Mortgage to Purchase, or Afterwards?

December 19, 2005 "I have enough cash to swing a all-cash purchase if I want, but I don�t want all my money tied up in the house, I want to get some of it back in a mortgage. What is the down side of paying cash and taking out the mortgage later versus taking out the mortgage at the time of purchase?" The downside of taking the mortgage after you have purchased the house is that the mortgage will then be classified as a "cash-out refinance" as opposed to a "purchase mortgage". Why does that matter? Cash-out refinance loans are viewed as riskier than purchase loans, and therefore are priced higher. On prime loans, the rate difference is about 1/8%. Only a small proportion of those who take cash-out refinances have houses that don�t already have a mortgage, as in your case. Most have a mortgage and want to raise cash, and some of those are in financial distress and end up in default. That�s why cash-out refinances have higher loss rates than purchase mortgages, and are charged a higher price. The other side of the coin is that it is more difficult to shop effectively for a purchase mortgage than for a refinance. Borrowers purchasing a house are faced with a closing date on which they must provide funding to complete the purchase. This means that at some point in the process there is not enough time for the purchaser to back out of a deal and start anew with another loan provider. Once past that point, they are vulnerable to a variety of tricks by unscrupulous loan providers that can cost more than 1/8%. In contrast, the refinancing borrower who feels badly treated by a loan provider can opt out of the deal at any point and start again with another loan provider. Usually, timing is not critical on a refinance. Even after a loan closes, a borrower refinancing with any lender other than his current lender, has 3 days to rescind it. The lender must then return all fees and remove any liens on their property. This right is not granted to loans used to purchase or construct a house. I think if it were me, I would pay cash and mortgage later, despite the price difference. With a refinance, I�m in charge. Copyright Jack Guttentag 2005

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

Search More Info On:

You'll be re-directed to Top-Lenders.com