There are basically three (3) ways of financing a real estate purchase, namely: a) spot cash, b) deferred cash payment, c) long term financing. A resale house or property from an individual seller (as opposed to a developer) is usually to be paid in Spot Cash. On the other hand, real estate for sale from developers, can be availed in longer terms.
Each type of financing scheme has its own advantages and disadvantages. To determine which one is appropriate to you, it is best to start looking at your own budget and financial capabilities. Some financial institutions (banks, credit unions, money lenders, etc) will require income documents from your and/or your co-borrower to determine which one applies to you.
Listed below are the characteristics of each type of payment scheme.
1. Spot Cash. This is an outright payment for the entire contract price of the property you are buying. The entire contract amount must be paid within the agreed number of days (usually 30 days) from the date of reservation. One of the advantages of Spot Cash payment is the large amount of discount that can be availed. Buyers who have enough savings are usually attracted by the discount being offered. Another advantage of Spot Cash payment is that all the necessary documents will get to your hands in a short period of time, assuming everything is in its proper order. Another advantage of Spot Cash payment is that it doesn’t require a lot of documents on the part of the buyer.
The only disadvantage of this approach is that only a few buyers can afford to do so. Buyers usually buy on borrowed funds and savings are usually allocated for something else.
TIP: You don’t have to pay Spot Cash from your savings. Wise buyers will usually loan from other sources that offer lower interest rates and then pay spot cash. It’s like borrowing from A at super low interest rate to pay spot cash for real property offered by B.
2. Deferred Cash. You can think of it as an installment payment without the discount and without interest. There are people who don’t want to be burdened with interest payments. They usually go for this option. Aside from saving on interest payments, Deferred Cash payment also allows for shorter time period for the documents to be processed. In many cases, the entire contract price may be covered within 3 years. Always check with your developer the time-frame for the whole amount to be paid.
3. Long Term Financing. Long Term Financing usually divides the contract price into two: a) down payment and b) financed amount. The amount to be financed is usually covered by a mortgage from a financial institution. Some developers will also offer In-House Financing, but it usually has higher interest rates than available in the market. The loan company will require a lot of income documents from you before your loan is approved. It’s understandable, they want to make sure that they are granting loan from someone who has the ability to pay it in time. The amount of loan and payment terms largely depend on your income, employment or business standing.
This is the usual payment scheme followed by the buyers. Its advantage is that it feels light and can be inserted as part of the monthly budget for the household. The disadvantage is that the longer the loan term, the higher the total payments you will have to cover and therefore the more expensive the property becomes in the long run.
TIP: If you can afford it, offer to you pay a large down payment. This means your mortgage amount will be less. Remember it is the financed amount that will eventually bear the interest. The standard down payment is 20% of the total contact price. If you can pay more like 30%, do so. The lender will love you for it.