When you set your sights on buying a home, one of the decisions you'll need to make is how you will purchase the property.
Will you be paying cash for the home or getting a mortgage? While most home buyer's are not in the position financially to buy with cash, some have this ability.
Whether it makes sense to buy houses with cash is another story. We will be looking at the pros and cons for making a cash purchase.
By the time you're done reading, you'll have a better understand if it is the right financial move for you.
What is a Cash Buyer?
A cash buyer when purchasing a house is someone who is choosing not to finance the acquisition with a mortgage lender.
The buyer has the funds readily available either in the bank or some other investment account.
When you are a cash buyer, you can expect the listing agent representing the seller to ask for a proof of funds letter before accepting your offer.
A proof of funds letter will take the place of a mortgage preapproval letter. It proves that you have the ability to buy the home and you are not wasting anyone's time.
Sometimes real estate agents will refer to a buyer with no mortgage contingency as a cash buyer. In this instance they are not really a cash buyer even though it appears this way when looking at a real estate contract.
Some buyers will also pay cash and then immediately get a loan after the closing takes place.
What Are The Pros For Buying a House in Cash?
There are going to be certain advantages for paying cash for a home, especially when the market favors sellers.
Cash Buyers Are More Desirable With Home Sellers
In hot real estate markets where there are multiple offers and bidding wars, cash is king. Buying a house for cash takes many of the worries off the table for a seller.
There is always a big fear that a buyer will not be able to procure financing. A cash buyer takes that fear off the table.
Secondarily, the seller does not have to worry about an appraisal contingency. A low real estate appraisal could cause the sale to fall through. With cash sales and no mortgage, there is no appraisal.
In buyer's markets where there are far fewer buyers, paying cash will likely put your offer to the top of the pile if there happened to be multiple buyers.
The difference between a buyer's and seller's market is that in a buyer's market it would be highly unlikely you would need to make a cash offer to make your offer stronger.
You Won't Have a Mortgage Payment
Speaking from personal experience, I love the fact I no longer have a mortgage payment. It is a very liberating feeling not to have this financial obligation hanging over your head.
Not having a mortgage payment saves you from taking that amount of money to pay the lender every month.
Also by not financing the property, you are not paying mortgage interest each month to the lender. Over the term of any loan, the mortgage interest adds up to a significant amount of money.
Much Lower Closing Costs
When you get a loan from a mortgage lender there will be additional fees associated with taking out the mortgage. These closing costs can add up.
Closing costs include lender fees, an application fee, loan origination fees or discount points are all costs that may be associated with a home purchase.
When you pay for a house in cash, there are no worries about lender-related closing costs, which means lower closing fees for you.
You Can Close on The House Quickly
Without have one of the more common contingencies - the mortgage financing clause, you can close as quickly as you want.
By not having a mortgage lender involved in the transaction the time to close on the property can be done fast. It is not out of the question to be able to close in a week when you're paying cash.
The average time to close on a traditional purchase with a loan is 6-8 weeks by the time all is said and done.
Cons For Buying a House With Cash
As with most things, there are some downsides when buying a house in cash.
Money is Tied up in a Non-Liquid Asset
When you pay for a house using cash, you're putting money in an asset that isn't easily liquid. You can't just access your equity or get rid of the property at a moment's notice.
It is easier to get money from a savings account than it is to sell your home and use the funds from the sale.
Quite often the money you're paying in cash could be used elsewhere as an investment that generates income of long term capital appreciation.
Owning your home outright can provide great peace of mind, but it's not always the best financial decision.
If you have to use all your savings to do it, you could find yourself in a situation where you have no emergency savings and no money to fix necessary repairs on your new home.
You Get No Mortgage Tax Deduction
One of the excellent tax benefits of home ownership is the mortgage tax deduction. When you itemize your deductions, you won't have the luxury of this tax perk.
The mortgage interest deduction allows you to deduct mortgage interest on the first $750,000 of your mortgage which reduces taxable income.
Final Thoughts on Buying With Cash
Buying a house in cash is not going to be right for everyone. The type of current local real estate market could dictate your decision when your in the fortunate position of being able to pay cash.
If you're considering purchasing a home with cash, you should consult with a financial advisor or tax professional to get an idea of how your individual situation might affect your finances.
There are a number of factors to consider when investing, including the opportunity cost, liquidity you require in your financial portfolio, and the tax benefits and consequences.
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