Trying to buy a home in the current real estate market can be incredibly frustrating.
Interest rates are at a 22-year high, and the number of new listings for sale this spring was roughly 40% below 2019 levels. This means that monthly payments for the same amount borrowed are much higher than just a year ago. In many markets, the most desirable properties are starting bidding wars and selling for well above the asking price.
This environment is making many buyers wonder how they can make their offer more attractive to the seller. One way to do that is an all-cash offer. Sellers and realtors are interested because it can ensure a faster closing day with lower closing costs.
Of course, most people don’t have the price of a house sitting in their checking account. However, there are situations where a home buyer may be able to make it work, especially when:
- You just need a temporary “bridge” of extra financing between buying and selling. Example: You’re selling your current home but want to buy your new home first because it will be easier to sell your home after you’ve moved out (as someone who once tried to sell a house while living in it with three kids and a dog, I totally get this!).
- You have cash, retirement accounts and/or non-retirement investment accounts.
- You have financially secure friends or family willing and able to provide a private loan.
- You've already saved quite a lot but are not quite there.
Each path comes with its own set of considerations and impacts. Therefore, the choice of strategy will depend mainly on the buyer's unique financial situation, risk tolerance and long-term financial goals.
1. Borrow from retirement savings
If you have substantial retirement savings in a 401(k) account, you may be eligible to borrow from it to purchase a home with cash. Individuals can borrow up to $50,000 each, and couples can borrow $50,000 each, provided they have sufficient funds in their accounts. The advantage of borrowing from your retirement savings is that it does not impact your credit score since you are essentially borrowing from yourself.
Borrowing from your retirement savings usually involves repaying the loan over a five-year period through payroll deductions. This convenient option allows you to access the necessary funds without relying on external lenders or incurring additional interest charges.
However, evaluating the potential impact on your retirement savings is crucial to ensure it aligns with your long-term financial goals. While you repay the loan, your paycheck will be reduced. This pay reduction may not be ideal when it happens at the same time you’ve just a bought a new home.
2. Roth IRA withdrawal
Making a withdrawal from your Roth IRA can be another viable method to finance a home purchase in cash. Unlike traditional IRAs, contributions to a Roth IRA are made with post-tax dollars, meaning you can withdraw your contributions (not the earnings) at any time without incurring taxes or penalties. This can prove to be a significant advantage when you need a large sum of cash for a home purchase.
However, it's essential to be prudent when deciding to withdraw from your Roth IRA. While this move won't affect your current taxable income, it could potentially hinder the growth of your retirement savings. Over time, the power of compound interest can significantly amplify the value of your Roth IRA, so withdrawing substantial amounts might mean missing out on potential earnings.
It's always advisable to consult with a financial adviser to understand the implications of such a decision on your long-term financial well-being.
3. Securities-backed loans
If you have a large taxable investment account, one strategy for raising cash to consider is utilizing securities-backed loans. These loans allow you to access cash without selling your securities, which can have tax implications. By taking a loan against the value of your taxable brokerage account, you can secure favorable interest rates and faster turnaround times compared to traditional mortgages.
Typically, these loans offer up to 70% of your account's value, providing a significant amount of cash to facilitate your home purchase. Terms vary depending on where your account is held.
It's important to note that securities-backed loans come with risks. The value of your investments can fluctuate, and if the value drops significantly, you may be required to deposit additional funds or sell securities to maintain the loan-to-value ratio.
4. Private loan
Another potential avenue for buying a home with cash is seeking financial assistance from friends or family members. If you have loved ones willing to lend you funds to make a cash offer, it can be a viable option. However, it is crucial to approach this arrangement in a transparent and professional manner.
To ensure a healthy and mutually beneficial financial arrangement, establish a written agreement that includes a payment schedule with interest. The IRS dictates the minimum interest rate that can be charged on a private loan (the Applicable Federal Rate). This clarity and transparency will protect both parties and maintain the trust and integrity of your relationships.
5. Home equity loan or line of credit
If you own other properties, tapping into their equity through a home equity loan or line of credit can provide quick access to cash for your new home purchase. Home equity loans or lines of credit allow you to leverage the value you have built in your properties and use it as collateral for borrowing.
Before considering this option, it's essential to assess the potential risks involved. Defaulting on a home equity loan or line of credit could result in the loss of your property. However, for buyers with substantial equity in their properties, this option can be an effective way to access cash without selling existing investments or assets.
Making a cash offer can make you more attractive to sellers, but it doesn't mean you must forgo financing entirely. Some mortgage providers offer "delayed financing" options, allowing you to finance your purchase even after making a cash offer. This option can be advantageous, especially if you prefer to keep your cash reserves intact or take advantage of potential tax benefits associated with mortgage interest deductions.
Delayed financing options are typically available within the first six months after closing on the property. It's crucial to discuss this alternative with your mortgage broker to determine if it aligns with your financial goals and circumstances. They can guide you through the eligibility requirements, application process and potential benefits and drawbacks of delayed financing.
Numerous benefits to buying a home with cash
Buying a home with cash offers numerous benefits, including a competitive advantage in the real estate market and financial freedom from mortgage payments. By considering strategies such as securities-backed loans, borrowing from retirement savings, utilizing home equity, seeking financial assistance or exploring delayed financing options, you can navigate the home-buying process more effectively.
Remember to evaluate your financial situation, engage professionals, conduct thorough research and perform due diligence to make informed decisions. Building a lifelong financial plan that encompasses your homeownership expenses will ensure a solid foundation for your financial future. With careful consideration and strategic planning, you can achieve your goal of buying a home with cash and embark on a rewarding homeownership journey.
Sara Stanich is a Certified Financial Planner practitioner, Certified Divorce Financial Analyst (CDFA), Certified Exit Planning Advisor (CEPA) and founder of Cultivating Wealth, an SEC-Registered Investment Adviser. Sara has been a financial adviser since 2007, which followed 12 years in marketing roles and an MBA from New York University. She is a frequent source for the financial press, and has been quoted in Investor’s Business Daily, U.S. News and World Report, and CBS News. After over 25 years in New York City, Sara recently moved to the beach with her husband, three kids and Labrador retriever. She frequently blogs at cultivatingwealth.com.
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