Most people probably expect to use a mortgage to purchase a home, but what if you have enough to pay in cash?
In a hot housing market, an all-cash offer can give homebuyers a significant competitive edge over those whose bids are contingent on getting a mortgage. And who wouldn’t want to avoid monthly house payments if they could?
Does it really make sense, though, to forgo getting a home loan — especially when interest rates are so low?
Cash vs. Mortgage: A Quick Overview
According to a recent Confidence Index Survey by the National Association of Realtors®, 22% of home sales in August 2021 were cash deals.
Those buyers undoubtedly had a mix of motivations when they decided to pay with cash. Some people just don’t like the idea of carrying a big debt — or paying the interest on that debt. Others might want to skip some of the lending costs and nerve-wracking processes (approvals, appraisals, inspections, etc.) that are required when taking out a home loan.
And, yes, a cash offer can be an attention-getter when there are multiple offers on a house.
But it’s also important to look at the advantages of having a mortgage.
Before you move forward with a home purchase, here are some of the pros and cons of buying a house with cash vs. a mortgage.
Pros of Buying a House With Cash
There are some clear benefits to paying cash for a house, including:
Beating Out Other Buyers
A cash offer can help you compete more effectively with real estate investors who are able to plop down cash for properties of interest.
Or you may be able to negotiate a better price with a seller who’s looking for a quick closing. If your seller already had an offer or two fall through because of contingency issues, it’s possible you’ll be perceived even more favorably.
Speeding Up the Buying Process
When you use a mortgage to buy a home, you can expect to spend a few anxious days working on your loan application, pulling together your paperwork, and waiting for the lender’s approval.
Then you’ll have to wait, again, for a property appraisal, a title search, and other steps that let the lender know the collateral being used for the loan is solid.
With cash, you might be able to avoid some of those steps — and the costs that go with them. (You still may want to follow through, with procedures meant to ensure that your purchase is sound, even if they aren’t required. Otherwise, undiscovered issues could come back to bite you if you refinance or sell the home in the future.)
Buying When the Appraised Value Isn’t Market Value
Paying cash for a house can allow you to purchase a home that won’t appraise for the sellers’ asking price (or the price the average buyer may be willing to pay). If you understand the problems, and plan to make necessary improvements, you may still decide it’s the house you want.
And when the time is right, you can apply for a cash-out refinance to potentially get some money back out of the property.
No Monthly Payment and Fewer Long-Term Costs
With a cash purchase, you won’t have a monthly mortgage payment in your budget, which can feel quite freeing. And you can avoid some of the long-term costs associated with a mortgage, including interest and private mortgage insurance.
Cons of Buying a Home With Cash
Drawbacks also exist when paying cash for a house. Here are a few:
Losing Out on Investing Potential
Yes, if you pay cash, you’ll save by not paying interest, but could you make more money year to year by investing your money elsewhere? If you can lock in a low interest rate on a mortgage, it could free up cash for other purposes, including saving for retirement. (Plus, a hallmark of savvy investing is diversifying your portfolio. If you put most of your cash into your house, that’s just one asset — the opposite of diversification.)
Keep in mind also that if you liquidate assets to help pay for the home, you won’t just lose out on the earnings potential. If those assets have gone up in value since you purchased them, you also may trigger capital gains taxes.
Using Up All Your Cash
If purchasing your home with cash takes a big chunk out of your savings, you might not have the money you’ll need later for unexpected expenses or home improvements.
And if you end up using a credit card for those costs, the interest rate will likely be higher than it would be for a mortgage. The average rate in 2021 was over 16%.
Cash Isn’t Always Better
An all-cash offer is a power move, but it won’t necessarily win the day. Though the thought of a quicker and easier closing will probably get the sellers’ attention, they may still go with the highest offer, even if it includes a mortgage contingency.
Missing Out on the Mortgage Tax Deduction
If you itemize on your federal taxes, you won’t be able to deduct your mortgage interest if you pay cash for your home. Depending on what you’d pay in interest each year, and what your tax bracket is, this could be a significant consideration.
The deduction can also be taken on loan interest for second homes, as long as it stays within the limits.
If you are looking to purchase your house
with a mortgage loan, SoFi
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How to Buy a House With Cash
If you like the idea of being an all-cash buyer and you’re wondering what that process involves, here are some next steps to consider.
Consolidate Your Cash
Getting your cash together in one place could take a while, so give yourself some time. If you’re ready to buy, you may want to move your money from savings accounts, and any investments and other assets you’ve liquidated, to one easy-to-access account.
If you already own a home and plan to sell it, you’ll have to figure that into this process as well.
Negotiate the Price and Sign the Contract
Once you know how much cash you have to work with, you can make an offer on a home. Be prepared to provide proof that you have enough money to make the purchase. If the offer is accepted, you’ll sign a contract.
Consider the Worth of an Inspection
If you’re paying cash, a home inspection won’t be required, but it’s a good way to protect yourself in case there are hidden issues. The same goes for getting an appraisal, owner’s title insurance, a termite inspection, and homeowners insurance.
Prepare for the Closing
The closing is when you’ll seal the deal and pay the seller. You may be asked to provide a cashier’s check for the amount you owe, or you might be able to pay with an electronic transfer.
How to Obtain a Mortgage
If you’ve decided that buying a house — or second home — with cash isn’t doable or practical, then you’ll need to know how much you can afford to borrow.
Getting prequalified and preapproved are basics in securing a mortgage. The first provides a ballpark estimate of how much you may be able to borrow and at what rates, and the other will tell you exactly how much you can probably borrow and at what terms.
When getting preapproved, lenders will review things like your credit scores, employment history, earnings, assets, and debt to make sure you can meet your mortgage payment obligations.
You’ll need to consider if your savings are enough for your down payment, closing costs, moving costs, and home repairs. Even if a 20% down payment is ideal, that’s not always realistic or required.
Recommended: What is the Average Down Payment on a Home?
Delayed Financing: An Option for Cash Buyers
Delayed financing is a way to combine the benefits of cash and mortgage home buying. In short, it’s a way for you to buy a house with cash but then refinance the property within the first six months to get some of your cash investment back.
This route gives you the advantages of being a cash buyer but the ability to regain some of your sacrificed liquidity.
The cash-out amount can vary by loan program, and there are specific eligibility requirements. For example, lenders generally require that the purchase was an arm’s-length transaction. This means the buyer and seller do not have any relationship outside of this transaction.
The stipulation is included to help ensure that each party is acting without pressure from the other, and that both have access to the same information about the deal.
You may also need to show the lender a copy of your settlement statement showing the home was purchased with cash, a title report showing that you are the owner and that there are no liens on the property, and proof that your own money was used to make the purchase (no borrowed, gift, or business funds).
Paying cash for a house can be a good way to get attention in a hot seller’s market. And the idea of avoiding a monthly mortgage payment — and interest — can be appealing. But there are potential downsides to an all-cash deal.
Something to think about while rates remain super low: SoFi offers fixed-rate mortgages with as little as 5% down, as well as cash-out refinancing and loans for second homes and investment properties.
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