The lease option also helps if you are short of down payment money and closing costs. Typically you pay anywhere from $1,000 to $5,000 as non-refundable option consideration that goes toward the purchase price, if you eventually purchase. The monthly rent should be set at market value. Anything you pay above market value should go toward the down payment. When I buy using a lease option I will usually have the seller give me double credit for anything above market. So if I'm paying $200 above market rent, I want $400 toward the purchase price each month. You should also shoot for the longest option period possible (say 36 month), with an optional one-year extention for a set fee. Make sure you lock in todays selling price, or your option is worthless.

If you already have the down payment and closing costs, I'd go with the seller financing (assuming the rate is fair). Make sure you put in the contract that you have the first right of recission to buy the note back from the seller. Sometimes a seller will sell the mortgage to another investor at a substantial discount because he wants all his cash now. It would be nice if that investor were you.

Good luck.