What Interest Rate should a Seller Charge for a Seller-Financed Property?

Texas usury laws say that interest rates cannot exceed 18{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} …which would be the max rate a buyer would pay if they were crazy enough to agree to an 18{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} interest rate.

As a seller of hundreds of seller-financed notes in the Houston real estate market, I have charged anywhere from 8{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} to 12{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}. The rate will vary depending on annual salary, credit history, employment history and how much down payment. Typically, the more favorable the credit factors means the lower the interest rate, and/or the larger the down payment usually means a lower interest rate.

Bear in mind, if you choose to seller-finance your property you are passing on the option to cash-out and put that money to work in a CD, T-bill, stock market, etc. And, instead, you are choosing to create an asset backed note receivable (the mortgage you accept backed by the house as collateral) with a better rate of return than you may get in the money market or stock market. Also, you are taking on the responsibility of managing / collecting a mortage and enforcing it if the mortgagee (buyer) starts to miss payments. Because of these factors, you should be compensated with a higher interest rate than on a traditional mortgage.

You could also think of this as “what return on investment am I willing to accept by having this buyer as a credit risk?” Bad credit, low down payment and poor employment history would likely mean you would want a higher return; verus, good credit, strong down payment and stable employment would likely mean you would accept a lower rate of return.

If you think 8{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} – 12{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} seems high compared to standard mortgage rates ….I usually tell my customers that if they want a better interest rate than I am offering they should consider getting a traditional mortgage and paying me off.

In my opinion, the interest rates on seller-financed homes for sale in Houston usually run between 8{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} – 12{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} when considering the above information.