Certainly, not everyone can pay all cash for a home. But if you have the ability, should you? There are pros and cons to that decision that you need to apply to your specific situation. As the housing market softens, there is less need to make an all-cash offer that moves you to the front of the line when multiple offers are being made. On the other hand, what interest rates are hovering around 7%, do you want to take out a loan for $400,000 or more?
1. It’s still a tight market. The market has softened a little but there is still a limited amount of inventory to choose from. If you find the house of your dreams and think there will be more than one offer being made on it, an all-cash offer still puts you in the best position to have your offer accepted.
2. All cash costs a lot less in the long run. It’s not only the higher loan rates that you save on. When a lender is involved, the closing costs can easily add up to 5% of the loan. On a $400,000 loan, that comes to an extra $20,000 that you will pay for the home. When you do include the interest on the loan, it easily adds up to hundreds of thousands of dollars that you’ll pay above the purchase price.
3. Consider your financial liquidity. On one hand, paying all cash is going to seriously deplete your savings account and you’ll probably need to sell many of your financial holdings. On the other hand, you won’t have a monthly mortgage payment that could easily be over $2,500. You can immediately start rebuilding your savings. Plus, if your investments earn more than the 7% rate that you’ll pay on a mortgage, you’ll soon be money ahead by paying all cash for your home and investing what you would otherwise be paying for the mortgage.
4. You will actually own your home. When there is a mortgage on your home, you don’t actually own it. If life throws you a really bad curve ball, the bank can always take your home away through foreclosure. Paying all cash gives you the security of knowing that you really do own your home and your liabilities are reduced to paying property taxes and homeowners insurance if you choose to.
5. You can close the deal faster. This is one of the less important reasons because it depends on the rare seller that needs the deal to close in a few days or a week. When you have a lender involved, you’ll need to plan for at least a month to close the deal. When you do have a seller that needs a fast closing, you should ask for a discount even if there are multiple offers. A desperate seller is likely to accept an offer for $10,000 below the asking price just to get the money into their account in a week.
There are other benefits that an all-cash offer provides such as being able to waive contingencies and the appraisal but there are also reasons why you might want to take out a mortgage even if you can pay all cash.
Some of these are the exact opposite of the reasons for paying all cash. You really need to make the decision based on your personal circumstances.
1. You might have all your investment money tied up in your home. An important key to successful investing is a diversified portfolio. Although real estate has a long history of appreciating in value faster than inflation, no investment is complete without risk. You may want to keep part of your wealth invested in something else.
2. It will probably take longer to become a homeowner. If you don’t already have the cash but plan on saving the full price over several years, it’s going to take you a lot longer than if you take out a mortgage today. In the meantime, you’ll be missing out on the appreciation in home values that would add to your net worth today.
3. You will qualify for a favorable mortgage. If you are in a position to pay all cash for your home, you will also qualify for the most favorable mortgage available. Your better decision might be to make a 20% down payment so that you won’t have to pay for private mortgage insurance (PMI). You can then use the rest of your cash to make investments paying more than the 7% interest that you would be saving buying with all cash.
4. You could miss out on a sizable tax break. The Tax Cuts and Jobs Act of 2017 made this less valuable to some homeowners but for new homeowners with a big mortgage, it can still offer a financial reward by lowering your federal tax bill. You can deduct interest on a mortgage up to $750,000.
5. You get extra title protection with a mortgage. The home-buying process involves reviewing the title for any claims, liens, or issues that could prevent you from taking full ownership. Title research takes place whether you pay in cash or get a mortgage, but it’s always smart to get title insurance on your investment. It protects you if the title research missed any claims. When you get a mortgage to buy your house, the lender also has an interest in making sure the title is clear and that you stay in the house and keep paying your mortgage. Your lender will secure title insurance, too. This means that if there is a claim filed at some point, you’ll have an additional layer of protection that a cash buyer wouldn’t have.
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