Entering into a contract for deed (CD) can be a viable alternative to traditional mortgage financing for purchasing a home. However, it’s important to understand the associated costs, including the contract for deed premium and the rate differences compared to standard mortgages. This article will provide insight into these costs, helping you make an informed decision.
Contract for Deed Premium: What It Is and How It Works The fundamental cost of a contract for deed is the difference between the purchase price of the home and the price at which it is sold under the contract for deed agreement. This difference is referred to as the contract for deed premium, typically ranging from 1-3% per year, depending on the home’s price. This premium is a key factor in the overall cost of a contract for deed transaction.
Factors Affecting the Contract for Deed Premium Several factors influence the size of the contract for deed premium:
- Home Price: The premium percentage varies based on the home’s selling price.
- Down Payment: A larger down payment typically results in a lower premium, as it reduces the risk and the amount financed.
- Early Payoff: Paying off the contract early can further lower the premium, making it a financially attractive option for buyers.
No Mortgage Insurance Required A significant aspect of contract for deed financing is the absence of mortgage insurance. Since a contract for deed is not a conventional mortgage, buyers are not required to pay mortgage insurance, which is typically a requirement in traditional mortgage agreements when the down payment is less than 20% of the home’s value.
Interest Rates Comparison Interest rates for contracts for deed are generally higher than those for traditional mortgages, typically by 1-2%. This rate difference is influenced by several factors, including the down payment amount. A larger down payment can lead to a lower interest rate, as it decreases the risk for the seller and the amount financed.
Understanding the costs associated with a contract for deed, including the premium and rate differences, is crucial for anyone considering this route for home purchase. It offers an alternative to traditional mortgage financing, but it’s important to weigh the costs and benefits to determine if it’s the right choice for you.
If you’re considering a contract for deed for your home purchase, we encourage you to contact us for more detailed information and personalized advice. At A Good Deed, we’re committed to helping you navigate the complexities of real estate financing and finding the best solution for your needs.
