LET'S STAY CONNECTED!

Financing Makes Sense

As June winds up and we head into July, we are definitely in “home buying season. ”For home buyers who are able to pay all cash for their desired home, there can be some drawbacks and compromises when deciding between a cash deal versus a financed one. People who sell their companies and/or receive large sums of money occasionally make headlines for buying properties without financing. AsOrion’s brokers know, the vast majority of home buyers use financing, however, and for good reasons.

The benefits to purchasing a home in cash include a more straight forward deal, strong negotiating power, no appraisal is required, there are no mortgage payments and there are fewer closing costs. All cash deals often allow for quick and clean transactions.

Apart from cash deals, brokers know that there are also benefits to financing a home such as not allocating as much cash in one investment, being able to readily utilize money that would have been tied up in a property, spreading cash exposure among different investments to reduce risk and having tax deductions. Mortgage interest is tax deductible and can reduce the effective mortgage interest rate by 1 percent in most tax brackets. When home buyers invest cash in 100 percent of the property, they are tying up that money for a single use; therefore, it may make more sense to finance part of the purchase, particularly if they realize a return on investment. Partial cash financing on a home will allow for more financial freedom and can prevent a significant loss if the consumer needs to sell the home at a low price.

Put another way, and keeping things simple by focusing on your client’s return, let’s say a family buys a home for $800,000. They put $100,000 down and obtain a loan for $700,000. Over the next year the house appreciates by 5 percent and is worth $840,000. So, for $100,000 invested, their asset is now worth $40,000 more, a return of 40 percent! Someone who paid all cash would have only earned 5 percent.

There are some options to leverage strategic financing. Some buyers will purchase a property with cash and then finance the purchase a short time later. Fannie Mae and Freddie Mac offer options. Putting more money into a cash payment, thus choosing a lower LTV and loan period, will allow for the best rate and on Jumbo loans, using enough cash for a down payment to reduce the loan amount below conforming loan limits. It may also be beneficial to consider a 5/1 or 7/1 ARM at 50-60percent LTV for practicable monthly payments and minimal borrowing cost for your client.

A trained mortgage broker is ideally situated to help borrowers think about various options.

‍