Gap Money

When someone pays all cash for a property, and then seeks financing to fill that gap in her/his cash position, we call that kind of financing Gap Money.

In the last four years, we’ve seen a decent increase in the number of real estate transactions where buyers have elected to pay all cash.   I certainly see the appeal of doing so when the cash offer is truly superlative over other offers, but there are some pitfalls to be aware of and some strategies to consider:

Gap MoneyIf one wants to take full advantage of the mortgage interest tax deduction(s), the mortgage application date must be within 90 days of the property purchase

What’s important to keep in mind is the fact that even though the IRS will allow the deductibility of the interest and consider the loan a purchase –money loan, lenders still consider the financing a cash-out refinance, which may limit various loan options and possibly raise concerns about the non-recourse nature of a true, purchase-money loan.  Another strategy may be to obtain a Bridge loan to finance the purchase with the intent of refinancing the mortgage post-close, as doing so allows for a broader range of available loan programs.

Purchase-money loans can close in as little as three weeks, and strong borrowers are no riskier than cash buyers

We have seen a number of financed transactions beat all-cash offers simply because the financed offer was better and the borrowers were solid.  There may also be an emotional element on the seller’s side to sell to a buyer who will occupy the property.  Make sure to consult with your real estate professional about such nuances that may affect your transaction.

With municipal bonds paying over 5% on a tax-adjusted basis, and with mortgage rates below 3% on a tax-adjusted basis, that’s a serious investment strategy consideration

Whenever the spread on investment income is greater than the cost of debt, it’s wise to consult with your financial planner and your mortgage professional about the appropriate amount of debt that should be considered and your risk tolerance.  We site municipal bonds as an example since AAA rated muni’s are considered a very conservative investment with a great return.

Securing a cash-out loan post close will cost more

Title fees alone are higher for refinance transactions, and true purchase-money loans generally have lower rates and allow higher leverage versus cash-out loans.

For more on various financing strategies and to determine the right program for you, please consult your trusted mortgage professional.

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