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.