`There’s too much cash chasing too few good houses for sale.”
That’s what an experienced Realtor said to me recently. She’s right. Another Realtor recently told me about a $1.5 million luxury home sale that he made. The buyer is making a $1 million down payment and obtaining an “easy qualifier” $500,000 mortgage.
Those numbers seem astronomical to most home buyers, including me. As a 30-year investor in rental houses, I’m used to dealing with “little numbers,” such as $100,000 to $250,000 home sales prices.
However, I can’t recall ever paying more than a 10 percent cash down payment. I’ve also bought many houses for nothing down (meaning no cash from my pocket).
For most people, buying a home with a large cash down payment is not a viable option; however, some home buyers pay all cash.
Visit any retirement community, and you’ll find that most of the homeowners don’t have mortgages. In fact, nationwide, about 50 percent of all homes are owned free-and-clear, with no financing.
The big advantage of a cash purchase, of course, is no monthly payment, but the big disadvantage is having all your eggs in one basket. If that home’s market value declines, due to economic conditions, all the loss comes out of your pocket.
To avoid tying up so much equity in one asset, homeowners who are at least 62 might consider taking out a reverse mortgage to increase their monthly income. The two major nationwide reverse mortgage lenders (except in Texas) are Fannie Mae and FHA. In the Western states, Financial Freedom Plan makes reverse mortgage loans up to $750,000 to senior citizens.
Fannie Mae even lets seniors borrow on a reverse mortgage home purchase plan with no monthly payments. More details are available at www.reversemortgage.org.
Before shopping for a home, shop for a loan. Get pre-approved, not just prequalified. Insist on a letter from the actual lender stating the maximum mortgage that you can obtain.
For example, VA offers qualified veterans no down payment home loans. FHA requires a 3 to 5 percent down payment. Fannie Mae’s “Flex 97” plan requires only a 3 percent down payment if you have good income and credit; even the 3 percent can be borrowed. PMI (private mortgage insurance) home loans for 90 and 95 percent of the home purchase are easily available with good income and credit.
The five primary advantages of high loan-to-value home mortgages include:
– Purchasing a home that is likely to go up in market value instead of wasting money on rent.
– Income tax deductions for mortgage interest and property tax payments. In addition, loan fees paid to obtain a home acquisition mortgage are deductible as itemized interest in the year of home purchase; however, loan fees paid to refinance home loans must be amortized over the life of the refinanced mortgage.
– Low down payment home buyers can invest their cash elsewhere. This liquidity advantage is often overlooked by home buyers.
– Leverage, which means controlling an asset with little cash. As the home appreciates in market value, the return on low down payment dollars invested is usually far higher than dollars invested in a zero-mortgage home purchase. The disadvantage, of course, is having to make monthly mortgage payments.
– Limited downside risk if the market value of the home declines. To illustrate, if you buy a $100,000 home for $10,000 down payment, your maximum loss is $10,000. However, if you paid $100,000 cash for the same house, you could lose up to $100,000.
