The traditional fixed or variable interest rate mortgage is usually the first option buyers think about when it comes to financing real estate. Although this is by far the most popular financing method, there are alternative ways to finance real estate purchases that you will want to consider.
Securities-based or Assets-based Financing
One alternative real estate financing option is securities- or assets-based financing. Your securities or assets are used as collateral for the real estate loan, and you don’t need to use your cash reserves for a down payment. You borrow against your assets instead of depleting your assets for the down payment. There are several benefits to this alternative real estate financing. First, you can keep your investment strategy on track because you are using your investments as collateral instead of selling investments for a down payment. Your securities will still increase in value while giving you the collateral you need. Second, your entire portfolio of securities can be considered for your real estate loan, giving you a substantial borrowing advantage.
Home Equity Loans
For real estate financing, you don’t need to look any further than the equity in your current home or other real estate property. As you make monthly payments for your real estate, you decrease the amount you owe on the mortgage and increase your equity in the property. Equity is the difference between the market value of your property and the amount you still owe on the property’s mortgage. You can secure a home equity loan or a home equity line of credit against the equity you have built. Home equity loans and lines of credit are fairly easy to obtain, and the interest you pay on these loans is tax-deductible. Keep in mind that your current real estate is the collateral for a home equity loan or line of credit, and your home or other property can be seized for nonpayment of your new real estate loan.
Assume Seller’s Mortgage
Sometimes sellers are willing to allow a buyer to simply assume, or take over, their mortgage. This usually means that no money is exchanged. Sometimes the seller is willing to pay the buyer to assume the mortgage. This may be the case if the seller is desperate to sell the property. In a sellers’ market, the buyer may be willing to pay a fee for the convenience of assuming a mortgage. The seller signs over the deed to the buyer, and the current mortgage terms may or may not need to be revised.
A lease option gives the buyer immediate possession of the property and provides for the purchase of the property at a later date. The seller retains ownership of the property until the date of sale. Instead of providing a down payment for the property, the buyer makes monthly lease payments until the determined purchase date. Typical lease option payments are about 5 — 15% higher than average local rent payments. The buyer pays the property taxes and insurance as well as maintenance and repair costs from the beginning of the lease option agreement.