Advantage of Fixed Price

One important advantage of the installment contract approach to home purchase is that the buyer can often lock in a purchase price, even if the actual purchase transaction is still years away. The benefit of this is that such a fixed price can beat inflation by taking advantage of anticipated appreciation.

Consequently, even if the buyer and seller agree to a market price today, the buyer will be purchasing the property at a premium value (because of its equity appreciation) a few years later.

For example, consider the scenario of Lorna who wishes to buy a $90,000 property with an installment contract—and with no down payment. After three years, the property's value appreciates to (hypothetically) $100,000. During that same period, Lorna's monthly payments lower the principal balance to $80,000.

Thus, when Lorna applies for a refinance, she will be applying for a mortgage loan of $80,000 on a property worth $100,000—therefore, she has established $20,000 in equity without really trying.

$90,000

Sales price on installlment contract

$100,000

Appraised value at time of purchase completion

$80,000

Balance on installment contract sales price after three years

$20,000

Property's built-in equity at time of purchase completion

If she wanted to, Lorna could take out a second mortgage on her equity of $20,000. She could then use that second mortgage loan to consolidate other debts, arrange home improvements or make a down payment on another property. She could also decide to sell it.

Best Investment Tips and Ideas

Best Investment Tips and Ideas

The dynamics of investing can be very emotional and stressful if not properly managed. When you are aware of what is all involved you give yourself the power to avoid those situations or at least manage them effectively. That will make your investments more exciting, rewarding, and enjoyable. Those positive factors will only lead to greater success in all that achieve with investments and life.

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