Here in the San Francisco Bay Area there are many buyers paying cash to buy a home in order to win in multiple offer situations in this very competitive market.
Paying cash is a great strategy to buy the home. The question the buyer must consider after closing escrow is "does it make sense to get a mortgage after paying cash?"
Let's look at the pros and cons from the point of view that a mortgage will not be pursued:
- There is no chance the home will be lost to a lender foreclosure
- Funds that would have been used to pay a mortgage can be used for other purposes (investment, entertainment, paying for higher education, etc.)
- Insurance coverage is dictated by the property owner, not by lender requirements
- Credit history cannot be negatively affected by a late mortgage payment
- if the property is a rental, the cash flow is at its maximum
- There is no "hassle factor" in dealing with a lender regarding payments
There may be other Pros - if I missed any let me know!
- There can be no mortgage interest deduction on the property
- If a mortgage is pursued after paying cash, there may be a time limit in terms of when the mortgage has to be applied for and/or when it has to close in terms of the interest being deductible (check with a tax professional)
- Liquidity is reduced by the amount of the sale price
- Assets are concentrated in real estate, which reduces asset diversification
- There is no guarantee that equity can be accessed later without selling the property
- Interest rates may be higher if equity needs to be accessed later
- If the property decreases in value there is less diversity in the asset portfolio to offset the loss
As with the pros, I may have missed some cons - can you think of any?
If the buyers make the decision to pursue a mortgage shortly after purchasing with cash, a program that they may pursue is called "delayed financing".
Now that we know what the pros and cons are of paying cash and then obtaining/not obtaining a mortgage, the most important question is "How do I make the decision as to the best course of action?"
Here are the alternatives in terms of making this decision;
- Make the decision by yourself based on what you feel or think
- Ask a friend or family member what they think you should do
- Ask a financial professional what they think you should do
- Ask a financial professional who has decision modeling software that can visually show you how your alternatives fit within the context of all of your financial concerns
We have a tool that helps our clients make effective financial decisions, Opes Advantage . This tool models different "what if" scenarios that would help someone clearly see their alternatives in terms of obtaining a mortgage after paying cash to buy a home.
I can help clients who own property in the state of California model this decision. We offer this as an additional complementary service to our mortgage services.
If you have paid cash to buy a home in California, do yourself a favor. Contact me to help you model and visually see what your best alternative is in terms of whether it makes sense to own the property with or without a mortgage!