Real-estate investors share 2 creative financing strategies that can help you lock in a low mortgage rate even in today’s environment

  • Mortgage interest rates are relatively high right now, hovering around 7%.
  • But as successful investors have taught us, it’s possible to score lower rates.
  • One strategy is to do seller financing. Another is to do subject-to financing.

The average 30-year fixed mortgage rate is just above 7% as of September 2023.

Even in this relatively high-rate environment, some homebuyers are able to lock in low interest rates.

Kent is a San Diego-based real estate investor. He, for example, owns three investment properties, the most recent of which he financed with a 2.5% interest rate. Insider checked his settlement statements and quitclaim deeds to confirm his property ownership.

Here are some of the innovative financing strategies He and other investors are employing to obtain lower interest rates and, as a result, lower mortgage payments.

1. Seller financing

Instead of using a traditional mortgage originator such as a bank, credit union, or government agency, the buyer purchases directly from the seller with seller financing. The seller acts as the lender, providing a loan with agreed-upon terms such as the interest rate and payment schedule.

This is what He did with his most recent purchase, an affordable housing unit purchased in May 2023.

According to him, he and the seller agreed on a large down payment (50%) and a low interest rate (2.5%), as well as a 10-year balloon payment. With a balloon payment, you make monthly payments at first and then pay the remainder in one lump sum at the end of the loan term.

It is important to note that the terms can be whatever the seller and buyer agree on. Another investor interviewed by Insider who used seller financing to expand his portfolio agreed to a 20% down payment at a 4.9% fixed interest rate amortized over 15 years. Two other investors, both 20-year-old college dropouts who were unable to obtain a bank loan, negotiated a 10% down payment, a 4% fixed interest rate, and a five-year balloon payment.

These types of innovative seller-finance transactions can be found everywhere. Kent He, property investor >

The seller financing was a “win-win-win.” He went on to explain: “We gave the seller what they wanted, we got a monthly payment that still made sense, where we can make $200 to $300, and we also get to give the tenant a better quality of life.” He has an amputee tenant who needs a wheelchair ramp, which he is currently installing in the house.

“These types of creative, seller-finance deals are all over,” he went on to say. “You might think, ‘I can’t buy this house because the interest rate is 7.5%. But what if the seller agrees to finance it and becomes the bank?”

The seller benefits from a consistent stream of passive income with each monthly payment. Furthermore, by working directly with the buyer, they can avoid putting their home on the market and incurring realtor fees.

The one major drawback to seller financing is the due-on-sale clause. When you take out a mortgage, there is a clause in the promissory note called the due-on-sale clause that states that if there is a change in title, the bank can require the borrower to pay the remaining balance of the loan. If the mortgage company notices a new owner, it will consider the home sold and can demand full payment of the remaining debt.

This means that in order to do this type of financing, you must first find a seller who owns their property outright.

2. Conditional financing

The buyer takes over the existing financing with subject-to financing. You do not actually assume the mortgage; it remains in the seller’s name with the same terms; however, you will make mortgage payments on the seller’s behalf.

“When you buy the house and it changes over into your name, you’re going to keep the mortgage and make the payments for that mortgage company,” explained Zeona McIntyre, a financially independent real-estate investor and consultant. “You may also be making some payments to the seller for any equity they have in the home and you would still be paying a down payment to the seller.”

The buyer will benefit greatly from inheriting a low interest rate, especially in today’s high-interest-rate environment.

“You could now have a 3% interest rate instead of an 8% interest rate,” McIntyre said. “That means the payment’s going to be much lower and maybe you can actually get some cash flow when you couldn’t otherwise.”

Furthermore, as with seller financing, the buyer is not required to qualify for a loan.

She added that there are advantages for the seller as well: “The seller becomes the lender, which means they can create terms however they want.” With subject-to, everything is negotiable. That means the seller could accept less than a 20% down payment — perhaps 5-10% — and then charge more than the market rate price.”

According to documents reviewed by Insider, McIntyre owns nine investment properties (many of which she financed creatively). She also works as a realtor. She has recently assisted sellers in listing their properties subject-to and determining how to structure the terms.

“I have sold some homes that went $50,000 to $100,000 over what the market rate would be because they’re able to give this low interest rate and low down payment,” she went on to say. “Everything serves as a lever. You can pull one up and make others fall.”

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