Owning a home of your own. If there is one thing that bind across the history of the U.S. it has been this dream. In addition, the goal of owning a home of your own has been more than aspiration – it has been achievable. However, times are changing and while the middle-class might be under siege more half of all Americans own the property they live in.
With so many people opting to own instead of rent, what are the best pays to pay for a new home? Well, there are many options to choose from. These include the traditional options such as mortgages and cash as well as some new options like reverse mortgages (if you are over the age of 62) and seller financing – this is the trick the pros use.
The home mortgage has been around since for more than 100 years. However, they were usually short-term loans (ranging from five to 10 years) and this had the effect of locking most Americans out of the housing market. In addition, most of these loans had a ‘bullet’ payment at the end of the term, like a balloon payment today, and average Loan-to-Value ratio was only 50%.
As you can see these loans were not attractive and while default rates were low, mortgages were not the primary tool used to purchase homes in the U.S. This started to change following World War II. In 1948, the maximum loan term was raised to 30-years and programs such as Veterans Administration (VA) and Federal Housing Administration (FHA) loans can into being.
Both developments helped to transform the market for home loans in the U.S. Almost overnight millions of veterans and first-time homebuyers were given access to the home mortgages. As a result, mortgage debt rose from 20% of the home market in 1949 to more than 70% in 2001. Think about it, you probably know someone with a mortgage.
What are the advantages to using a mortgage to buy a home? First off, these loans allow homebuyer to get the home of their dreams with little or no money down. In addition, record low-interest rates have allowed buyers to purchase more expensive homes for less. Lastly, most mortgage loans do not have prepayment penalties. As such, you can get a 30-year mortgage and try to pay it off early. For example, paying an extra $50 per month can reduce the term of your mortgage by nearly three years.
Even though we live in a world of credit cards, bitcoins, and online payments, the truth is that cash is still king. If you think that using cash to buy a house is unrealistic, think again. While the approach will require some sacrifice in the short-term a young couple without children who can save $30,000 per year could have enough to buy their first home in less than five years.
Another could be to save up and then use the cash to reduce the amount you need to finance. Not only could this help you to buy a more expense home but it could also help you to save tens of thousands in finance costs.
Remember, cash is still king and if you are considering buying a home you should not overlook this option to either purchase your home outright or to reduce the cost of financing your home purchase.
That’s right, reverse mortgages can be used to purchase a home. Granted, you will need to be over the age of 62 and will have to meet some other requirements but if you are, then you can qualify for a Home Equity Conversion Mortgage (HECM) for Purchase.
The benefit to this option is that you won’t need to make any monthly payments over the life of the loan. While the potential downsides include higher down payment and closing cost requirements as well as the fact that most of the value of the home will be under the loan. This means that the interest due may eat into equity you hold in the home.
According to All Reverse Mortgage Inc., a leading reverse mortgage lender in California, this option is best ‘for borrowers who are looking to maximize their buying potential for a new home, or who want to relocate in retirement, this option can help retirees strategically in achieving these goals.’
This is the options that real estate professionals use. They realize that motivated sellers are likely to cut a deal and why should they use their own money when a seller can provide a significant amount of equity needed to purchase a home.
As the name implies, seller finance is when the previous owner provides a ‘loan’ for all or part of the home. While this is a private mortgage, it is usually different from other home finance options such as hard money loans.
Even though seller finance sounds like a great deal, and it is, the key to getting a seller to provide financing is to find one who is motivated to sell. As such, this option works best in a soft market or when traditional financing is difficult – in the case of multi-family homes with low occupancy rates.