Even though it may seem increasingly challenging to finance and buy a home these days, there are options for qualified buyers who do their research and are patient. The best time to buy a home is when you’re ready to buy the right home. Interest rates and financing come second. Take a breath. There are answers. Keep perspective on interest rates. While we may not see 3% rates again for a while, ask anyone born before 1960 what they think of a mortgage rate between 4% and 5%. They will recall when 7.5% was considered reasonable!
The current state of the housing market is inspiring some to think outside the box and explore less traditional financing options. It’s important to note that these techniques come with risks and may not be a good fit for everyone. I always recommend you consult your accountant or tax advisor before pursuing any of these options. Let’s take a look at some of these techniques.
Home Equity Line Of Credit (HELOC)
This type of loan can be a good solution if you need cash and have equity in your home. A HELOC gives the borrower access to funds by using home equity as collateral. You can borrow up to 80% of the home’s value (less the mortgage balance). Interest paid on this type of loan is sometimes tax-deductible. HELOCs also typically have lower interest rates than home equity loans and personal loans, but, to get the best rates, you’ll need a high credit score, a low debt-to-income ratio, and a lot of equity. Keep in mind that taking out a HELOC will impact your credit profile so you will want to do the calculations carefully.
Seller Financing
If you’re only eligible for a small mortgage loan, you may want to try seller financing. Also known as “seller carryback,” this financing technique means the home’s owner will finance some, or all, of the purchase for the buyer. Since the seller becomes the home buyer’s lender, the seller is permitted to set the loan terms. This technique is worth thinking about, but there won’t be many takers in a seller’s market.
Lease-to-Buy Option
It’s not always true that it’s better to buy than to rent. Lease option contracts can put you on the right path toward purchasing a home if you come across a property you aren’t ready, or able, to buy. In this scenario, investors arrange with the homeowner to buy the property at the end of the lease. While you will likely pay above-market rent, a portion of your rent will go towards a future down payment on the property. If you’re not certain that you will buy the home at the end of the agreement, this option may not be for you.
Self-Directed IRA
A self-directed IRA gives investors more control and has some tax advantages. It is important to remember that all returns must go to the IRA rather than directly to the investor. This is not necessarily a drawback, but you would be wise to seek input from your accountant or tax advisor before pursuing this. Also, any real estate property purchased with a self-directed IRA can’t be used by the investor or the investor’s family. It can only be used as an investment property.
FHA Loans & VA Loans
Both FHA loans and VA loans are government-backed mortgage loans. While the government isn’t the lender, it insures these types of loans to help low-income borrowers or people with less-than-perfect credit purchase homes. This lowers the risk for mortgage lenders making them more willing to offer better rates and terms. An FHA loan enables borrowers with credit scores of at least 580 to make a down payment of as little as 3.5 percent. Keep in mind that this real estate financing loan needs a 1.75 percent upfront insurance fee as well as an ongoing 0.85 percent annual insurance charge of your loan balance. FHA loans are backed by the US Federal Housing Administration while VA loans are backed by the U.S. Department of Veterans Affairs. VA loans are available to those who have served in the military.
Although these options may require some fancier footwork than a traditional mortgage, they could create opportunities to increase your investments and build wealth. If you decide to employ any of these techniques, be sure to consult an experienced real estate attorney and tax advisor. Give me a call or send me an email if you’re interested in purchasing a home with some innovative real estate financing strategies. You can reach me by phone at (401) 924 – 1774 or email at gordon@hoganri.com.
ABOUT HOGAN ASSOCIATES
Hogan Associates is an independent Rhode Island brokerage founded by Leslie Hogan and Matt Hadfield, two of Rhode Island’s most experienced agents, each with a strong track record of success in the Greater Newport real estate market. Hogan Associates’ 36 sales agents work on behalf of buyers and sellers of fine properties in the coastal communities of southern RI. The firm has offices in Newport and Middletown and is a member of Who’s Who in Luxury Real Estate, an elite broker network with more than 130,000 sales professionals located in approximately 880 offices in 70 countries and territories. In 2020 & 2021 Hogan Associates received Newport Life Magazine’s Best of Newport County award. For more information, visit HoganRI.com.
