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I have a friend who has fallen on hard times, and he owns home that is (was) worth well over $1M. Like most Americans, he has the home pretty well leveraged, in fact owing much more on it that it is worth today. As you can suspect, his moral is low right now and he does not know what to do. He doesn’t want to lose his house, but he also knows his ability to make the payments on the home is coming to an end.
Creative Solutions To Home Financing
Fortunately for my friend, I have been doing quite a bit of research and reading on home finance right now. All the rules of the past 5 years have been thrown out the window and I am re-acquainting myself with traditional lending standards (you know, the kind that work….).
The first solution that I went back to requires additional collateral. Many of my clients have healthy IRAs and stock portfolios (healthy meaning a lot invested in them, not healthy as in performing well) and most do not want to liquidate because the valuations have fallen so far.
Use Your IRA To Help Reduce Your Mortgage Balance
The first thing I ask when working with a client in this situation is whether or not they have additional collateral that they can borrow against. In the case of somebody who is trying to finance (or refinance) a multi-million dollar home, we often look to their other investments. With many people having IRA accounts, that is a great place to start looking.
It is actually possible to borrow money using an IRA as collateral, that requires interest only or even no payments. So, look at this example:
John and Jane Smith own a large home with a mortgage balance of $900K. Their business is struggling right now and they are having difficulty making the payments on their home. They would feel much more comfortable with a smaller mortgage, but they cannot sell the home right now because the mortgage balance is far higher than the home’s current value.
John and Jane have done well in the past and currently have a substantial amount in their IRA accounts.
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Not sure I agree with the advice. At some point you have to preserve cash and live within your means. Otherwise, in five years, John and Jane will end up with no house and no $500k IRA, not to mention having paid the interest on $450K mortage and the property taxes on a $900K house for five years. I would sell the house, even if it means cashing out a portion of the IRA to pay the deficit, taxes and penalty. Even if it is $150K, they will be left with a $350K IRA, can downsize to a $250K house and use the money they “save” on the mortgage and taxes to replenish their IRA. Within five years, they will still have rebuilt their $500K IRA and have a house they can afford (while continuing to build their retirement savings).
The ability to “think outside the box” is really the essence of creative financing, rather than just a collection of a few loan products. Look for many more great Tallahassee Real Estate Blog articles that feature “creative financing” at the theme.
Tony, I’m not sure I understand your point. If they use a hedgeloan to pay their mortgage down, they haven’t made a difference in “preserving cash/living within means” category. Selling their home now without “absolutely needing to” is foolish, you don’t buy high and sell low. The real estate market will recover and that will be the time to sell the home. If you analyze the loss offset as well as the penalty on the IRA withdrawal, your observation would have them lose the whole IRA.
I would sell the house, even if it means cashing out a portion of the IRA to pay the deficit, taxes and penalty. Even if it is $150K, they will be left with a $350K IRA, can downsize to a $250K house and use the money they “save” on the mortgage and taxes to replenish their IRA.
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