owner financed deal hesitations

[Brian Walsh]

I am a middle aged male, married with 2 kids (16 and 6). I have never owned a home and have always rented while I completed my education (am now a doctor).

My wife and I found a deal where the owner is willing to finance the property (price 296K). The assessed value of the home in 2009 was 287K. The owner will hold the mortgage starting at $1000 for first 2 years of deal. Then after 2 years, owner held mortgage rate is set at FED Rate (currently almost zero) plus 3%. All the while the owner states she is just looking for $1000 per month. There is no pre-payment penalty. We are putting 10K down.

My radar is going off on this deal, and I am trying not to get emotionally attached to the house. When I look up amortization tables on 286K at 3% the normal payment is about $1250. What I figure is happening is the owners want the design of the contract to pay little equity, get a decent down payment, then keep the person in the contract for as long as possible. Also what I am questioning is the use of the FED rate as the means to adjust the payment up or down. Has anyone ever heard of this? If the FED goes up to 6% then I would be paying 9% on a house with slow moving equity.

I am a good doctor but a lousy money manager. Any help and information would be appreciated.

Thank you.