Avoid Homebuyer's Remorse With Delayed Financing

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NEW YORK (MainStreet) -- For most of us, paying cash for a home is unimaginable. We just don’t have that much money lying around. It may surprise you, then, to hear that nearly 30% of homes are bought with cash. Some of these buyers are wealthy, and others are retirees who have paid off their mortgages and can use the equity from the old home to buy the new one flat out.

But is a cash purchase for real estate a good idea? What if you paid cash and then wish you hadn’t? In that case, you’ll be glad to know that a new Fannie Mae rule is making life a little easier for cash buyers with homebuyer’s remorse.

The clear benefit of paying cash is that you don’t have to qualify for a mortgage or pay interest on top of your purchase price. Interest, depending on the rate, can double or triple the cost of buying a home, whereas by paying cash you won’t have to shoulder monthly mortgage payments, leaving more of your income for other things.

Also, a buyer offering cash presents the home seller with a guaranteed deal, while a bidder requiring a mortgage could have the loan denied. The cash buyer is therefore in a position to negotiate a better price.

But there’s a big downside to the cash purchase: Your money will be tied up in the home, unavailable for living expenses, vacations or other purposes.

A cash purchase may be the only option for a retiree without enough income to qualify for a mortgage, but buyers who could take either course are generally told to consider investment returns. Avoiding a mortgage that charges 4.5% is like earning a guaranteed 4.5% on the cash put into the home. If you can invest elsewhere at a higher return, that would be the best option on a purely financial basis.

What would happen if you opted for the cash purchase and then decided you would prefer a mortgage?

If you had enough income, you could take out a mortgage through a cash-out refinancing. In June, Fannie Mae, which backs the lion’s share of mortgages issued these days, lifted a rule that prohibited this kind of “delayed financing” until six months after the sale closed. Among the conditions:

  • The loan cannot exceed the documented purchase price plus closing costs.
  • The home purchase must have been an arm's-length transaction, not a sweetheart deal, like a sale from parent to child.
  • There must be a title search to prove there are no liens against the property and that no mortgage financing was used to buy it. The buyer must document the source of funds used for the purchase.

Generally a cash-out refinance is limited to 70% of the home’s value. Of course you could take a smaller amount if you just wanted a rainy day fund. That would minimize your payment, too.

If you’re considering this option, also investigate home equity loans. A home equity installment loan, which means borrowing a lump sum for a five, 10 or 20 years, will probably have a higher loan rate than a mortgage but lower closing costs.

A home equity line of credit, or HELOC, might have very low closing costs and a low initial rate, though the floating rate could rise later. A HELOC works like a credit card: You borrow only what you want when you want. It is a good option if you just want to have money available for an emergency, as you wouldn’t face interest charges until you’d tapped your line of credit.

If you recently paid cash for a home and are having second thoughts, don’t take too long to consider your options. Loan rates are not likely to stay at today’s historically low levels forever.

—For all the latest real estate news, visit MainStreet’s “Buying a Home” topic page!

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