Buying a home with cash isn’t just for the jet set these days.
Spiking interest rates on home mortgages have led a growing number of recent homebuyers to find creative ways to pay for their new homes with cash, the Wall Street Journal reported.
One homebuyer in Colorado, seeking to avoid mortgage rates that in September topped 6 percent for the first time in nearly 15 years, bought a three-bedroom home for $965,000 in cash. To do so, he used personal savings, took out a loan using stock as collateral, receiving an adjustable rate based on the federal-funds rate plus a 2.25 percent margin.
He plans on using the funds from the sale of his soon-to-be former house, listed for $1.7 million, to pay off what he borrowed against his stocks.
A little over 31 percent of U.S. home purchases in July were made in all-cash transactions, compared with 27.5 percent over the same period last year, according to Redfin.
Other alternatives to finding cash to pay for a home include taking out loans against other assets, seller financing or borrowing money from families and friends to avoid getting a traditional mortgage, where interest rates are now higher, the Journal said. Buyers can get lower interest rates from those alternative tools than conventional mortgages.
“The people turning to these strategies aren’t mega-millionaires or billionaires,” San Diego-based mortgage broker Kenny Simpson told the Journal. “They are average people that might have saved up money, they might have leveraged a business or something else, or they had a family member willing to lend them the money.”
Sellers, meanwhile, are spurred to accept lower cash offers to avoid having to start from square one if an offer with financing falls through.
Recently, appraisals have consistently been coming in below the offered price, causing lenders to balk, scuttling deals that were weeks in the making.
All of which has had a negative impact on first-time homebuyers, who don’t have the cash or assets to compete in a market with declining inventory, prices that are holding and skyrocketing mortgage interest rates, according to the New York Times.
From July 2021 to July 2022, first-time buyers accounted for about a quarter of home purchasers. Typically first-time buyers account for about 40 percent of the market, according to NYT.
The longer the delay into home ownership, the less equity a buyer builds up, according to the Times. In addition, renters, without the benefit of fixed interest rates, are more vulnerable to the vagaries of the housing market in terms of increased rent.
And the alternative financing doesn’t come without downsides – such as the loss of mortgage interest deductions — for buyers. Anyone considering alternative financing techniques are encouraged to first seek the help of financial advisers, the Journal said.
The hope is for interest rates to fall and for prices to come down as well.
“It’s not like in the mid ‘80s when we had interest rates that were 14 percent,” Melissa Cohn, a Delray Beach, Florida-based mortgage broker and regional vice president with William Raveis Mortgage, told WSJ. “It’s really much more a case that there have been such aggressive rate hikes in such a short period of time. It’s like a tourniquet was applied to the credit market. There’s still blood going through but it’s mostly stopped.”
— Ted Glanzer