In this blog, I’d like to write about different ways to finance a home whether it be your dream home or your next real estate investment. Here are 7 known, and not so known, ways you can finance or fund your real estate purchase. Keep in mind some of these tools may not replace a 30 year amortized loan but there’s a time and use for all of them. Let’s begin now:
#1: Borrow from your 401(k) Plan:
To help you fund unplanned expenses while saving for retirement, most 401(k) plans allow for employees to take loans from their 401k accounts. Mind you there are certain requirements and restrictions, but it’s there if you need it. One thing attractive about this option is, in a way, you are borrowing from yourself and paying yourself interest. Talk to your HR department, your CPA and financial advisor before taking a loan from your retirement plan (or using any of these ideas for that matter). Sidenote to mention: in 2020 the CARES Act permits you to withdraw up to $100,000 from your qualified retirement plan or IRA for a corona-virus related distribution. This is a temporary provision and topic that should be a blog of its own.
#2 Take a Loan on Your Current Home:
If you have equity on your current home, you can potentially tap into that equity in the form of a HELOC or cash out refinance amortized loan. You can then use these funds to purchase your next home or investment. I’ve had clients who wanted to upsize their home, use this strategy coupled with the 401k loan in #1. They purchased their replacement home first, moved in, sold their old home and used the proceeds to pay back their 401k loan and HELOC. Check out my related blog, “Buying and Selling a House at the Same Time.” Here’s the link: https://realestateofhawaii.com/real-estate-blog/buying-and-selling-a-home-at-the-same-time/
#3 Assume a VA loan:
If you didn’t know, VA loans are assumable. The buyer assuming the loan must qualify and, in most cases, must have VA eligibility. I admit that this financing option is probably the least likely of occurring but worth mentioning. Especially if you heard me mention in my recent video on VA loans about my client that locked in at 2.50%!
#4 Owner financing:
Sometimes the seller of the property is willing to accept owner-financing. In this case the seller becomes the buyer’s bank. Although this may seem attractive to some people, there is some risks and I suggest you consult with a real estate attorney or specialist for advice and to review or draft the purchase contract, promissory note and related documents.
#5 Borrow from your investment portfolio:
If you have a non-retirement investment portfolio, you may be able to borrow from it via a SBLOC or securities-based line of credit. Check with your brokerage or financial planner on the availability and terms offered. You may be able to open and use a SBLOC for a short-term bridge loan for the purchase or down payment of your home or investment.
#6 Borrow from your insurance policy:
This is also known as infinite banking or becoming your own banker. The concept involves whole life or universal life insurance policies. You become your own banker as you use your cash surrender value of your insurance policy as your collateral for a loan. The collateral of your policy is said to be more liquid than equity in real estate because the loan can be taken out more quickly at lower interest rates than usually available from real estate debt. I have not used this strategy yet but have a bunch of friends who have.
#7 Buy with funds in your self-directed IRA or solo 401k:
A lot of people think you can only invest in stocks, bonds and mutual funds with these retirement accounts. But you can actually buy real estate with a self-directed IRA or solo 401k plan. You can even obtain financing in some cases. The account needs to be sitting with an administrator or provider that allows this. As with anything, there are requirements and restrictions so do what you have to do to make sure you are in compliance. One thing I like about this strategy is that the fees and expenses are a little more transparent. The downside is that unexpected expenses can pop up. As long as you plan for them and don’t get too bent out of shape, you can absorb them and move on.
So those were 7 alternatives for financing a home. If you have any more, add them to the comments below.
