Pros and Cons of Different Home Financing Methods

Pros and Cons of Different Home Financing Methods
by John Carlucci - October 17, 2022

Very few people have enough money to buy their homes without having to apply for a loan. Banks make good use of that as there are now numerous methods of home financing.

To make sure you don’t make the wrong move and end up in a financing agreement you can’t carry out, in today’s article, we’ll be taking a look at all the pros and cons of home financing methods.

Pros and Cons of a Mortgage

Getting a standard mortgage is the most common way of financing a home. It’s very simple – you pay for a part of the home’s value, and your bank pays for the rest. You make monthly payments to the bank that include the principal amount of money and the bank’s interest!

There are two major downsides. The first one is the possibility of losing your home. The home you’re buying is used as collateral for the agreement. If you’re behind on your payments and you can’t make them, the bank has a legal claim to your home (even if you paid part of it off).

If it does come to this and the bank takes your house – you don’t get that money back!

The other big problem with a mortgage is that it doesn’t change over time. No matter how much value your home loses, be it because of something you did or because of things you can’t influence, the mortgage stays the same.

Hypothetically, you could end up paying $200 000 for a $140 000 home!

Another flaw that a lot of people forget about is that you’re committing to being in debt for the foreseeable future, which is never comfortable.

There are pros too!

Long-term mortgages are currently still the safest way for someone to buy a home, even if they take a long time to pay off.

By getting a mortgage and paying it off on time, you’re also improving your credit score.

The most important thing is – you’re finally able to afford a home. This would, for a lot of people, be borderline impossible without a mortgage.

Pros and Cons of a Reverse Mortgage

When it comes to reverse mortgage pros and cons, the cons are a bit more obvious.

Firstly, a lot of people misunderstand the purpose of a reverse mortgage and use it as a free line of credit. This is not what a reverse mortgage is! In most cases, a reverse mortgage can only be approved for certain things – such as paying taxes or making home repairs.

Since you’re getting cash as equity of your home, your heirs could end up inheriting less than the actual worth of your home. That’s why it’s suggested not to use a reverse mortgage irresponsibly!

There’s also the risk of losing your home, just like with a regular mortgage. If you don’t pay your taxes, insurance, and some other fees on time, the bank can foreclose your home.

However, if you do everything right, the pros are great.

You can pay off the loan for your home. You can actually use the money you get from your reverse mortgage to pay your current mortgage – that makes a reverse mortgage a way of home financing.

A reverse mortgage allows you to liquefy assets and get cash, so you can secure your retirement if you haven’t saved up.

It’s important to remember that reverse mortgages are complicated, so you should get advice from an expert if you’re seriously considering this.

Pros and Cons of Seller Financing

Seller financing is a method of home financing that includes the person buying the home financing it through the seller, with no bank involved. The seller extends credit to the buyer, who uses that credit to make a down payment.

Afterward, the buyer has to make regular payments to the seller until they pay the home off entirely.

Unfortunately, this usually includes a higher interest rate than you’d have with a bank. The balloon-payment clause is also often in effect – after a few years (10 or 15, for example), you need to make a large payment to the seller.

That payment can contain the rest of the money you owe.

In case you don’t have enough for that payment, you could lose your home.

On a positive note, the initial down payment is very flexible because the seller can make it anything they want. You also don’t have to pay bank fees, and the process is much faster than with a bank.

This is often an option for buyers who can’t get a mortgage.

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