In a higher interest rate environment - although we need to remind ourselves that the 30-year fixed rate mortgage has averaged about 7.74% over the past 50 years - there are other ways to pay for a home purchase. Here are some:
1. Sell assets, stocks, bonds, real estate, partnerships, jewelry, art, etc to generate cash to avoid paying a mortgage or reducing the mortgage amount. If your investments generate 3% (or less), the savings when compared to a 7% mortgage are obvious. This should be done extremely cautiously with the help of a financial advisor.....and some will advise against doing so simply because it means less income for them. Selling assets that have appreciated in value triggers capital gains taxes. If you are under 59.5 years of age, there are IRS penalties for liquidating certain retirement funds too early.
2. Margin loans - a loan based on the value of your owned assets/equities - are beneficial for home buyers who don’t want to sell their assets to avoid paying capital-gains taxes, and borrowers who are self-employed or lack sufficient documentation to qualify for a mortgage.
3. Cross-collateralization can be used to purchase a primary home, a second home, or an investment property: multiple assets are used as security for a loan. if you were to buy a $1 million home with a traditional mortgage at an 80% loan-to-value ratio you'd qualify for an $800,000 mortgage and have to come up with $200,000 in cash. If you own another home free and clear, by using a cross-collateral loan, the lender would combine the appraised values of both homes and finance up to 70%, the maximum loan-to-value ratio lenders use who offer cross-collateral loans. So if your other home is worth $500,000, you would qualify for a $1,050,000 loan (70% x $1.5 million), allowing you to get 100% financing for the million-dollar purchase, and private mortgage insurance is not required. The lender will mortgage both properties to secure the loan. The interest rate is usually comparable to a traditional mortgage.
4. Borrowing money from a relative/friend or - if you are lucky enough - accelerating inheritance or gifting.
5. Partnering. Maybe buy that home WITH a parent, relative, or close friend, whereby they become partners in its ownership, and upon resale you share any profits. Maybe that partner moves into the cottage/pool house for multi-generational living? Think creatively!
