Innovative Home Financing Ideas: Thinking Beyond Traditional Mortgages

In today’s ever-changing real estate market, having a clear understanding of creative financing options can empower homebuyers. These strategies can make homeownership more accessible, even in a competitive landscape, and are some of the approaches I've worked with clients on firsthand. Buying a home is not a one-size-fits-all all approach, so do yourself a favor and file this away for safekeeping until you're ready to buy your first or next home. 

Below, I'm sharing four of my favorite, innovative financing options: 2-1 buydowns, bridge loans, Home Equity Loans (HELOANs), and gift funds.

2-1 BUYDOWNS: A TEMPORARY INTEREST RATE RELIEF

A 2-1 buydown offers borrowers reduced interest rates for the first two years of their mortgage. This can ease the upfront financial burden during the early years of homeownership and allows many buyers to get into their dream home without having to make as many sacrifices on a stricter budget.

How it works:

• Year 1: The interest rate is 2% lower than the standard rate (e.g., 4% instead of a current market rate of 6%).

• Year 2: The rate is 1% lower than the standard rate (e.g., 5% instead of a current market rate of 6%).

• Year 3 and onward: The rate returns to the original agreed-upon rate (e.g., 6%).

Who pays for it:

The cost of the 2-1 buydown is typically covered upfront at closing and can be paid by the borrower, the seller, or even the lender. This cost equals the difference in payments between the original rate and the reduced rates over the two years.

For example:

• Year 1: Monthly payment savings of $300 at 4% = $3,600 annually.

• Year 2: Monthly payment savings of $150 at 5% = $1,800 annually.

• Total cost: $5,400 of 2-1 buy down.

This option is ideal for buyers expecting their income to grow or for those looking to hopefully be able to refinance within the 2-year window. I've also loved this option when clients know they have a promotion coming down the pipeline but are looking to make a move now. This allows for a bit more affordability upfront and for the adjusted mortgage payments to slowly ease in over the course of two years.

Bridge Loans: Transitioning to Your Dream Home

Lining up the sale of a home and purchase of a new home can be challenging and stressful. To help ease my clients’ experience with their big life transition, we've leveraged a bridge loan. This is a short-term loan that is based on the equity of your current home and helps bridge the gap to buy your new home before selling your current one.

Key benefits:

• If a lot of your cash liquidity is tied up in your current home, a bridge loan enables you to write non-contingent offers, making your bid more attractive in competitive markets.

• You can lean on a bridge loan to fund a portion or all of the cash you'll need to close on the new home - down payment, closing costs, and other upfront expenses. 

• With a typical term of six months, bridge loans provide breathing room for buyers to transition into their new home while coordinating the sale of their current property. If you're tackling home improvement projects at your new home and want to continue living in your current home, this is a lifesaver!!

HOME EQUITY LOANS (HELOANS): UNLOCK YOUR HOME’S POTENTIAL

A Home Equity Loan, or HELOAN, lets homeowners tap into the equity they've built in their property with a one-time, fixed-rate loan. Don't get these confused with a HELOC (Home Equity Line of Credit). Both are fun options, but a HELOAN is a loan.

What sets it apart:

• Fixed interest rates so you don't have any surprises and instead have consistent, predictable payments.

• Large borrowing power with loan amounts typically ranging from $20,000 to $500,000.

• A minimum credit score requirement of 680.

Popular uses:

• Home improvements or major renovations.

• Debt consolidation to streamline finances.

• Investments in additional properties or businesses.

Whether you're looking to fund a project or make an additional real estate investment, a HELOAN offers flexible solutions that can be tailored to your goals. The flexibility and diversity on these types of loans is one of the things I love most about them!

Gift Funds: A Helping Hand for Homebuyers

Loved ones can play a big role in getting you set up for success if they're in a position and want to help. By leveraging gift funds many clients have been able to bridge financial gaps, which helped them meet various costs associated with purchasing a home.

How gift funds can be used:

• Down payments: Cover all or part of your upfront cost when deciding what percent down to put on a home.

• Closing costs: Offset fees such as appraisals, title insurance, and legal expenses. 

• Prepaid expenses: Fund homeowner’s insurance, property taxes, HOA pre-payments, or initial interest payments.

Requirements to keep in mind:

• Funds must come from approved donors like relatives, employers, or charitable organizations.

• A gift letter is required, verifying the donor’s relationship to the borrower and confirming that no repayment is expected.

• Lenders will verify the gift source and transfer process for compliance.

THE BOTTOM LINE

At McFadyen & Co and Guild Home Mortgage, we’re committed to helping you explore all the possibilities for financing your dream home. These creative strategies are a few of our favorites, but we have more up our sleeves depending on a borrower’s needs. Whether you're looking to ease into mortgage payments with a 2-1 buydown, navigate big life transitions with the assistance of a bridge loan, leverage equity with a HELOAN, or be lucky enough to receive gift funds, each of these home-buying strategies can bring you one step closer to homeownership and making your vision of a home a reality.

Ready to take the next step? Connect with our team here to discuss which option is the perfect fit for your goals!

Jen

Allison Larson of Guild Mortgage

Allison’s social character is what drives her to build such a strong foundation with her clients from day one. She believes fostering current relationships, while continuously extending a hand to new affiliations is what keeps her professional life successful and exciting. By creating an environment where people feel comfortable asking questions and expressing their housing goals, she’s able to cater her methods to each unique individual.

Allison leads her Guild Mortgage team of local mortgage experts and is always open to connect and provide advice Follow along with @allisonlarsonloans on Instagram.

Ready to read more?