Taking out a mortgage is the traditional way to finance a home. There are many types of mortgages, offering a variety of options for buyers. You can apply for a fixed rate loan, like a 15 or 30-year mortgage, or a variable rate mortgage like an adjustable rate mortgage (ARM). However, there are other home mortgage alternatives that provide a variety of options.
You should start by selecting a home mortgage that best fits your financial situation. But first, ask yourself if a mortgage is even the right option for you.
Another important question to ask is whether you are qualified for a home mortgage. In this economy, mortgage lending companies have become even stricter with their requirements after the housing crisis over a decade ago. Borrowers need to have a high credit score and be able to have quite a bit of upfront cash necessary for the down payment to qualify for a mortgage in most cases.
Fortunately for the people who do not want to go down the mortgage route or who just can’t qualify for a mortgage, there are other ways to be able to own a home.
Here are three home mortgage options to consider:
Borrow against your life insurance policy
As you make payments on many whole life insurance policies, they will increase its cash value over the years. The dividends and interest that you earn will also go toward increasing the insurance policy’s cash value.
As the principal of that life insurance policy, most allow you to borrow against its cash value. Since technically that money is already yours, you do not need to go through a loan qualification process. You should check the interest rates and determine if it is competitive enough.
Borrowing against your insurance policy to finance a home mortgage can be tricky because it will affect the value of your policy. Only do so if you think you can repay the loan.
Sit down with your insurance agent and determine the pros and cons of buying a home using this method. The benefits you get from owning your own home must be able to surpass the cost of borrowing against a life insurance policy.
Another option that isn’t always the best choice is borrowing against your 401k retirement plan. Many plans allow you to borrow against your balance for life events such as buying a home.
Be careful though. In addition to losing future earnings while you repay the loan to your retirement account, you need to repay the loan before you leave your job. If you lose your job, you’ll how to repay the balance right away. If you don’t repay, the government could hit you with penalties for withdrawing the money before you’re legally allowed.
Lease a home
The lease option to a home mortgage is more familiarly known in layman’s terms as the rent to own option. Rent to own is a good way to find the house of your dreams and test drive it before you buy.
As a renter, you often pay a higher price than the regular rental fee. The lender puts that difference toward the eventual purchase of the same home. Normally, if you decide later to not buy the home, you forfeit those extra payments.
Renting to own can be a good option if you don’t have the financial means to buy a house using a traditional home mortgage but would like to start toward owning a home now.
It is usually a good choice for people who also don’t have enough cash for a down payment. It’s a good way to keep your options open if you don’t know what your plans will be three to five years from now.
When going for a rent to own option to a home mortgage, make sure that the fine points of the deal are spelled out in your renter’s agreement.
An important point to note would be what portion goes to outright rent and what goes towards home equity. In some extreme cases, some people were able to negotiate that the lender uses most of the money towards owning the home.
Go with a private lender
If you have a low credit rating and are unable to qualify for a traditional home mortgage, you might want to go a different route such as through a private lender.
You can obtain hard money loans, and there are many private lenders that finance these kinds of deals. You can also approach real estate investors who want to earn a higher return on their investments for home financing deals.
While loans from private lenders or real estate investors have fewer requirements, the same isn’t true for hard money loans. But, be aware that the payback terms are often in favor of the lender. These terms could make the total loan amount more costly than taking out a traditional home mortgage.
While these kinds of loans have fewer requirements, the payback terms are often in favor of the lender. The total amount will be more expensive that taking out a traditional home mortgage. Interest rates can be much, much higher, reaching up to 20% at a time. You will also need to plunk down about 30% of the value as a down payment.
While using a private lender can be a way to buy your home now, you can change your funding source later as well. If your circumstances change later, you might be able to qualify for a home mortgage and pay off the private lender.
If you decide to go with a private lender instead of a traditional home mortgage, you want to vet the private lender properly. Make sure that everything is on the up and up. Be careful that you don’t make any deals with loan sharks and lending syndicates.
Owning your own home is a dream for most people. Depending on your circumstances, that dream may not be attainable if you try going the traditional home mortgage route. You might not have the credit score or down payment to use traditional home mortgage funding. Fortunately, there are other ways to own your own home.
Did you go through the traditional home loan route, or did you seek alternative financing methods?