Thinking of Buying A Home With Cash? Here are the Pros and Cons
Can you imagine your life as a homeowner without a mortgage? It's entirely possible if you buy a home with cash!
That’s right. You don’t have to be a millionaire or a retiree to purchase with cash. In fact, these deals are surprisingly common and provide certain advantages over those who would rely on a mortgage.
A recent report from ATTOM Data Solutions revealed that “all-cash sales made up 29% of single-family home and condo sales in 2017.” More buyers are now opting to pay all cash for their residential real estate, especially in hot housing markets. These all-cash sales are a sign of a stronger economy since there will also be fewer foreclosures.
Likewise, according to the REALTORS® Confidence Index (January 2017), “buyers of homes for investment purposes, distressed sales, and second homes are also more likely to pay cash.”
There are plenty of situations where buyers may find paying for a home in cash is a good option: they might have a large sum of savings at hand, could have just won the lottery, or could be flush with equity as already long-term homeowners.
If you’ve ever seriously considered purchasing a home in cash, it’s a good idea to make sure you understand all the pros and cons before you sign on the dotted line.
1. It's a Smart Strategy in a Tough Seller’s Market
In a Redfin study, an all-cash offer ranked as the most effective strategy for winning a bidding war. It improves a competitive offer’s chances of success by 97%, proving that buying a home with cash can help buyers cut through the competition. In a luxury market, it also increases a buyer’s likelihood of success by over 400%. Yep, that’s fourfold. It can also be an advantage since it typically comes with shorter escrow periods and fewer contingencies. In hot markets where bidding wars occur, cash is truly king!
2. It's a Money Saver
Purchasing a home with cash can help you save money on many of the expenses that are loan-related, including closing costs, lender’s title insurance, and other fees that lenders usually charge to take out a mortgage. Sure, there are expenses you need to deal with, such as processing and filing fees and title insurance, but these will considerably be lower compared to when you get a mortgage.
Since closing costs can equal to about 2-5% of the purchase price of a home, a buyer who pays with cash can avoid many of these expenses.
3. Save up on Mortgage Interest
And speaking of savings, not getting a mortgage loan means you won't have to pay mortgage interest for the next 15 or 30 years. Even if the current interest rates are low, paying interest tied up to the loan can cost homeowners thousands of dollars. A cash purchase can save you this additional cost, and you can add up the money you saved into your savings, retirement fund, or other investments later on.
4. Streamlining the Sales Process
Because a lot can get in the way when a buyer is getting a mortgage, an all-cash purchase tends to close sooner or faster because there's lesser paperwork and no lender involved. Buyers and sellers will avoid encountering any delays related to a subpar credit score, mortgage approval, or even a poor home appraisal. It can assure both parties that there will be fewer things that can go wrong with the deal.
5. Can Provide You Extra Peace of Mind
Without a mortgage, you can live your life without worrying about monthly payments. For many home buyers who gave an all-cash offer, this reason alone is enough because it gives them security and peace of mind.
Even if you lose your job or things turn bad financially, you're assured that you won’t foreclosed on because you already own your home. Also, all you need to pay on a monthly basis are the property taxes and homeowners’ insurance.
6. Get Around Bad Credit History
Getting approved for financing can be quite a challenge for buyers who have less-than-stellar credit but otherwise have a steady income and a considerable amount of savings. Paying a house using your hard-earned cash can save you from the hassle of the mortgage process and the need to worry about your credit history.
There are, however, some disadvantages to an all-cash offer:
1. Limited Liquidity
Buying a house with cash could seriously limit your liquidity since you'll be paying a huge amount of money upfront. This is why home buyers are only recommended to give an all-cash offer if they will still have money left for emergencies.
2. Possibly Limiting Your Investment Opportunities
If an all-cash home purchase means tying the majority of your money into just one asset, then this is another important thing to factor into your purchase consideration.
Even billionaires, including Facebook founder Mark Zuckerberg, prefer the mortgage route when they are more than capable of paying for their house upfront. They understand the value of a diversified investment portfolio.
3. Say Goodbye to Mortgage Interest Tax Deductions
One of the most popular financial incentives that attract buyers to is the major tax deduction from mortgage interest. But if you've paid your home with cash, you won’t be eligible for this tax benefit. A home paid for in cash becomes ineligible for this advantage. However, by the same token, not paying for mortgage interest is already a huge advantage.
4. It Takes Two to Tango to Streamline The Purchase Process
Because cash offers can close faster due to fewer contingencies and no mortgage delays, it can be a challenge if the seller is not yet ready to completely move out or they still haven't found their next place. It can put the seller in an awkward position if their home sells faster than they initially thought.
5. An All-Cash Home Purchase Won't Contribute To Your Credit Score
Despite the hassle that comes from making mortgage payments psychologically and financially, your personal credit can actually benefit from these contributions. Having a long history of timely payments can positively impact your credit score — one thing you can’t get if you’ve paid your home with cash.
No matter the climate of your housing market, always consider the following before making your investment: What is our financial situation? What are our long-term investment strategies? Can we really afford to tie up so much money into one asset?
Buying a home can be your biggest financial commitment — more so if you're paying with cash upfront. Aside from the home purchase itself, it’s smart to consider the other costs associated with homeownership and how exactly this will affect your finances.