Posted on July 15, 2015 - 12:52 PM
by Natasha Hunter
Partial financing can offer benefits for buyers intending to pay all cash for a home.
Not all buyers have the resources to even consider paying cash for their residence or second home. For those who do, Strategic Financing can offer some opportunities they may not have considered.
Today, we're touching on some ideas that may be of interest to your all-cash buyers.
There are definitely some benefits to paying cash for real estate ...
...yet there are also some drawbacks and tradeoffs when comparing a cash deal to one that uses financing.
Cash Purchase Benefits:
- Usually a straightforward, clean deal
- Strong negotiating position when making an offer
- Appraisal not required (though recommended)
- No mortgage payments
- Fewer closing costs, no escrows
However, Strategic Financing can provide buyers with planning and cash-flow options that may not be available with a cash purchase.
- Leverage - A basic principle of real estate investment;
using borrowed money to own property,
increasing rate of return; putting less of one's
own cash at risk.
- Liquidity - Money that would have been tied up in a
property is readily available as a cash reserve
fund or for another investment.
- Diversification - Another basic investment principle;
spreading cash exposure among different
investments, reducing overall risk.
- Tax Deduction - Mortgage interest is tax deductible
(within limits) for primary residences and
second homes when itemizing deductions.
This can reduce the effective mortgage interest
rate by up to 1% in most tax brackets. See your
When committing cash to 100% of the purchase,
buyers are tying up their money to that single specific use for as long as they own the property.
If they can invest or use some of that cash and realize a good return or benefit, it might make sense to finance at least partof the purchase.
Liquidity may be the strongest consideration for many buyers.
Real estate traditionally takes longer to sell than stocks, bonds, mutual funds, jewelry, or other assets. This lag time between deciding or needing to sell and actually receiving money from the sale must be taken into account.
If money tied up in property is needed quickly by the owner, he or she may be forced to sell at a drastically reduced price.
For many cash buyers, freeing up some of their money faroutweighs any financing costs. Only by knowing what loan programs are available to them (and at what cost) can they make an informed decision.
Here are some examples of Strategic Financing when a buyer has cash available:
- FNMA's Delayed Financing Exemption - an immediate
cash-out of 50-60% of the all-cash purchase price.
- Since lower LTVs (Loan-To-Value ratios) and shorter
loan periods bring better rates, choose the LTV and
time frame for which the rate is most offset by the
interest deduction benefit. Properly structured, this can
deliver an effective interest rate under 1.5% in our
current rate environment.
- On upper-bracket properties normally needing Jumbo
financing, use enough down payment to bring the loan
amount under the $417,000 conforming limit, receiving
better terms and rate.
- Consider a 5/1 or 7/1 ARM at 50% - 60% LTV for
manageable monthly payments and low borrowing cost.
Remember that all of these methods (and others) provide buyers with a combination of Leverage, Liquidity, Diversification, andtax deduction benefits.
Whether you have buyers with available cash for their purchase, or ones with just 5% or 10% down payment, call me to present the financing options that will help them decide what's in their best financial interest.
Well-informed buyers make for much smoother transactions.
Let me reinforce the trust
your buyer has placed in you! sm
All information provided by Chris Carter. See contact information below.
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