What is the Interest Rate on a Contract for Deed in Texas (TX)

The interest rate on a contract for deed, or land contract in Texas can vary. A good rule of thumb is it depends on the amount of down payment and risk for the seller.

Each area does really have it's own set market. From Houston, San Antonio, or Dallas or the outer regions of Texas, owner financing rates do differ quite a bit. The main reason for this is the potential major price differences and local buying population.

Most interest rates on land contract for deeds or land contracts in TX currently range from a fixed 6.8% - 12% on a standard 30 year amortization. Because of property values in certain parts of Texas there is starting to be more owner financing offered as an interest only payment.

Sellers whom do a fair amount of owner financing tend to like to make it more of a standardized process. These sellers of owner financed homes typically will take the current going 30 year fixed rate and put a spread on it. This spread is a direct relation of risk.

For instance, for simplicity take a $300,000 home in Texas. The seller is willing to accept anywhere from 5 - 10% up front as a down payment. The seller might even show you an example stating that if you put down 10% your rate will be:

Current 30 Year Fixed Rate + Spread = Total Interest Rate on Land Contract

So for a 10% down payment we take a current prime 30 year fixed rate of 4.5% and since this is an owner financed home the spread will be 3 points (3%). So the interest rate you would have on this land contract if you put 10% down is a fixed rate of 7.5%.

Next the owner tells you, that you can put only 5% down but the spread will be 4.5%, for a total rate of 9%. So here you are putting 5% down, and paying a total fixed rate of 9%.

Why does a seller do this? First and foremost is the risk, the less down payment the seller receives the more risk the seller has if anything in this deal goes bad. Although your down payment isn't the only factor, there can be such things as your current financial situation, term of the contract, or lump sum payments that you can negotiate in.

Most land contract for deeds that I see in Texas have an interest rate that ranges from 6.2% - 12.0%. Can you get a better deal, sure, but it will take some negotiation and having a good understanding of the ins and outs of owner financing.

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