What is the interest rate on a land contract?


Quick Answer

There is no set interest rate for land contracts, but the interest should be keyed to the interest rates on mortgages. It's common to charge about 1 percent higher than the current percentage rate on mortgages. Some states, such as Ohio, set legal maximum interest rates on land contracts.

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Full Answer

A land contract is an alternative way to buy and sell real estate. In a land contract, the seller provides the financing, as opposed to a bank. The legal title to the property remains with the seller until the contract is paid in full. At closing, title is then transferred to the buyer. A land contract gives a seller more rights to get the property back if the buyer defaults.

The amortization of the contract dictates how long the contract runs. The amortization depends on the size of the contract, the amount of the monthly payments and how much interest is charged. The higher the interest rate, the longer the amortization is. Lower interest rates or higher payment amounts shorten the contract's length. Many times a balloon payment is used with a land contract to shorten the term; those payments are usually set about five to 10 years from the date the contract takes effect.

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