how to calculate finance charges on a leased vehicle

How to Calculate Finance Charges on a Leased Vehicle.

At some point, you may want or need to have a new car. You may also want to weigh the cost differences between leasing and buying before you make your decision. One way to compare costs is to figure out exactly what you will be paying for each. When you buy a car, you finance the amount charged for the vehicle and the interest rate is clear. When you lease a car, you pay to use the vehicle for a period of time, similar to renting it, and turn it in at the end of the lease. The finance charges for a lease may not always be clear. To calculate the finance charges on a leased vehicle, you need to know only a few things: the net capitalized cost, residual value and money factor. If these are known, calculating your finance charges is a simple process.

Part 1 Collecting Necessary Data.

1. Determine the net cap cost. The term “net cap cost” is a shortened form of net capitalized cost. This is ultimately the overall price of the vehicle. The net cap cost may be affected by other additions or subtractions, as follows.

Any miscellaneous fees or taxes are added to the cost to increase the net cap cost.

Any down payment, trade in or rebates are considered “net cap reductions.” These are subtracted and will reduce the net cap cost.

Suppose, for example, that a vehicle is listed with a cost of $30,000. There is a rebate or you make a down payment of $5,000. Therefore, the net cap cost for this vehicle is $25,000.

2. Establish the residual value of the vehicle. This is a bit like predicting the future. The residual value is the vehicle’s value at the end of the lease, when you will return it. This is always a bit uncertain because nobody can predict the exact condition of the vehicle, the mileage or the repairs that it will undergo during the lease. To establish the residual value, dealers use industry guide books, such as the Automotive Leasing Guide (ALG).

The graphic shown above illustrates the decline in the vehicle’s value over time. For this example, the residual value at the end of the term is set at $15,000.

Some dealers choose not to use the ALG. Instead, they may develop their own guide or functions for setting residual values.

3. Find out the dealer’s money factor. Leased vehicles do not charge interest in the same way that purchase agreements do. There is, however, a finance charge that is analogous to interest. You are paying the leasing company for the use of their vehicle during the term of your lease. This charge is based on a number called the “money factor.”

The money factor is not generally publicized. You will need to ask the dealer to share it with you.

The money factor does not look like an interest rate. It will generally be a decimal number like 0.00333. To compare the money factor to an annual interest rate, multiply the money factor by 2400. In this example, a money factor of 0.00333 is roughly like a loan interest rate of 0.00333x2400 = 7.992% interest. This is not an exact equivalence but is a regularly accepted comparison value.

Part 2 Performing the Calculations.

1. Add the net cap cost and the residual value. The finance charge is based on the sum of the net cap cost and the residual value. At first glance, this appears to be an unfair doubling of the car’s value. However, in combination with the money factor, this works as a way to average the net cap cost and the residual value. You end up paying the finance fee on an average overall value of the car.

Consider the example started above. The net cap cost is $25,000, and the residual is $15,000. The total, therefore, is the sum of $25,000+$15,000 = $40,000.

2. Multiply that sum by the money factor. The money factor is applied to the sum of the net cap cost and the residual value of the car to find the monthly finance charge.

Continuing with the example above, use the money factor 0.00333. Multiply this by the sum of the net cap cost and residual as follows:

$40,000 x 0.00333 = $133.2.

3. Apply the monthly finance charge. The result of the final calculation is the monthly finance charge that will be added to your lease payment. In this example, the finance charge is $133.20 each month.

4. Figure the full monthly payment. The finance charge may be the largest portion of your monthly payment, but you cannot count on it to be the full payment. In addition to the finance charge, many dealers will also charge a depreciation fee. This is the cost that you pay to compensate the dealer for the decreased value of the car over time. Finally, you may be responsible for assorted taxes.

Before you sign any lease agreement, you should find out the full monthly charge you are responsible for. Ask the dealer to itemize all the costs for you, and make sure that you understand and can afford them all.

Part 3 Negotiating with the Dealer.

1. Ask for the data you want. Many people, when leasing a vehicle, seem satisfied to accept the bottom line figure that the dealer assigns. However, to verify that any deal you negotiate is actually honored, you need to know the details of the finance charge calculations. Without asking for the data, you could be the victim of carelessness, simple error, or even fraud.

You could negotiate a reduced price for the vehicle, but then the dealer could base the calculations on the original value anyway.

The dealer might not apply proper credit for a trade-in vehicle.

The dealer could make mathematical errors in calculating the finance charge.

The dealer could apply a money factor other than the one used in the original negotiations.

2. Press the dealer for the “money factor.” The money factor is a decimal number that car dealerships use to calculate the finance charges. This number is not an interest rate but is somewhat analogous to interest rates. Some lease dealers may publicize the money factor, while others may not. You should ask for the money factor that your dealer is using. Also ask how the money factor is used to calculate the finance fee charged on your lease.

3. Ask the dealer to show you the calculation worksheet. The dealer is not required to share with you the calculations that go into the finance charge and monthly payments on your leased vehicle. Unless you ask specifically, you will probably never see that information. You should ask the dealer, sales clerk or manager to share the calculations with you. Even if you have the individual bits of data, you may not be able to confirm that the figures were calculated accurately or fairly unless you compare your notes to the dealer’s calculations.

4. Threaten to leave if the dealer is not forthcoming with information. The only leverage you have in the negotiations over a leased vehicle’s finance charges is the ability to walk away. Make it clear to the dealer that you want to verify the calculations and the individual pieces of information that go into figuring your finance charges. If the dealer is unwilling to share this information with you, you should threaten to leave and lease your car from somewhere else.

Tips.

If the lease dealership will not provide you with the money factor, go to a different dealer. You cannot determine and compare your true costs and fair value unless you have this information.

The higher the car value at lease end (that is, less depreciation), the less your finance charges will be, which, in turn, will reduce your monthly payment.

Warnings

Some dealers may present the money factor number so that it is easier to read, such as 3.33; however, this could be misinterpreted as the interest rate. Be aware that this is not the rate that will be used. This number should be converted to the actual money factor by dividing by 1,000 (3.33 divided by 1,000 = 0.00333).

Be aware that the finance cost (as calculated here to be $133.20) is not necessarily your total monthly payment. It is only the finance charge and may not include other charges such as sales tax or the acquisition fee.

Things You'll Need : Net cap cost, Residual cost, Money factor, Paper, Pen or pencil, Calculator.

December 19, 2019

How to Calculate Finance Charges on a Leased Vehicle

How to Calculate Finance Charges on a Leased Vehicle.

At some point, you may want or need to have a new car. You may also want to weigh the cost differences between leasing and buying before you make your decision. One way to compare costs is to figure out exactly what you will be paying for each. When you buy a car, you finance the amount charged for the vehicle and the interest rate is clear. When you lease a car, you pay to use the vehicle for a period of time, similar to renting it, and turn it in at the end of the lease. The finance charges for a lease may not always be clear. To calculate the finance charges on a leased vehicle, you need to know only a few things: the net capitalized cost, residual value and money factor. If these are known, calculating your finance charges is a simple process.

Part 1 Collecting Necessary Data.

1. Determine the net cap cost. The term “net cap cost” is a shortened form of net capitalized cost. This is ultimately the overall price of the vehicle. The net cap cost may be affected by other additions or subtractions, as follows.

Any miscellaneous fees or taxes are added to the cost to increase the net cap cost.

Any down payment, trade in or rebates are considered “net cap reductions.” These are subtracted and will reduce the net cap cost.

Suppose, for example, that a vehicle is listed with a cost of $30,000. There is a rebate or you make a down payment of $5,000. Therefore, the net cap cost for this vehicle is $25,000.

2. Establish the residual value of the vehicle. This is a bit like predicting the future. The residual value is the vehicle’s value at the end of the lease, when you will return it. This is always a bit uncertain because nobody can predict the exact condition of the vehicle, the mileage or the repairs that it will undergo during the lease. To establish the residual value, dealers use industry guide books, such as the Automotive Leasing Guide (ALG).

The graphic shown above illustrates the decline in the vehicle’s value over time. For this example, the residual value at the end of the term is set at $15,000.

Some dealers choose not to use the ALG. Instead, they may develop their own guide or functions for setting residual values.

3. Find out the dealer’s money factor. Leased vehicles do not charge interest in the same way that purchase agreements do. There is, however, a finance charge that is analogous to interest. You are paying the leasing company for the use of their vehicle during the term of your lease. This charge is based on a number called the “money factor.”

The money factor is not generally publicized. You will need to ask the dealer to share it with you.

The money factor does not look like an interest rate. It will generally be a decimal number like 0.00333. To compare the money factor to an annual interest rate, multiply the money factor by 2400. In this example, a money factor of 0.00333 is roughly like a loan interest rate of 0.00333x2400 = 7.992% interest. This is not an exact equivalence but is a regularly accepted comparison value.

Part 2 Performing the Calculations.

1. Add the net cap cost and the residual value. The finance charge is based on the sum of the net cap cost and the residual value. At first glance, this appears to be an unfair doubling of the car’s value. However, in combination with the money factor, this works as a way to average the net cap cost and the residual value. You end up paying the finance fee on an average overall value of the car.

Consider the example started above. The net cap cost is $25,000, and the residual is $15,000. The total, therefore, is the sum of $25,000+$15,000 = $40,000.

2. Multiply that sum by the money factor. The money factor is applied to the sum of the net cap cost and the residual value of the car to find the monthly finance charge.

Continuing with the example above, use the money factor 0.00333. Multiply this by the sum of the net cap cost and residual as follows:

$40,000 x 0.00333 = $133.2.

3. Apply the monthly finance charge. The result of the final calculation is the monthly finance charge that will be added to your lease payment. In this example, the finance charge is $133.20 each month.

4. Figure the full monthly payment. The finance charge may be the largest portion of your monthly payment, but you cannot count on it to be the full payment. In addition to the finance charge, many dealers will also charge a depreciation fee. This is the cost that you pay to compensate the dealer for the decreased value of the car over time. Finally, you may be responsible for assorted taxes.

Before you sign any lease agreement, you should find out the full monthly charge you are responsible for. Ask the dealer to itemize all the costs for you, and make sure that you understand and can afford them all.

Part 3 Negotiating with the Dealer.

1. Ask for the data you want. Many people, when leasing a vehicle, seem satisfied to accept the bottom line figure that the dealer assigns. However, to verify that any deal you negotiate is actually honored, you need to know the details of the finance charge calculations. Without asking for the data, you could be the victim of carelessness, simple error, or even fraud.

You could negotiate a reduced price for the vehicle, but then the dealer could base the calculations on the original value anyway.

The dealer might not apply proper credit for a trade-in vehicle.

The dealer could make mathematical errors in calculating the finance charge.

The dealer could apply a money factor other than the one used in the original negotiations.

2. Press the dealer for the “money factor.” The money factor is a decimal number that car dealerships use to calculate the finance charges. This number is not an interest rate but is somewhat analogous to interest rates. Some lease dealers may publicize the money factor, while others may not. You should ask for the money factor that your dealer is using. Also ask how the money factor is used to calculate the finance fee charged on your lease.

3. Ask the dealer to show you the calculation worksheet. The dealer is not required to share with you the calculations that go into the finance charge and monthly payments on your leased vehicle. Unless you ask specifically, you will probably never see that information. You should ask the dealer, sales clerk or manager to share the calculations with you. Even if you have the individual bits of data, you may not be able to confirm that the figures were calculated accurately or fairly unless you compare your notes to the dealer’s calculations.

4. Threaten to leave if the dealer is not forthcoming with information. The only leverage you have in the negotiations over a leased vehicle’s finance charges is the ability to walk away. Make it clear to the dealer that you want to verify the calculations and the individual pieces of information that go into figuring your finance charges. If the dealer is unwilling to share this information with you, you should threaten to leave and lease your car from somewhere else.

Tips.

If the lease dealership will not provide you with the money factor, go to a different dealer. You cannot determine and compare your true costs and fair value unless you have this information.

The higher the car value at lease end (that is, less depreciation), the less your finance charges will be, which, in turn, will reduce your monthly payment.

Warnings

Some dealers may present the money factor number so that it is easier to read, such as 3.33; however, this could be misinterpreted as the interest rate. Be aware that this is not the rate that will be used. This number should be converted to the actual money factor by dividing by 1,000 (3.33 divided by 1,000 = 0.00333).

Be aware that the finance cost (as calculated here to be $133.20) is not necessarily your total monthly payment. It is only the finance charge and may not include other charges such as sales tax or the acquisition fee.

Things You'll Need : Net cap cost, Residual cost, Money factor, Paper, Pen or pencil, Calculator.

December 19, 2019

how to reduce finance charges on a car loan

How to Reduce Finance Charges on a Car Loan.

Finance charges applied to a car loan are the actual charges for the cost of borrowing the money needed to purchase your car. The finance charge that is associated with your car loan is directly contingent upon three variables: loan amount, interest rate, and loan term. Modifying any or all of these variables will change the amount of finance charges you will pay for the loan. There are a number of ways to reduce finance charges on a loan, and the method you choose will be contingent upon whether you already have a loan or are taking out a new loan. Knowing your options can help you save money and pay off your vehicle faster.

Method 1 Reducing Finance Charges for a New Loan.

1. Learn your credit score. Automobile loans are largely determined by the borrower's credit score; the better the borrower's credit score is, the lower his interest rate will likely be. Knowing your credit score before you apply for an automobile loan can help ensure that you get the best possible loan terms. You can obtain a free copy of your credit report (one free copy is guaranteed every 12 months) by visiting AnnualCreditReport.com or by calling 1-877-322-8228.

Your credit report won't explicitly contain your credit score, but it will contain information that determines your credit score. Because of this, it's tremendously important to review all of the information contained in your credit report and understand what determines your credit score to ensure that there are no errors.

If your credit score is low, you may need to improve your credit score. Improving your credit score will likely get you much better terms on your loan. If you can hold off on purchasing your vehicle until you've repaired your credit, it may be worth waiting.

Consider contacting a credit counseling organization to help you rebuild your credit. A credit counselor can work with you to build and stick to a budget, and can even help you manage your income and your debts. You can find a credit counseling organization near you by searching online - just be clear on the terms and fees of the services offered before signing up with a credit counselor.

2. Shop around for your loan. Most dealerships offer automobile loans at the dealership, which can make it convenient for buyers. However, the dealership may not be offering the best available loan. Many automobile dealers arrange loans by acting as a "middle man" between you and a bank, which means that the dealership may charge you extra to compensate for its services. Even if the dealership's fees aren't unreasonable, it's likely that the dealer will then sell your contract to a bank, credit union, or finance company, and you may end up making payments to that third party. Even if you end up going with the dealer's financing option, it's worth shopping around for a better loan from a local bank or credit union.

3. Don't take out a small loan. Every loan term is different, depending on factors like your credit score and the amount you're requesting to borrow. Smaller loans typically have very high monthly finance charges, because the bank makes money off of these charges and they know that a smaller loan will be paid off more quickly. If you intend to take out an auto loan for only a few thousand dollars, it may be worth saving up until you have the whole amount that you'll need to purchase an automobile, or purchasing an automobile that fits in your available price range.

4. Get a pre-approved loan before you buy a car. Pre-approved loans are arranged in advance with a bank or financial institution. This may be helpful, as many people feel pressured to go with the loan options that a dealer offers at the car lot, and end up getting a loan with high finance charges. If you get a pre-approved loan beforehand, you'll know exactly how much you can afford to spend on an automobile, which will also help you stay within your budget.

5. Consider leasing instead of buying. Leasing a vehicle allows you to use your vehicle for an arranged duration of time and a predetermined number of miles. You won't own your car, but lease payments are typically lower than what the monthly payments on a loan would be for the exact same vehicle. Some lease terms also give you the option of purchasing your vehicle at the end of the leasing period. Before you decide to lease, it may be helpful to consider.

the lease costs at the beginning, middle, and end of the leasing period.

what leasing offers and terms are available to you.

how long you want to keep the automobile.

Method 2 Refinancing an Existing Loan.

1. Contact your lender. You can apply to refinance your automobile loan with the lender from the original loan, or you can switch to a new lender. Lenders who allow refinancing will replace your existing loan with a new loan, typically offering lower monthly finance charges. Not every lender will allow borrowers to refinance a loan, so it may be worth comparing your options to determine which lender to go with, or whether you're eligible to refinance at all.

2. Gather the necessary information. As part of the refinancing application process, you'll need some basic information to provide the lender. Before you apply to refinance your loan, you'll need to have ready:

your current interest rate.

how much money is still owed on the existing loan.

how many months remain in the existing loan's terms.

the make, model, and current odometer reading of your vehicle.

the current value of your vehicle.

your current income and employment history.

your current credit score.

3. Compare refinance loan options. If you are eligible for an automobile loan refinance with your existing lender, you may be eligible for a better loan through a different lending institution. It's worth comparing your refinance loan options to get the best available loan terms. When you search around and compare refinance options, it's worth considering:

the loan rate.

the duration of the loan.

whether there are pre-payment penalties or late payment penalties.

any fees or finance charges.

what (if any) the conditions for automobile repossession are with a given lender.

Method 3 Pre-paying an Existing Loan.

1. Learn whether you're able to pre-pay your loan. If refinancing isn't an option, you may be eligible for pre-paying your loan. Pre-payment, also called early loan payoff, simply means that you pay off your debt before the agreed-upon end date of an existing loan.[29] The benefit of pre-paying your loan is that you're not subjected to the monthly finance charges you would otherwise be paying on your loan, but for that reason many lenders charge a pre-payment penalty or fee.[30] The terms of your existing loan should specify whether there is any pre-payment or early loan payoff penalty, but if you're unsure you can always consult with your lender.

2. Learn the pre-payment process for your lender. If your lender permits you to make pre-payments on your loan, there may be a special process for making those payments. These payments are sometimes referred to as principal-only payments, and it's important to specify to your lender that you intend for that payment to be applied to the principal loan, not the finance charges for upcoming months. Each lender's process may be different, so it's best to call or email the lender's customer service department and ask what you need to do to make a principal-only payment towards your loan.

3. Calculate your early loan payoff amount. There are many early loan payoff "calculators" available online, but all of them factor in the same basic information to determine how much you will need to pay in order to payoff your loan early:

the total number of months in your existing loan term.

the number of months remaining on your existing loan.

the amount your existing loan was for.

the monthly payments remaining on your loan.

the current annual interest rate (APR) on your existing loan.

Tips.

Reducing the finance charges by reducing the term of the loan will lower the finance charges overall but it will also increase your monthly payment, because you take less time to repay the loan.

Consider working with a credit counseling organization if you're having trouble sticking with your budget or paying off your loans.

November 26, 2019

How to Reduce Finance Charges on a Car Loan

How to Reduce Finance Charges on a Car Loan.

Finance charges applied to a car loan are the actual charges for the cost of borrowing the money needed to purchase your car. The finance charge that is associated with your car loan is directly contingent upon three variables: loan amount, interest rate, and loan term. Modifying any or all of these variables will change the amount of finance charges you will pay for the loan. There are a number of ways to reduce finance charges on a loan, and the method you choose will be contingent upon whether you already have a loan or are taking out a new loan. Knowing your options can help you save money and pay off your vehicle faster.

Method 1 Reducing Finance Charges for a New Loan.

1. Learn your credit score. Automobile loans are largely determined by the borrower's credit score; the better the borrower's credit score is, the lower his interest rate will likely be. Knowing your credit score before you apply for an automobile loan can help ensure that you get the best possible loan terms. You can obtain a free copy of your credit report (one free copy is guaranteed every 12 months) by visiting AnnualCreditReport.com or by calling 1-877-322-8228.

Your credit report won't explicitly contain your credit score, but it will contain information that determines your credit score. Because of this, it's tremendously important to review all of the information contained in your credit report and understand what determines your credit score to ensure that there are no errors.

If your credit score is low, you may need to improve your credit score. Improving your credit score will likely get you much better terms on your loan. If you can hold off on purchasing your vehicle until you've repaired your credit, it may be worth waiting.

Consider contacting a credit counseling organization to help you rebuild your credit. A credit counselor can work with you to build and stick to a budget, and can even help you manage your income and your debts. You can find a credit counseling organization near you by searching online - just be clear on the terms and fees of the services offered before signing up with a credit counselor.

2. Shop around for your loan. Most dealerships offer automobile loans at the dealership, which can make it convenient for buyers. However, the dealership may not be offering the best available loan. Many automobile dealers arrange loans by acting as a "middle man" between you and a bank, which means that the dealership may charge you extra to compensate for its services. Even if the dealership's fees aren't unreasonable, it's likely that the dealer will then sell your contract to a bank, credit union, or finance company, and you may end up making payments to that third party. Even if you end up going with the dealer's financing option, it's worth shopping around for a better loan from a local bank or credit union.

3. Don't take out a small loan. Every loan term is different, depending on factors like your credit score and the amount you're requesting to borrow. Smaller loans typically have very high monthly finance charges, because the bank makes money off of these charges and they know that a smaller loan will be paid off more quickly. If you intend to take out an auto loan for only a few thousand dollars, it may be worth saving up until you have the whole amount that you'll need to purchase an automobile, or purchasing an automobile that fits in your available price range.

4. Get a pre-approved loan before you buy a car. Pre-approved loans are arranged in advance with a bank or financial institution. This may be helpful, as many people feel pressured to go with the loan options that a dealer offers at the car lot, and end up getting a loan with high finance charges. If you get a pre-approved loan beforehand, you'll know exactly how much you can afford to spend on an automobile, which will also help you stay within your budget.

5. Consider leasing instead of buying. Leasing a vehicle allows you to use your vehicle for an arranged duration of time and a predetermined number of miles. You won't own your car, but lease payments are typically lower than what the monthly payments on a loan would be for the exact same vehicle. Some lease terms also give you the option of purchasing your vehicle at the end of the leasing period. Before you decide to lease, it may be helpful to consider.

the lease costs at the beginning, middle, and end of the leasing period.

what leasing offers and terms are available to you.

how long you want to keep the automobile.

Method 2 Refinancing an Existing Loan.

1. Contact your lender. You can apply to refinance your automobile loan with the lender from the original loan, or you can switch to a new lender. Lenders who allow refinancing will replace your existing loan with a new loan, typically offering lower monthly finance charges. Not every lender will allow borrowers to refinance a loan, so it may be worth comparing your options to determine which lender to go with, or whether you're eligible to refinance at all.

2. Gather the necessary information. As part of the refinancing application process, you'll need some basic information to provide the lender. Before you apply to refinance your loan, you'll need to have ready:

your current interest rate.

how much money is still owed on the existing loan.

how many months remain in the existing loan's terms.

the make, model, and current odometer reading of your vehicle.

the current value of your vehicle.

your current income and employment history.

your current credit score.

3. Compare refinance loan options. If you are eligible for an automobile loan refinance with your existing lender, you may be eligible for a better loan through a different lending institution. It's worth comparing your refinance loan options to get the best available loan terms. When you search around and compare refinance options, it's worth considering:

the loan rate.

the duration of the loan.

whether there are pre-payment penalties or late payment penalties.

any fees or finance charges.

what (if any) the conditions for automobile repossession are with a given lender.

Method 3 Pre-paying an Existing Loan.

1. Learn whether you're able to pre-pay your loan. If refinancing isn't an option, you may be eligible for pre-paying your loan. Pre-payment, also called early loan payoff, simply means that you pay off your debt before the agreed-upon end date of an existing loan.[29] The benefit of pre-paying your loan is that you're not subjected to the monthly finance charges you would otherwise be paying on your loan, but for that reason many lenders charge a pre-payment penalty or fee.[30] The terms of your existing loan should specify whether there is any pre-payment or early loan payoff penalty, but if you're unsure you can always consult with your lender.

2. Learn the pre-payment process for your lender. If your lender permits you to make pre-payments on your loan, there may be a special process for making those payments. These payments are sometimes referred to as principal-only payments, and it's important to specify to your lender that you intend for that payment to be applied to the principal loan, not the finance charges for upcoming months. Each lender's process may be different, so it's best to call or email the lender's customer service department and ask what you need to do to make a principal-only payment towards your loan.

3. Calculate your early loan payoff amount. There are many early loan payoff "calculators" available online, but all of them factor in the same basic information to determine how much you will need to pay in order to payoff your loan early:

the total number of months in your existing loan term.

the number of months remaining on your existing loan.

the amount your existing loan was for.

the monthly payments remaining on your loan.

the current annual interest rate (APR) on your existing loan.

Tips.

Reducing the finance charges by reducing the term of the loan will lower the finance charges overall but it will also increase your monthly payment, because you take less time to repay the loan.

Consider working with a credit counseling organization if you're having trouble sticking with your budget or paying off your loans.

November 28, 2019

how to finance real estate

How to Finance Real Estate.

Real estate can be a very good investment. Depending upon your resources, you may need to know how to finance the real estate. When financing, there are a number of considerations and options for you to consider.

Steps,

1. Review your financial background. Prior to considering a loan you should be aware of several factors which may affect your loan approval.

Check your credit score. A low credit score may affect the interest rate that you will pay or may prevent you from getting the loan.

Make sure you save enough money to cover a down payment. Although no money down loans have existed, it is likely you will pay an upfront payment of anywhere from 3.5% to upwards of 20% of the cost of your new real estate. A second loan may help defray that cost.

You may need to establish that you have a stable level of income, and a lender may consider the ratio of your debt to income. A high percentage of debt to income could disqualify you for a loan.

2. Assess the maximum amount of mortgage you can afford. You will need to take a look at your income and expenses, including your debt. That debt should include any installment debt, mortgage debt on a second property, loans, credit card debt, child support and additional debt which will be acquired with the new property. That additional debt should include the new projected insurance, taxes and home owners fees. You should add that debt to any other monthly expenses, such as food, clothing, health care, and transportation costs to determine the amount of your overall obligations should you complete your purchase. Of course certain expenses such as your current rent payments would be excluded. Subtract the obligations from your income to determine the maximum mortgage payment you could make and decide the mortgage amount you would be comfortable making.

3. Secure pre-approval or pre-qualification for a loan with a lender. A lender will review your finances and give you an idea how much you can borrow. The pre-approval process goes through a more in depth analysis of your finances and more accurately reflects an amount that you can borrow. Neither review is binding on the lender.

4. Determine the type of loan you want or need. The first option most people consider is the conventional loan. There are several types of conventional loans.

The fixed loan locks in the interest rate and the payment amount for the duration of the loan.

In the adjustable rate mortgage, the interest rate is subject to change over the course of the loan.

A jumbo mortgage comes into play when a loan is higher then a certain amount which then results in a higher interest rate.

A loan may also have a balloon payment which usually allows for a lower interest rate for a period of years and then finishes with a final lump sum payment.

5. Pursue alternative financing if a conventional loan is unavailable or not your best interests. One option is to see if the lender will consider taking on other collateral you own to secure the loan. Also, the seller may agree to either finance part of the loan, or agree to lease the property to you with the intent to sell it to you. One other option is to secure a private money loan from private investors looking to make money on their investment.

Tips.

The process of pre-approval or pre-qualification not only gives you an estimate of your maximum mortgage, it tells a potential seller that you are a serious buyer which can give you an advantage over offers from other buyers.

Warnings.

Even though you are pre-approved for a mortgage at a certain amount, it does not guarantee that you will be able to afford that mortgage. Remember to review your current financial situation and try to anticipate any future expenses before taking on a mortgage that ends up too large to handle.

December 17, 2019

How to Finance Real Estate

How to Finance Real Estate.

Real estate can be a very good investment. Depending upon your resources, you may need to know how to finance the real estate. When financing, there are a number of considerations and options for you to consider.

Steps,

1. Review your financial background. Prior to considering a loan you should be aware of several factors which may affect your loan approval.

Check your credit score. A low credit score may affect the interest rate that you will pay or may prevent you from getting the loan.

Make sure you save enough money to cover a down payment. Although no money down loans have existed, it is likely you will pay an upfront payment of anywhere from 3.5% to upwards of 20% of the cost of your new real estate. A second loan may help defray that cost.

You may need to establish that you have a stable level of income, and a lender may consider the ratio of your debt to income. A high percentage of debt to income could disqualify you for a loan.

2. Assess the maximum amount of mortgage you can afford. You will need to take a look at your income and expenses, including your debt. That debt should include any installment debt, mortgage debt on a second property, loans, credit card debt, child support and additional debt which will be acquired with the new property. That additional debt should include the new projected insurance, taxes and home owners fees. You should add that debt to any other monthly expenses, such as food, clothing, health care, and transportation costs to determine the amount of your overall obligations should you complete your purchase. Of course certain expenses such as your current rent payments would be excluded. Subtract the obligations from your income to determine the maximum mortgage payment you could make and decide the mortgage amount you would be comfortable making.

3. Secure pre-approval or pre-qualification for a loan with a lender. A lender will review your finances and give you an idea how much you can borrow. The pre-approval process goes through a more in depth analysis of your finances and more accurately reflects an amount that you can borrow. Neither review is binding on the lender.

4. Determine the type of loan you want or need. The first option most people consider is the conventional loan. There are several types of conventional loans.

The fixed loan locks in the interest rate and the payment amount for the duration of the loan.

In the adjustable rate mortgage, the interest rate is subject to change over the course of the loan.

A jumbo mortgage comes into play when a loan is higher then a certain amount which then results in a higher interest rate.

A loan may also have a balloon payment which usually allows for a lower interest rate for a period of years and then finishes with a final lump sum payment.

5. Pursue alternative financing if a conventional loan is unavailable or not your best interests. One option is to see if the lender will consider taking on other collateral you own to secure the loan. Also, the seller may agree to either finance part of the loan, or agree to lease the property to you with the intent to sell it to you. One other option is to secure a private money loan from private investors looking to make money on their investment.

Tips.

The process of pre-approval or pre-qualification not only gives you an estimate of your maximum mortgage, it tells a potential seller that you are a serious buyer which can give you an advantage over offers from other buyers.

Warnings.

Even though you are pre-approved for a mortgage at a certain amount, it does not guarantee that you will be able to afford that mortgage. Remember to review your current financial situation and try to anticipate any future expenses before taking on a mortgage that ends up too large to handle.

December 17, 2019

how to finance a franchise

How to Finance a Franchise.

A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.

Part 1 Arranging Financing with the Franchisor.

1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.

Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.

Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.

This information may be available online or in other documents provided with your franchise application, or you may need to request it.

2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.

McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.

3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.

The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.

Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.

Part 2 Securing Outside Financing.

1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.

Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.

These loans usually require you to have already established a relationship with a banker.

2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.

SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.

You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.

The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.

3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.

Two of the biggest online loan portals are Boefly and Franchise America Finance.

Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.

4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.

Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.

Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).

However, equity does not have to be repaid (unlike a loan).

You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.

Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.

Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.

If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.

Part 3 Using Your Own Assets.

1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.

Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.

2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.

You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.

You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.

Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.

3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.

If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.

Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.

So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.

Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.

Be warned, however, that if your new business fails, your retirement funds will be wiped out.

Part 4 Refinancing Your Franchise.

1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.

You can get a loan at a better interest rate.

You want to consolidate multiple loans into a single payment.

You want to change from and adjustable to fixed rate of interest, or vice versa.

You need more capital to update equipment, make improvements, or open an additional location.

2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.

Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.

Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.

3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.

There may be other penalties as well, based on the details of your old loan.

The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.

4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.

Strengths and weaknesses of your business.

Major milestones or accomplishments.

Expertise you have developed in running the franchise.

Goals for the next two to five years.

Two years of tax returns.

The payment schedule of your current loan.

5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.

Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.

You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.

Tips.

Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.

Warnings.

It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.

Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.

December 02, 2019

How to Finance a Franchise

How to Finance a Franchise.

A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.

Part 1 Arranging Financing with the Franchisor.

1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.

Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.

Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.

This information may be available online or in other documents provided with your franchise application, or you may need to request it.

2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.

McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.

3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.

The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.

Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.

Part 2 Securing Outside Financing.

1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.

Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.

These loans usually require you to have already established a relationship with a banker.

2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.

SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.

You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.

The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.

3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.

Two of the biggest online loan portals are Boefly and Franchise America Finance.

Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.

4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.

Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.

Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).

However, equity does not have to be repaid (unlike a loan).

You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.

Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.

Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.

If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.

Part 3 Using Your Own Assets.

1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.

Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.

2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.

You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.

You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.

Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.

3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.

If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.

Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.

So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.

Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.

Be warned, however, that if your new business fails, your retirement funds will be wiped out.

Part 4 Refinancing Your Franchise.

1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.

You can get a loan at a better interest rate.

You want to consolidate multiple loans into a single payment.

You want to change from and adjustable to fixed rate of interest, or vice versa.

You need more capital to update equipment, make improvements, or open an additional location.

2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.

Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.

Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.

3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.

There may be other penalties as well, based on the details of your old loan.

The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.

4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.

Strengths and weaknesses of your business.

Major milestones or accomplishments.

Expertise you have developed in running the franchise.

Goals for the next two to five years.

Two years of tax returns.

The payment schedule of your current loan.

5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.

Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.

You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.

Tips.

Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.

Warnings.

It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.

Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.

December 03, 2019

how to owner finance a home

How to Owner Finance a Home.

There are many benefits to an owner financing deal when purchasing a home. Both the buyer and seller can take advantage of the deal. But there is a specific process to owner financing, along with important factors to consider. You should begin by hiring people who can help you, such as an appraiser, Residential Mortgage Loan Originator, and lawyer.

Part 1 Hiring People to Help You.

1. Hire an appraiser. Both the buyer and the seller should hire their own appraiser to determine the value of the house. The seller receives an appraisal in order to select a price for the home, and the buyer gets an appraisal to confirm that the selling price is fair. You can find an appraiser in the following ways:

look in the Yellow Pages, ask for a referral from a mortgage company, bank, or realtor, contact your state’s licensing agency.

2. Hire a real estate attorney. Both parties should work closely with a real estate attorney. A real estate attorney can draft all of the necessary paperwork. The attorney can also protect your interests. For example, the buyer can include a protection clause just in case the property has to be sold in response to a life changing event, job relocation or loss, divorce or death.

You can get a referral to a real estate attorney by contacting your local or state bar association. Bar associations are organizations made up of attorneys, and they often provide referrals to their members or can help you find an attorney.

3. Get advice from a Residential Mortgage Loan Originator (RMLO). A Residential Mortgage Loan Originator can give you advice on how to manage owner financing in a way that is transparent and compliant with regulations. When you owner finance a home, you are essentially providing the buyer a loan until they complete their payments on the home. Since you want your agreement to be clear and binding, it's good to work with a mortgage professional.

Your RMLO can help ensure that your owner financing documents are compliant with the Safe Act and Dodd Frank Act.

Make sure your RMLO is properly licensed by your state. Check with your state’s Department of Business Oversight or equivalent state office to check.

Part 2 Preparing for the Sale.

1. Get approval if you still have a mortgage. Owner financed sales work best when the owner has title free and clear or the owner can pay off the mortgage with the buyer’s down payment. However, if the seller still has a large mortgage, they need to get their lender’s approval.

Check whether you can pay off the mortgage with the buyer’s down payment. If not, then contact your mortgage company and discuss that you want to sell the house.

2. Consider performing background checks to control risk. Both the seller and buyer should perform background checks on each other. Many owner financed sales are short-term, for five years or so. At the end of the term, the buyer is expected to refinance and then make a “balloon payment,” paying off the balance of the loan. As a seller, you will want assurance that a buyer can get a traditional loan at the end of the contract term, which means you definitely want to check their credit history and employment.

In fact, sellers should consider having buyers complete a loan application. You can verify references, employment history, and other financial information.

Buyers also benefit from background checks. For example, they might discover that the seller has been financially irresponsible. If the seller still holds a mortgage on the home, there is a risk of default.

3. Determine loan details. One advantage of an owner financed sale is that the seller controls details about the financing. Because the seller is assuming a lot of risk, they should come up with terms that protect them. Talk with your attorney about what the terms of the loan should be. Consider the following.

a substantial down payment (usually 10% or more), an interest rate that is higher than usual (though less than your state’s maximum allowable interest rate), a loan term you are comfortable with.

4. Ask your lawyer draft a purchase and sale agreement. You want to protect yourself legally by making sure that you have all of the necessary legal documents prepared. Your real estate attorney can draft a purchase and sale agreement, which both seller and buyer will sign. This document provides information about the following:

closing date, name of the title insurance company, final sale price, details about a down payment, if any.

contingencies which must be met for the sale to proceed, such as an acceptable inspection and a clear title report.

5. Draft a promissory note. The seller also needs the buyer to sign a promissory note or other financial instrument. Your lawyer can draft this document for you. It should contain the following information.

borrower’s name, property address, amount of the loan, interest rate, repayment schedule, terms for late or missed payments, consequences of default.

6. Have your lawyer draft a mortgage. The mortgage provides security for the loan. Your lawyer should also draft this document for you. The mortgage is what allows you to repossess the house should the buyer default on the loan.

Part 3 Completing the Sale.

1. Agree on an interest rate and term with the buyer. Your RMLO partner will calculate the agreed upon amount based on a specific period of time and if you have agreed on a balloon payment. Remember that not every state allows balloon payments.

For example, you can base monthly payment amount on a hypothetical 30-year mortgage, but schedule payment of the remaining amount in 5 years (balloon). The RMLO will also create required disclosures for the seller/lender.

2. Close the sale. Both the buyer and seller should have independent attorneys who can review all paperwork to make sure that it is complete. You should schedule a closing to sign everything and make copies.

3. Hire a loan servicer to manage payments. The seller should talk to their lawyer about whether they want to hire a loan servicer. If they do, then their lawyer can recommend someone. A loan servicer provides many important services.

collects the mortgage payments, sets up an escrow, handles tax statements and payments, makes insurance payments, processes payment changes, performs collection services, if necessary.

4. Record your mortgage or deed of trust. You can record it in the county land records office. Doing so will allow the buyer and the seller to take advantage of tax deductions. Making the deal official in this manner also proves that the sale took place.

Part 4 Deciding Whether an Owner Financed Sale is Right.

1. Analyze your situation as a seller. Owner financed sales are rare, and you shouldn’t jump into one until you have thoroughly considered your situation. Think about the following.

You usually must own the house free and clear of any mortgage. Otherwise, you will need your lender to give you permission to sell.

Taxes can be complicated and you’ll want to hire a tax professional to help you.

You might have to go through the foreclosure process if the buyer stops making payments. This can be costly and time-consuming.

However, you may make much more money on an owner financed sale than if you sell the traditional way.

2. Determine if an owner financed sale is ideal as a buyer. Buyers usually like owner financed sales because a seller might be less choosy than a bank or mortgage lender. However, you should consider the following.

You might have to come up with a larger down payment than you normally would. The owner-seller is taking a risk by financing your sale, and in return they might want a larger down payment or higher interest.

Owner financed sales often close faster than other sales.

You need to be sure you can make the balloon payment if one is written into the contract. If you break the contract, then you could lose the house and all of the payments you have made up to that point.

3. Talk with professionals if you have questions. In addition to working with a real estate lawyer, you might want to meet with a tax professional, such as a certified public accountant. Ask about the tax benefits of an owner financed sale compared to selling outright.

If you are a buyer, then you should talk about how to raise your credit score so that you qualify for a traditional mortgage when the balloon payment comes due.

4. Make sure your buyer can cover the balloon payment. Owner financing is most often used when the buyer or property does not qualify for a conventional loan. This means the buyer may not have the resources to cover the balloon payment at the end of your term. Discuss your buyer's options before entering into a contract with them.

If you are a buyer, make sure that you have your options for paying the balloon payment lined up before you agree to the seller's terms.

5. Consider a lease-to-own option. This option is often more advantageous for the buyer and less complicated for the seller. You and the person interested in your home will lock in a potential sale price for the home, as well as a lease agreement ranging from 2 to 5 years. During that time, the person will pay you rent on the home, with a portion of that rent going toward a down payment on the house. After the lease ends, the person can choose to proceed with the sale as arranged, or they can opt to walk away.

If they walk away, they don't get a refund on the extra money they paid toward the down payment.

If they do walk away, you'll need to relist your home.

Tips.

The seller should ask that the buyer purchase homeowner's insurance and confirm the seller as mortgagee.

The seller should establish a land contract. With a land contract, title doesn’t pass to the buyer until the final payment has been made. Discuss this option with your attorney and see if such a contract is feasible.

December 03, 2019

How to Owner Finance a Home

How to Owner Finance a Home.

There are many benefits to an owner financing deal when purchasing a home. Both the buyer and seller can take advantage of the deal. But there is a specific process to owner financing, along with important factors to consider. You should begin by hiring people who can help you, such as an appraiser, Residential Mortgage Loan Originator, and lawyer.

Part 1 Hiring People to Help You.

1. Hire an appraiser. Both the buyer and the seller should hire their own appraiser to determine the value of the house. The seller receives an appraisal in order to select a price for the home, and the buyer gets an appraisal to confirm that the selling price is fair. You can find an appraiser in the following ways:

look in the Yellow Pages, ask for a referral from a mortgage company, bank, or realtor, contact your state’s licensing agency.

2. Hire a real estate attorney. Both parties should work closely with a real estate attorney. A real estate attorney can draft all of the necessary paperwork. The attorney can also protect your interests. For example, the buyer can include a protection clause just in case the property has to be sold in response to a life changing event, job relocation or loss, divorce or death.

You can get a referral to a real estate attorney by contacting your local or state bar association. Bar associations are organizations made up of attorneys, and they often provide referrals to their members or can help you find an attorney.

3. Get advice from a Residential Mortgage Loan Originator (RMLO). A Residential Mortgage Loan Originator can give you advice on how to manage owner financing in a way that is transparent and compliant with regulations. When you owner finance a home, you are essentially providing the buyer a loan until they complete their payments on the home. Since you want your agreement to be clear and binding, it's good to work with a mortgage professional.

Your RMLO can help ensure that your owner financing documents are compliant with the Safe Act and Dodd Frank Act.

Make sure your RMLO is properly licensed by your state. Check with your state’s Department of Business Oversight or equivalent state office to check.

Part 2 Preparing for the Sale.

1. Get approval if you still have a mortgage. Owner financed sales work best when the owner has title free and clear or the owner can pay off the mortgage with the buyer’s down payment. However, if the seller still has a large mortgage, they need to get their lender’s approval.

Check whether you can pay off the mortgage with the buyer’s down payment. If not, then contact your mortgage company and discuss that you want to sell the house.

2. Consider performing background checks to control risk. Both the seller and buyer should perform background checks on each other. Many owner financed sales are short-term, for five years or so. At the end of the term, the buyer is expected to refinance and then make a “balloon payment,” paying off the balance of the loan. As a seller, you will want assurance that a buyer can get a traditional loan at the end of the contract term, which means you definitely want to check their credit history and employment.

In fact, sellers should consider having buyers complete a loan application. You can verify references, employment history, and other financial information.

Buyers also benefit from background checks. For example, they might discover that the seller has been financially irresponsible. If the seller still holds a mortgage on the home, there is a risk of default.

3. Determine loan details. One advantage of an owner financed sale is that the seller controls details about the financing. Because the seller is assuming a lot of risk, they should come up with terms that protect them. Talk with your attorney about what the terms of the loan should be. Consider the following.

a substantial down payment (usually 10% or more), an interest rate that is higher than usual (though less than your state’s maximum allowable interest rate), a loan term you are comfortable with.

4. Ask your lawyer draft a purchase and sale agreement. You want to protect yourself legally by making sure that you have all of the necessary legal documents prepared. Your real estate attorney can draft a purchase and sale agreement, which both seller and buyer will sign. This document provides information about the following:

closing date, name of the title insurance company, final sale price, details about a down payment, if any.

contingencies which must be met for the sale to proceed, such as an acceptable inspection and a clear title report.

5. Draft a promissory note. The seller also needs the buyer to sign a promissory note or other financial instrument. Your lawyer can draft this document for you. It should contain the following information.

borrower’s name, property address, amount of the loan, interest rate, repayment schedule, terms for late or missed payments, consequences of default.

6. Have your lawyer draft a mortgage. The mortgage provides security for the loan. Your lawyer should also draft this document for you. The mortgage is what allows you to repossess the house should the buyer default on the loan.

Part 3 Completing the Sale.

1. Agree on an interest rate and term with the buyer. Your RMLO partner will calculate the agreed upon amount based on a specific period of time and if you have agreed on a balloon payment. Remember that not every state allows balloon payments.

For example, you can base monthly payment amount on a hypothetical 30-year mortgage, but schedule payment of the remaining amount in 5 years (balloon). The RMLO will also create required disclosures for the seller/lender.

2. Close the sale. Both the buyer and seller should have independent attorneys who can review all paperwork to make sure that it is complete. You should schedule a closing to sign everything and make copies.

3. Hire a loan servicer to manage payments. The seller should talk to their lawyer about whether they want to hire a loan servicer. If they do, then their lawyer can recommend someone. A loan servicer provides many important services.

collects the mortgage payments, sets up an escrow, handles tax statements and payments, makes insurance payments, processes payment changes, performs collection services, if necessary.

4. Record your mortgage or deed of trust. You can record it in the county land records office. Doing so will allow the buyer and the seller to take advantage of tax deductions. Making the deal official in this manner also proves that the sale took place.

Part 4 Deciding Whether an Owner Financed Sale is Right.

1. Analyze your situation as a seller. Owner financed sales are rare, and you shouldn’t jump into one until you have thoroughly considered your situation. Think about the following.

You usually must own the house free and clear of any mortgage. Otherwise, you will need your lender to give you permission to sell.

Taxes can be complicated and you’ll want to hire a tax professional to help you.

You might have to go through the foreclosure process if the buyer stops making payments. This can be costly and time-consuming.

However, you may make much more money on an owner financed sale than if you sell the traditional way.

2. Determine if an owner financed sale is ideal as a buyer. Buyers usually like owner financed sales because a seller might be less choosy than a bank or mortgage lender. However, you should consider the following.

You might have to come up with a larger down payment than you normally would. The owner-seller is taking a risk by financing your sale, and in return they might want a larger down payment or higher interest.

Owner financed sales often close faster than other sales.

You need to be sure you can make the balloon payment if one is written into the contract. If you break the contract, then you could lose the house and all of the payments you have made up to that point.

3. Talk with professionals if you have questions. In addition to working with a real estate lawyer, you might want to meet with a tax professional, such as a certified public accountant. Ask about the tax benefits of an owner financed sale compared to selling outright.

If you are a buyer, then you should talk about how to raise your credit score so that you qualify for a traditional mortgage when the balloon payment comes due.

4. Make sure your buyer can cover the balloon payment. Owner financing is most often used when the buyer or property does not qualify for a conventional loan. This means the buyer may not have the resources to cover the balloon payment at the end of your term. Discuss your buyer's options before entering into a contract with them.

If you are a buyer, make sure that you have your options for paying the balloon payment lined up before you agree to the seller's terms.

5. Consider a lease-to-own option. This option is often more advantageous for the buyer and less complicated for the seller. You and the person interested in your home will lock in a potential sale price for the home, as well as a lease agreement ranging from 2 to 5 years. During that time, the person will pay you rent on the home, with a portion of that rent going toward a down payment on the house. After the lease ends, the person can choose to proceed with the sale as arranged, or they can opt to walk away.

If they walk away, they don't get a refund on the extra money they paid toward the down payment.

If they do walk away, you'll need to relist your home.

Tips.

The seller should ask that the buyer purchase homeowner's insurance and confirm the seller as mortgagee.

The seller should establish a land contract. With a land contract, title doesn’t pass to the buyer until the final payment has been made. Discuss this option with your attorney and see if such a contract is feasible.

December 03, 2019

How to Work out a Rental Yield

How to Work out a Rental Yield.

Rental yield, essentially, tells you how much you can expect to earn from an investment property that you're renting out. It's typically expressed as a percentage of the cost of the property. You can use this figure to determine if a property you're thinking about buying would be a good investment or to understand your return on investment (ROI) in a property you already own. This figure is also helpful if you're trying to decide if a "buy-to-let" mortgage is affordable for you. To work out the rental yield, you need to know the total costs of buying and owning the property as well as the amount of rent you'll collect.

Method 1 Totaling Property Costs.
1. Calculate your yearly mortgage payments. If you have a mortgage on the property, total the mortgage payments you would make over the course of a year, including interest, taxes, and any associated fees. These payments are part of your cost of owning the property.
Even if you don't have a mortgage, you're likely still responsible for property taxes on the property. Those would also be considered part of your costs of ownership.
If you don't own the property yet, use an estimate of mortgage payments or get an offer from a mortgage company for the property and use that number instead.
2. Get a quote for insurance. If you rent out the property, you'll typically need landlord insurance, which may have different rates than homeowner's insurance. If you don't already own the property, a quote from a reputable insurer will help you estimate this cost.
In addition to landlord's insurance, you may also want to consider other types of insurance to cover damage to the property.
Rent insurance may also be available to you, which provides you some money in the event your tenant breaks their lease or needs to be evicted for nonpayment of rent.
3. Include any management fees or other property expenses. If you've hired a management company to run the property on your behalf, their fees are considered part of your costs. You may also have other property expenses or fees, depending on where the property is located.
For example, if you only own the building but not the land, you may have to pay rent for the land that the property sits on.
If you have a unit in an apartment building or condominium complex, you may also have association fees to consider.
Tip: Include in this category expenses you might incur in the event you have to advertise for a tenant. Fees for listing the property or doing background checks on tenants are also costs of owning and renting the property.
4. Estimate costs for repairs and maintenance. Over the course of the year, your tenant may have things break that need to be repaired. While you can't necessarily predict all of these expenses, you can typically come up with a reasonable estimate based on the age of the property and its fixtures.
You also want to consider major repairs that may be necessary in the event of a natural disaster or other event. While your insurance may cover some of this expense, you'll likely still have to pay a deductible.

Method 2 Determining Gross Rental Yield.
1. Total your yearly rental income. Evaluate how much you charge in rent, then multiply that amount to get the total rent you'll collect each year. If you collect weekly rent, multiply the weekly rent amount by 52. For monthly rent, multiply by 12.
For example, if you rent the property out for $500 a week, you would have an annual rental income of $26,000.
2. Find the current value of the property. If you plan to purchase the property this year, the value of the property would be equal to your purchase price. However, if you already own the property, use the most recent appraisal to determine the current value.
If you're looking at a property for sale, use the asking price as the value of the property, even if you think the asking price is too high and plan to make a lower bid on it.
3. Divide the rental income by the value to find the gross rental yield. Once you have those two figures, complete the equation. Your result will be a decimal value. Multiply that number by 100 to get a percentage.
For example, if your yearly rental income is $26,000 and the property is valued at $360,000, you have a gross rental yield of 7.2%. Gross rental yield is considered ideal if it's somewhere between 7 and 9%, so the gross rental yield for that property is good. Any lower than that, and you likely wouldn't have the cash flow in the event emergency repairs were needed.
Warning: While gross rental yield is easy to calculate, it doesn't take a lot of other factors into account that can affect the investment value of a property, such as the property's location, age, or condition.

Method 3 Calculating Net Rental Yield.
1. Start with your total yearly rental income. Just as when working out gross rental yield, you'll need the total rent you collect from the property in a year. Multiply weekly rent by 52 and monthly rent by 12 to find the annual amount.
For example, if you rented a condominium for $2,000 a month, your annual rental income would be $24,000.
Tip: Net rental yield is typically calculated at the end of the year, looking back at real numbers. If the property was vacant for any period during the year, don't include the rent you would have received for that time in your yearly rental income total.
2. Subtract your annual expenses from the rental income. For net rental yield, you'll also take into account the other costs of owning the property. Include all fees, mortgage payments, interest, taxes, insurance premiums, and other costs associated with the property for the year. Typically these will be monthly expenses, so don't forget to multiply them by 12 to get the annual total.
For example, suppose your annual rental income was $24,000 and the condominium unit cost you $900 a month to maintain. Your annual cost to own the property would be $10,800. When you subtract $10,800 from $24,000, you get $13,200.
3. Divide the result by the current value of the property. The current value of the property is not your mortgage payment, which likely includes interest, taxes, and other fees. Instead, look at the value of the most recent appraisal of the property. That's the amount you could likely sell the property for.
For example, suppose the condominium you own is worth $250,000. You have an annual rental income of $24,000 for the property, which decreased to $13,200 by the costs of owning the property. When you divide $13,200 by $250,000, you get 0.0528.
4. Multiply by 100 to find your net rental yield. Net rental yield, like gross rental yield, is expressed as a percentage of the value of the property. To get that percentage, take the decimal you got when you divided the annual rental income less costs by the current value of the property and multiply it by 100.
To continue the example, if you had annual rental income less costs of $13,200 divided by $250,000, you would have a net rental yield of 5.28%. This is considered a relatively low rental yield, but might still be sustainable depending on the location of the property or your reasons for owning it.

Community Q&A.

Question : When you say an acceptable yield is 7-9%, are you referring to the gross yield or the net yield?
Answer : A yield of 7 to 9% is considered a good yield regardless of whether it is a gross yield or a net yield. The net yield simply gives you more information about the actual cost of owning and managing the property. A property with a gross yield of 7 to 9% may have a much lower net yield, for example, if the property needed extensive renovations or repairs. In that case, it likely wouldn't be a worthwhile investment. However, a lower net yield might be acceptable depending on your reasons for owning the property and its location. For example, you might be willing to take a lower yield in a high-growth area where the property was rapidly appreciating in value.
Question : Does net yield include interest-only costs to the bank?
Answer : Net yield includes all costs of owning the property. If you have a mortgage on the property and are paying interest on that mortgage, those costs would be subtracted from your annual rental income along with all the other costs.
Question : What is the acceptable yield?
Answer : It depends on your goals. I'd say an acceptable average would be a 7-9% yield, but you may be happy taking as low as 4% if it's just supporting a pension, or if the property is located in an up-and-coming area where the value will increase significantly over time.
Question : Is there a good online calculator that will do this for me?
Answer : Excel or Google Docs can do this for you. Both are very good at it and keep track of it too. They both allow you to manipulate data to extract even more information.

Tips.

Work out your rental yield at least once a year. It will change depending on operating expenses and changes in the value of your property. Keeping tabs on your rental yield will help you determine when it's best to sell the property.
There are many real estate and finance companies that offer free rental yield calculators online. Simply search for "rental yield calculator" followed by the name of your country. The country name is necessary to ensure the calculator uses the same currency as you.

Warnings.

If you're comparing investment properties to buy, look at the property's past appreciation and potential to appreciate in the future as well as its rental yield. A high rental yield doesn't necessarily equate to a good investment if the property is in an undesirable area.

June 04, 2020