The key to avoiding high mortgage rates? Buying homes with cash

Photo: iStock
Photo: iStock


Cash-only deals are on the rise as buyers look for creative ways to circumvent 20-year-high interest rates

Ron Brown, a partner with Heidrick & Struggles, was on the hunt in Colorado’s Arapahoe County for a new primary residence that required less upkeep than the one he was living in. By the time he found a 3,000-square-foot townhouse he wanted to buy in September, mortgage rates were significantly higher than they were a year ago. On Sept. 15, Freddie Mac announced that the average rate that week on a 30-year fixed-rate mortgage topped 6% for the first time since 2008.

To avoid the rising rates, Mr. Brown, 56, said he bought the three-bedroom home in Littleton, Colo., for $965,000 in cash. To access the capital he needed for the purchase, he tapped into his personal savings and took out a loan using his stockholdings as collateral, receiving an adjustable rate based on the federal-funds rate plus a 2.25% margin. On Nov. 7, the federal-funds rate target was 3.75% to 4%.

He has listed what will soon be his former Colorado residence, a five-bedroom, 4,700-square-foot home 5 miles from his new house, for $1.675 million. Once it sells, he plans to use some of the return to pay off what he borrowed against his stock portfolio.

“My current house has appreciated greatly since I bought it," he said. “Financially it worked out really well, assuming I sell this house."

Mr. Brown is one of a growing number of recent home buyers who are finding creative ways to pay for their new homes with cash to avoid the skyrocketing rates on home mortgages. In July 2022, 31.4% of U.S. home purchases were made using all cash, up from 27.5% in July 2021, according to real-estate brokerage and data company, Redfin. West Palm Beach, Fla., had the highest percentage of all-cash deals in July, topping all metro areas at 56.4%. Nationwide, all-cash deals dipped to 29.9% in September, but still flirted with seven-year highs.

The rise in mortgage rates has been rapid and painful for many homeowners. The average 30-year fixed rate-mortgage peaked at 7.08% during the week of Oct. 27, topping 7% for the first time in 20 years, according to Freddie Mac. By comparison, in January 2021, the average rate was 2.74%. Average mortgage rates in 2021 were so low historically that even home buyers with the means to buy with cash went to lenders, according to San Diego-based mortgage brokers Kenny Simpson and Krystle Moore.

“When rates were lower, your cost of borrowing capital was so low," said Ms. Moore. “We would joke that it was almost free."

Today, rapidly rising interest rates aren’t only boosting the rate of cash-only deals, but fueling the popularity of alternative financing tools that can give buyers access to cash at lower interest rates than conventional mortgages, such as loans against stock or other asset portfolios, and seller financing, said Steven Kruse with Kentwood Real Estate in Denver.

Washington-based agent Anna Riley of Windermere Real Estate said that about 10% to 20% of the all-cash deals she’s worked on this year have been on the lower-end of her local luxury market. She said some buyers are even borrowing money from their families to avoid going through a traditional lender.

According to Mr. Kruse, slowing demand in the housing market has given home buyers, primarily seasoned home buyers, more time to consider purchase options that make the most financial sense for them. During the pandemic, “the strategy was ‘how the hell do I get into a home,’ " he said. Now, “things are sitting on the market and people are trying to weigh their decisions. It’s not something they have to pull the trigger on willy-nilly and waive rights," he said, such as the right to a home inspection.

“The people turning to these strategies aren’t mega-millionaires or billionaires," said Mr. Simpson. “They are average people that might have saved up money, they might have leveraged a business or something else, or they had a family member willing to lend them the money."

When Jian ‘James’ Dong and Quanyi ‘Cynthia’ Zhou were looking to buy their roughly 4,500-square-foot, four-bedroom home for $1.445 million in mid-September, the best rate they could lock in for a jumbo loan was 6%, Mr. Dong said. So they figured out a way to pay cash by leveraging their existing assets.

The couple were relocating from Michigan to Lakewood, Colo., for Mr. Dong’s new job with a research and product development company. Mr. Dong, 45, who is also a licensed loan officer, said he and his wife, 42, took out $1.5 million across three portfolio loans against their business assets, six paid-off rental properties. They secured a 5.125% interest rate on each of the loans, paying about $1,800 less in interest a month than they would have if they took a jumbo loan when they closed on their new home in October, Mr. Dong said.

If mortgage rates fall to a more reasonable level for them, Mr. Dong and Ms. Zhou plan to apply for a cash-out refinance loan on their Colorado home and use some of the money to pay off the portfolio loans.

When Nelson Gonzalez, a Florida-based real-estate agent with Berkshire Hathaway HomeServices EWM Realty, bought his primary home in Miami Beach in March 2021, he secured a 30-year 10/1 adjustable-rate mortgage with a 2% fixed interest rate for the first 10 years. The home, he said, has four bedrooms and spans roughly 3,800 square feet.

At the end of September, Mr. Gonzalez bought a three-bedroom, roughly 1,500-square-foot home in Miami Shores, a nearby village, to add to his personal investment portfolio. With rates significantly higher than they were when he bought his Miami Beach home last year and the 30-year fixed-rate mortgage nearing 7%, he paid just under $1.2 million in cash for the home, getting just under $900,000 from a 1031 exchange and just under $300,000 from his personal savings.

Had rates been lower, Mr. Gonzalez said he would have taken a mortgage on the home and rented it out. Instead, he plans to make some minor renovations and sell it, but is willing to field potential rental opportunities if the monthly income provides a hefty enough return. In Miami Shores, the median sale price of a home in September was $1.1 million, up 32.7% compared with the same period last year, according to Redfin.

The alternative financing strategies that some are deploying come with some downsides, including loss of mortgage interest deductions, said Melissa Cohn, a Delray Beach, Fla.,-based mortgage broker and regional vice president with William Raveis Mortgage. She suggests that anyone using one of these techniques, including borrowing from family, do so with the guidance of financial and tax advisers.

Ms. Riley doesn’t believe the rush to avoid rising interest rates will last forever. There is hope that either interest rates will drop from their current level or begin to stabilize while home prices soften, she said. She also said that, historically, 7% isn’t that high.

“It’s not like in the mid ‘80s when we had interest rates that were 14%," she said. “It’s really much more a case that there have been such aggressive rate hikes in such a short period of time. It’s like a tourniquet was applied to the credit market. There’s still blood going through but it’s mostly stopped."

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