By Gary L. Kelley, Realtor®
Relatively low interest rates and high demand have contributed to a competitive market some have called “crazy.” One of the common questions is how can so many people pay cash…and you may be living in the answer.
If you’ve owned a house for many years, you’ve likely built up equity you can tap. Some folks are “diversifying” by using this equity to help a family member buy a home, to buy a second home, or using the money to buy their downsizing home.
When a seller evaluates an offer, they are often checking to see if there is an inspection needed prior to the purchase and sale agreement (a potential point of renegotiation) and any financing terms. When cash is used, there is no appraisal or additional approvals needed.
This is where the importance of a strong loan officer with a depth of portfolio options comes into play.
There are many ways to access a home’s equity.
One is a HELOC, or Home Equity Line of Credit. This is a relatively easy way to access the equity in your home. Paperwork is relatively straightforward to access a portion of your equity. HELOCs are good to have in place for rainy day needs.
Some prefer a “Cash Out REFI,” where the mortgage on the house is refinanced and the equity can be financed giving you cash. This isn’t as simple as a HELOC.
If you haven’t applied for a mortgage since ~2008, be prepared for what will seem like a very challenging and laborious process. Ever since the great recession, lending standards are substantially stronger. It’s a good thing for all of us, and it’s not an “easy” process. My loan officer friends cringe when I say you need to act like it’s a game and you can’t get a mortgage. If you decide you will win the game, the requests don’t feel as daunting.
If your home is already paid, you can still take out a mortgage and use the cash. With interest rates so low, some financial advisors are recommending getting a mortgage on the theory you can reinvest the money at a higher rate than the mortgage, making more on your money.
Some people look at their 401K accounts eyeing them for easy cash. The issue with hitting your 401K is it is likely a taxable event and, below 59 ½ years old, there is penalty.
A good financial plan needs to be included as part of your thinking. We can toss ideas around for accessing the equity in your home, and your need to look holistically at your financial situation. What are your financial goals, are you building an estate to pass to your heirs, have you thought through long-term care, etc. You certainly don’t want to end up over leveraged and not able to enjoy life.
You need a team helping you, including a real estate professional, loan officer and financial advisor. You might also include an estate planner or life insurance person, depending on your concerns. Everyone comes at this from their own perspective (if all you have is a hammer, everything looks like a nail) and when you have input from your team, you can best make an informed decision.
Here is free app for your phone/tablet tied directly to the MLS https://www.homesnap.com/Gary-Kelley.
Gary is heard on WCRN AM 830 discussing “All Things Real Estate.”
If you need advice on selling your home or buying a new one, give us a call at 508-733-6005.