When homeowners need to unlock equity in their home, when they need cash for home repairs, medical bills, emergency travel expenses, or any of life’s unexpected costs, they often turn to cash-out refinancing. But delayed financing may be their best option.
For years, refinancing has been one of the top option for unlocking a home’s equity, but there is a new type of loan that may be taking its place: delayed financing.
By allowing homeowners and investors to get cash out of their property, while also giving buyers a competitive advantage, delayed financing could replace cash-out refinancing as a popular equity-tapping option.
Delayed Financing: Why it’s the New Cash-Out Refinance
In the current real estate market, which is highlighted by high prices, fast sales, bidding wars, and (unfortunately) frustration among buyers, delayed financing is a popular option.
To understand why delayed financing is replacing cash-out refinancing for many homeowners, you need to understand the mortgage option.
What is Delayed Financing?
Delayed financing is, essentially, a mortgage with a different process. The order is basically reversed; at the very least it’s jumbled.
With delayed financing, you don’t get approved for a mortgage and then make the purchase, the process for a normal transaction. Instead, you make the purchase with cash, then get a mortgage.
This allows you to have the advantage of a cash offer. A cash offer is important in today’s real estate market because numerous buyers are competing for a small slice of properties. With a cash offer, you attract the attention of sellers. Cash offers are more enticing because you won’t have to go through the financing, which could delay or derail the purchase. All things the same, if a seller has two offers, one that is contingent on financings and the other that is a cash offer, they will (likely) take the cash offer.
For this reason, it’s becoming more and more popular.
But there is an important requirement, one that will certainly keep delayed financing from becoming extremely prevalent. You need to have the cash on hand to make a cash offer. If you can’t buy the property outright, you can’t use delayed financing.
The State of the Housing Market Makes It the New Cash-Out Refi
The current real estate market makes this structure extremely attractive for buyers. Many would-be homeowners have expressed frustration with the current buying process. They are in the market for a home, but before they can even make an offer on an attractive property, the home is purchased. In some cases, they only have a chance to hear about a property; when they inquire with their agent, they learn it’s already sold.
In other cases, however, they have a chance to make an offer but their offer is rejected, either because it’s not enough (even when it’s at asking price) or because the offer has contingencies, such as financing or inspection contingencies.
The nature of the market is driven by many factors, but it seems that one of the most important is a low inventory. To put it simply, there are just too few houses available for the number of buyers. This simple fact drives up competition and makes it harder to purchase. Instead of competing against one or two buyers, you may be competing against ten. Obviously this can drive up bids and make a seller more likely to insist on non-contingent offers.
Reasons to Use Delayed Financing
People are motivated to use this type of mortgage for reasons beyond making a competitive offer. In many cases, it’s an option for investors who are unable to secure financing when they initially make the purchase.
If you are an investor purchasing a fixer-upper, you may be unable to secure financing on the purchase because the property is seen as having too little value by the lender. However, you could make the purchase with cash, fix up the property, and then secure delayed financing now that the property has a decent value.
Comparing Cash-Out Refi to Delayed Financing
Cash-out refinancing and delayed financing have a lot in common. Essentially, you are securing a loan against the property when you already own the property itself. The key difference, however, is that with delayed financing, there is no mortgage on the property, then you go out and get one. With cash-out refinancing, you have an existing loan on the property, then you replace it with a new mortgage.
With cash-out refinancing, you start with a property that has a mortgage and significant equity. (Usually you’ll need about 20% to use cash-out refinancing.) Basically you will refinance the loan, but instead of getting a loan more or less equal to the amount you had before, you get a loan larger than the amount needed to pay off the previous loan and take the rest out in cash.
For example, let’s say you have a home valued at $600,000 with a mortgage that has a remaining balance of $300,000, meaning you have $300,000 in equity value in the home. Now suppose you need $100,000 for major home repairs. You could to a use a cash-out refinance to get a loan for $400,000. You would use $300,000 of this new loan to pay off the old mortgage, then take the other $100,000 in cash to use for your repairs.
So both cash-out refinancing and delayed financing allow you to tap into your home’s equity. They arrive at the same destination, they just take a different path to get there.
Find the Right Loan from the Right Team
If you want to learn more about cash-out refinancing or delayed financing, contact our team today. We understand how to find the right loan for your specific needs, and we’ll do everything possible to help you get approved.
You mortgage loan can have a profound impact on your longterm finances, so work with a team that cares about your results.
