by John Darer CLU ChFC MSSC RSP
Should you sell your structured settlement payments to finance a down payment on a home, as a number of sell your structured settlement companies suggest?
Client First Funding "Your current structured settlement or annuity payments may be paying income for many years to come but you have specific housing needs today. A lump sum payment may be just what you need for a down payment on a new home".
"Whether you want to buy a new house...selling structured settlements to Woodbridge Structured Funding, LLC can put your award to work today"
Saving for a down payment on a home requires financial discipline. When you achieve your savings goal and use the money for a down payment, the money comes out of your savings. In other words, it is generally not borrowed or financed.
The fact that you are making a down payment means that you are contemplating borrowing money to purchase your home. At the time of posting the average 30 year mortgage rate was 4.21% and 15 year mortgage 3.37% (Source: Bankrate.com)
Selling structured settlement payments to raise money for a down payment means that you are financing the down payment. Depending on which cash now pusher you select you could be financing the down payment for your home at a rate of 18% or higher! The rate I'm talking about is the effective discount rate that is quoted that includes all origination fees, court filing fees, legal fees and commissions paid to the factoring broker, your settlement planner or financial advisor, if applicable.
Your structured settlement represents a stable source of guaranteed income. It's boring. It lacks sex appeal. You won't find it in trendy stores. But having a steady supply of income means a lot in these days of economic uncertainty, even if it means waiting a few more months or years.
Think very carefully before you sell structured settlement payments to finance your down payment on a home because home ownership may not be all that it's cracked up to be:
- "The economic recovery is in a bad way. To get it back on track, the housing market will need revival. And yet, three years after the economic crisis (and after bailouts, multiple rounds of stimulus, and much toiling over the national debt) housing numbers are getting worse. August 25, 2011 Time magazine on-line" (Roya Wolverson)
- Low appraisals are being blamed for slowing home sales in many areas of the country as new appraisal guidelines go into effect. Housing Predictor.com September 5, 2011
- Bargain hungry investors are searching for deals, but their ranks are thinning as the scavengers realize the market isn’t what it used to be – not even since the beginning of the year. Housing Predictor.com August 30, 2011
( Emphasis ours)
In addition to the possibility of effectively borrowing money to buy something that may decline in value, you need enough money to maintain the home, repair the home (when necessary) and pay taxes on the home. If you have to "rob from yourself" to make the down payment, how are you going to pay THAT? Even if the home appreciated, compare the long term return on real estate to your cost of money your effectively incur when selling the structured settlement payments to the cash now pushers.
Don't let short term thinking get your ship sinking!