Spring has arrived, the economy is picking up and we are back into finding the ways to conquer the American dream: “Owning your home”, and because we are all different, here are several alternatives that may help you:
1. Budgeting and saving: This is the good old way and we all must begin by having a reserve for a rainy day (3-6 months of our expenses). Then we can begin savings for our long term investments, such as buying a house.
2. Borrowing from your life insurance policy A Life Insurance Policies come in various colors and flavors but Whole life-insurance, Universal life-insurance and Global life-insurance accumulate cash value over time as you make your regular premium payments. It’s possible to borrow against this cash value and, when you borrow from your own life-insurance policy, there is no loan qualification process.
i. Interest on this type of loan are very low
ii. Your withdrawal will not be taxable
iii. The face value of your policy will not be affected
Consult your accountant or your financial advisor for additional information.
3. Seller financing With seller financing, you bypass the bank and make mortgage payments directly to the seller. The official agreement, which defines the principal amount, interest rate, repayment schedule, consequences of default and other terms, is usually drawn up in the form of a promissory note. However:
- The seller will be able to finance your property only if he owns it free and clear, but if this option is available
- Seller may not want to become lenders. (although seller financing can provide a better rate of return than the seller could get elsewhere, the additional risk and hassle may not be worth it. One thing to know and that may help you with the seller is: the seller doesn’t have to become a lender; he could arrange to resell the promissory note immediately to an investor in what is known as a simultaneous closing).
- When the option is available, seller financing has many potential benefits for buyers:
o The closing process can be faster, since strict bank requirements can be bypassed
o Less expensive, since there is no need to pay a mortgage origination fee or other lending fees that banks commonly charge.
o The terms of the mortgage and the criteria you need to meet to qualify are entirely up to you and the seller, which means there’s plenty of flexibility and room to negotiate.
- However: Be prepare to pay a higher interest rate to compensate the seller for the risk of lending to you.
4. Borrowing from a self-directed IRA Self-directed IRAs are a tool for investing in a wide variety of nontraditional assets, one of which is mortgages. A self-directed IRA differs from the Roth or traditional IRA you may already be familiar with in that the investment options the Internal Revenue Service allows for a self-directed IRA are much broader and can to a large part be dictated by the policyholder.
- The truth being said “You cannot purchase a home using your own self-directed IRA because of IRS rules that disallow what is called “self-dealing.” But someone who is not your lineal relative or business partner can use self-directed IRA assets to lend you money to buy a house”, but if you can get a friend or an investor to borrow from their self-directed IRA you are at a great advantage of getting to pay lower interest rates or buying quicker than expected. Do expect to pay interest rates from 8% to 12%.
5. Rent to own/lease option A rent-to-own arrangement, also called a lease option, lease to own or lease to buy, allows a homebuyer to rent a property for a specified initial term with an option to buy the property at the end of that term. Monthly rent payments are generally higher than market price; the surplus goes toward a future down payment. If the buyer opts not to purchase the property, the extra rent is forfeited.
Renting to own can be a good option for homeowners who aren’t quite financially ready to buy but expect to be within the next three years. Perhaps they need time to amass savings or improve their credit score enough to qualify for a loan. Renting to own can also be attractive to individuals who are not sure if they will be moving in the next few years and want to keep their options open.
6. Talk to your landlord That is if you are happy with the place where you live. individuals may be able to turn a pure rental situation into a rent-to-own opportunity. Keep in mind this is different type of agreement and the rent that you already paid does not go toward the purchase price.
It does not matter how to start making the dream of owning a home a reality, always review all the issues of your deal, Budget, budget, budget, budget and review your budget in a yearly basis.