Mortgage Rates Are Rising. How to Put Together Enough Cash to Buy a Home.

Nov 25, 2022


As home-financing costs have skyrocketed, cash is king once again. Nearly one in 10 new homes in the third quarter were purchased with cash, according to Census Bureau data—the largest share since 2014.

A big reason: Home-financing costs have risen at a speed unseen in decades as the Federal Reserve has hiked interest rates in a bid to slow inflation. The average rate on a 30-year fixed-rate mortgage has more than doubled to about 7% this year. That has added at least $800 to monthly costs for a $500,000 home purchase.

Avoiding those financing costs isn’t the only benefit of paying cash for a home, say financial advisors. All-cash purchases typically don’t require appraisals, which can derail mortgage-based deals. That makes them more attractive to sellers. “Because [cash buyers] provide that certainty, they can negotiate the price down,” says Peter Shieh, senior wealth advisor for U.S. consumer wealth management at Citi.

Not everyone has a big pile of cash lying around, however. Don’t worry. You can still make an all-cash offer using the following strategies.

Harness Home Equity

Current homeowners have a handful of options for using accrued equity in their existing home to raise cash for a new purchase.

One is to tap a home-equity line of credit on the existing home, a tactic for when clients are looking to downsize from a more valuable property to a less costly one, says Jeff Donham, a senior wealth advisor with the Colony Group.

“If you already have a fairly sizable mortgage on your existing home, you’re only going to get so much out of that home-equity line of credit,” Donham says. “But if you own it outright, you may be able to get enough money to put in a very competitive bid.”

Tap Your Portfolio’s Value

For prospective buyers with money in investment portfolios, there are a few options for using those assets for a home purchase. If you choose to cash out your equities, tax considerations become paramount. Investors who want to go that route might choose to sell equities that have appreciated as well as those with capital losses that can be harvested to offset the gains, says Jamie Hopkins, Carson Group’s managing partner of wealth solutions.

Margin loans are another popular option for investors. For example, someone with $1 million in equities who is buying a $400,000 home “can borrow up to 50% of their investment portfolio as a loan and then purchase a home all-cash,” says Colony’s Donham. The borrowers would then pay back the loan after selling their former home, negating the need to sell any stocks.

While securities-based lending can help investors make competitive home bids, Donham says he doesn’t recommend borrowing the full 50% of a portfolio’s value. If stocks drop in price, investors may face a margin call and have to add more cash. “You just have to be careful not to overborrow,” he says.

Fidelity offers variable rates depending on the size of one’s loan, ranging from 7.75% for balances of over $1 million to about 12.1% for balances of less than $25,000 as of Nov. 22, while Schwab’s base rate is 10.25%, with effective rates increasing as balances decrease. These rates obviously are higher than mortgage rates now, but remember: You’re borrowing for just a short time.

Borrow From a Family Member

If you’re lucky enough to have friends or family members willing to help, taking a loan from a close personal contact could translate into savings. “You can actually borrow money from family at a very low interest rate,” says Colony’s Donham. 

The applicable federal rate, an interest rate set by the Internal Revenue Service for private lending, changes monthly and will be 4.34% for long-term loans in December—significantly lower than most traditional mortgages. If you’re interested in using a family loan, you’ll need to involve some professionals. “Typically, it’s a private agreement,” says Citi’s Shieh, who says borrowers and their families can craft loan terms with help from a certified public accountant and attorney.

If a Cash Deal Isn’t An Option

Yes, the average rate on a 30-year fixed-rate mortgage is near a 20-year high, but there are many different types of mortgage loans, and some are less expensive. As rates have risen, buyers have increasingly turned toward adjustable-rate mortgages, or ARMs, which have lower rates but come without the certainty of fixed payments for decades. Also, jumbo loans (over $647,200) may be cheaper than so-called conforming loans.

Be creative. The ideal solution for reducing financing costs or making a competitive bid may actually be a larger down payment, says Carson Group’s Hopkins. He adds, “People think about this as a black-and-white decision where really it should be viewed as a full spectrum.”