Alternative Financing to Offset High Mortgage Rates
As conventional mortgage rates have doubled from 2021 to 2022 many buyers are turning to alternative ways to finance their home purchase. When mortgage rates were under 3% many buyers that could purchase with cash still got mortgages, since their cash could yield higher returns in other investments. According to an article in the November 10, 2022, Wall Street Journal, buyers are using creative ways to finance their purchase.
Creative strategies include:
Taking a loan against stock portfolios or investment real estate. This strategy is preferable for many buyers, because it avoids the possibility of paying capital gains taxes on appreciated stock or real estate.
Seller financing and mortgage assumption (government backed mortgages such as FHA, VA, and USDA are often assumable).
Gifts or loans from relatives.
Paying all cash. Cash sales in the United States in 2022 have increased to 31.4% of sales as compared to 27.5% in 2021. When mortgage interest rates drop, cash buyers may choose to take out a mortgage.
According to the WSJ article, there is a caveat:
“The alternative financing strategies that some are deploying come with some downsides, including loss of mortgage interest deductions, said Melissa Cohn, a Delray Beach, Fla.,-based mortgage broker and regional vice president with William Raveis Mortgage. She suggests that anyone using one of these techniques, including borrowing from family, do so with the guidance of financial and tax advisers.”