All-Cash, Then Finance
It’s called delayed financing, in which buyers pay cash for a home and then take out a mortgage soon after closing. Rarely used even two years ago, experts say it has picked up over the past 12 months.
“It was an extremely unusual phenomenon, but it’s going on quite a bit now,” says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.
The practice is growing mostly in affluent coastal housing markets, including New York and San Francisco. And it all boils down to competition. Sales of million-dollar-plus homes are on the rise nationwide, while inventory remains limited. All-cash buyers have a better chance of standing out from competing bids and getting the home at a lower price since their offer isn’t contingent on financing.
After the deal is done, these buyers also want to regain some liquidity. So they get a mortgage and, in some cases, stash this money in investments that might have higher returns than what they pay in mortgage interest. Other options: They might use it to purchase another property or to simply bolster their cash cushion.
In July, William Martin and his wife closed on a 6,500-square-foot home in Diablo, Calif. Sensing that there was a lot of buyer demand for it, the couple gave a competitive offer: all cash, at slightly above the $1.785 million asking price. Those funds came from a mix of savings and money from his father-in-law and a friend, who were paid back a few months later when the Martins got a delayed-financing mortgage from Fremont Bank, a community bank in San Francisco. “That’s what helped me make the decision to go forward with the purchase from the beginning,” Mr. Martin says.
Delayed financing is similar to a cash-out refinance—in which a borrower with a mortgage also takes equity out of the home. But cash-out refis may require waiting a few months or longer to execute, says Keith Gumbinger, a vice president at mortgage-info website HSH.com. Rates and fees can also be higher, partly because of the extra legwork involved transitioning from an existing loan to a new one. Conversely, buyers who apply for delayed financing can be considered as early as the day after they become the new homeowner, since they own the property free and clear.
Still, not all delayed-finance options are alike. Some lenders, including Wells Fargo and Fremont Bank, say they charge the same interest rate and fees on this mortgage as they would if the borrower applied while buying the home.