First-timer schooled in all-cash real estate purchase

Inheritance may be best split in stocks, mortgage
By: Ilyce R. Glink: Inman News
Q: I recently moved to the Philadelphia area for a job. I'm currently reading your book, "100 Questions Every First Time Home Buyer Should Ask," and would like to look into purchasing my first townhome this summer.

Last year, I inherited a lump sum that is now invested in the stock market. Do you think that it would be a wise move to pay cash for the property and pay myself back the cash over time, or keep it invested and take out a mortgage?

I'm also thinking about working with a buyer broker in my area. Do you think that if I make a cash bid, or if my broker knows that I will be paying cash, that I will get squeezed for a higher price?

A: I'm glad you've taken the time to immerse yourself in knowledge and think through the possibilities before you buy your first home. So many people simply jump in and then find themselves underwater.

Let's start by looking at your finances. I'm impressed that you inherited a lump sum and within a year have invested it in the stock market. Clearly, that is long-term cash for you. Should you withdraw the cash now, there's a chance you might lose money if the value of your stocks has declined (although your current losses can be used to offset future gains on your federal income tax form). But if the value of the stocks you sell has increased, you will be subject to paying taxes on your gains.

Overall, paying for your first home entirely with cash is a very conservative financial move. Whether you choose to do it depends on how nervous you are about being able to make your payments each month and what kind of return you expect from the money you invested in the stock market.

If you have a good job and can make the payments on your mortgage, plus insurance and taxes, then I think you should use some of your inheritance to pay for part of the home. You could sell enough stock to put down 20 percent of the purchase price in cash, and get a mortgage for the rest. That will allow you to avoid paying private mortgage insurance.

Depending on your financial circumstances, you might benefit from the tax deductions available to you for the interest payments on the loan for the home and your real estate tax payments. Your accountant or tax preparer can help you work through the numbers.

Besides, long-term interest rates are still historically low, under 7 percent as of this writing. On the investment side, you can get a CD that pays more than 6 percent. The spread between what you're paying to borrow cash and what you can earn on your cash is shrinking. So there is less risk that you'll pay more for the cash you borrow on your mortgage than you can make in your investments.

Lock in now for a long-term fixed-rate mortgage (preferably 15 years, which will save you a ton of money in the long run, but if that's not affordable then do a 30-year) and buy a home you can stay in for the next five to seven years. That way you'll ride out any short-term shakeout in the marketplace.

When it comes to using agents, you know that I'm a big believer that all buyers should use them. But this advice applies particularly to first-time buyers.

First-time buyers often and wrongly assume that if they go it alone, they'll get a better deal. Unfortunately, the conventional real estate world doesn't work like that. If you go to see a home that's listed by an agent, the agent and seller have already come to terms on a listing agreement that spells out exactly how much commission will be paid - whether you have a buyer's agent in tow, or not.

If you're going to see homes that are for sale by owner, it's likely that these homes are mispriced to begin with - and not in your favor. Without an agent, you won't know if you're paying the right price, or getting fleeced on the purchase. Savvy FSBOs will usually agree to pay your agent at least a partial commission (2 percent to 2.5 percent or more), or there are other ways to wrap the buyer's agent fee into the deal.

As for paying cash or using a mortgage, he or she will be thrilled if you use cash because it eliminates one major issue - whether you qualify for financing. But as long as you're preapproved for a loan, I don't think it matters much to your agent.

He or she will want to know how much you can afford to spend, and will find homes in that price range. Just remember that you control the information you share. If you only want to pay $200,000 for a home, don't tell her you've been approved for a mortgage up to $300,000 - even if that's true.