Buy in cash and then mortgage?

Question

Hi I am an investor from Miami. I wanted to know if buying houses in cash and then getting a mortgage on them is a good idea. For example if I buy a house for 100k in cash and the market price is 120k will I get a mortgage on the 120k or on the purchase price of the 100k? Will the interest rates be the same whether I get the mortgage before or after?

Thanks!

George Despotopoulos · Answer

@Yoni Ramras @James Mc Ree I can chime in from a lender's perspective.

Generally it comes down to risk and also the fact that many lenders sell your loan to investors. These investors are usually much more curious and skeptical of new loans without a track record. They are less likely to pay premium for this. A seasoned loan is seen as safer as the borrower has been making payments for be it 6 or 12 months. This shows to an investor that most likely this borrower will keep making payments and pay back in full.

As far as costs for closing on a cash-out refinance, I think generally you'll see about 1.5%-2% from  non-traditional lenders, meaning non-bank lenders.

James Mc Ree · Answer

@Yoni Ramras

I don't know why one has to wait 6-12 months either.  That also didn't make sense to me.

You typically buy title insurance when you purchase the property, though you don't have to.  Your lender will require it when you do your cash out refi.  That is 2 title insurances, as an example.

James Mc Ree · Answer

You can get a mortgage based on the appraised value of the property.  Lenders don't use purchase prices nor perceived market prices.  Appraisals are based on comps to recently sold similar properties.

You can sometimes get a lower price with a cash offer and short settlement time.  You will end up paying more in closing costs this way because some costs will be doubled, such as recording fees and title insurance.

Many lenders require 6-12 months seasoning and charge a slightly higher interest rate for cash out refi mortgage versus purchase mortgages.  The higher rate doesn't make sense to me.  Several bankers explained to me that taking cash out of the property is considered higher risk than never putting it in when it is bought, but that never made sense to me.