Financing—Existing Mortgages, Adjustable rate mortgages and IRA Real Estate
First, you can pay cash. This works if you have enough cash to transfer from someplace else in your financial model to fully fund the real estate. You give up the present use of those dollars transferred and their potential growth and tax benefits in exchange for the real estate.
Second, 1031 or 1033 tax free exchanges to defer paying the tax due on the sale of real estate. This allows you to use dollars that would have gone to taxes at interest until some future date..
Third, use all or part of your IRA or 401-k rollover to fund the IRA real estate purchase. This allows you to tap into funds not regularly associated with real estate. It allows you to gain control of the IRA dollars and therefore reduce risk. This option is for qualified real estate oriented investors.
Fourth, you use a mortgage (leverage). This offers you the potential to increase your financial model’s worth quicker. You will have to decide what type of mortgage makes the most economic sense to your situation. A 15-year, a 30-year, an interest only, an adjustable rate or a home equity mortgage is possible. Each should be looked at carefully for the long-term ripple effects on your family.
Adjustable rate and interest only mortgages have been quite popular in the past few years. Some people are now finding their monthly payments increasing due to the rising interest rates. Or as Greg McBride, financial analyst at Bamkrate.com said “If you have an adjustable-rate mortgage poised for an increase any time in the next two years, you are standing on the train tracks with the bright lights bearing down on you,” Using your IRA to make up the increased monthly payment is an option.
The above four choices can be used alone on in combination to buy the real estate you desire. Which financing solution makes the most sense for you today and in the future?