How to Refinance an Owner Financed Home

Homeowners are likely to encounter several advantages upon refinancing a mortgage and even more benefits from the refinance of a loan provided by the previous owner. The financing an owner provides is usually a convenience for the buyer. Therefore, it typically has a higher interest rate than what is available in the lending market. In addition, owner financing doesn’t help the buyer’s credit rating because it’s not reported to any credit bureau. Sometimes an owner-financed note matures after only a few years and a large balance is due, unlike a traditional mortgage. The advantages of refinancing usually outweigh the challenging process of obtaining a new mortgage.

Preliminary Research

Step 1

Identify sound reasons for refinancing. The interest rate or length of an available new mortgage should deliver a low cost or security of long-term financing that is lacking from your current financing.

Step 2

Establish your boundaries for interest rate and monthly payment amount based upon improving existing financing provided by the former homeowner.

Step 3

Determine your credit rating using a free online service. You need this when inquiring about interest rates because a low credit score affects availability of the lowest rates.

Step 4

Examine online records of your local tax assessor to find the appraised value for your home. Compare this to the balance you owe on financing from the past owner. Refinancing is easiest to obtain with a low ratio of financing amount to value.

Step 5

Inquire about any prepayment penalty on the existing financing. A copy of the note you signed for the owner financing reveals this information.

Refinance Application

Step 1

Call several mortgage lenders to obtain interest rate quotes based upon your credit rating and ratio of financing amount to home value. Also ask about points charged, which are a percentage of loan amount paid at closing. Request quotes as “annual percentage rate” in order to simplify comparisons.

Step 2

Ask each mortgage lender how long the quoted rates are valid. Find out the requirements to lock a current rate so it doesn’t change for you. Also determine when a locked rate expires.

Step 3

Apply for the lowest cost mortgage refinancing but make sure you have an estimate of how much money you need to pay at closing.

Tips

  • The annual percentage rate for a mortgage essentially factors all mortgage costs into a single number. This figure is your actual cost of combined interest rate and initial points paid. A high APR is possible on a loan that charges the lowest interest rate.
  • Don’t assume you will not qualify for a new mortgage just because the amount you are refinancing is almost as much as the home value. Most lenders require at least 10 percent equity; meaning you owe less than 90 percent of the value. But some mortgage lenders grant loans to borrowers with less equity. Remember that low equity usually entails higher interest rates.
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  • Carefully check interest rate lock details. Closing on refinancing normally occurs about 45 days after application. But delays often arise. Make sure that you can lock the interest rate you want for at least 60 days. Many mortgage lenders typically offer a 60-day locked rate for new applicants at no cost.

About the Author

Brian Huber has been a writer since 1981, primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. He has a Bachelor of Arts in economics from the University of Texas at Austin.