Why Buying A House With Cash Can Be A MistakeTatyana Artemova
Just think how much easier your life would be if you could just write a check for your new house. No mortgage application, no monthly payments, and the security of owning your property altogether – seems like a no-brainer, doesn’t it? Sadly, but not always. Even if you have a few hundred thousand dollars lying around collecting dust, paying cash for a home isn’t necessarily the best financial option.
So, should you buy a house with cash? Your motivations and goals should determine the answer.
If your goal is to avoid paying mortgage interest by buying a property with cash – you should also consider how much that money could grow if you invested it instead. If you want to outbid other buyers on the house – a cash offer will catch the seller’s attention for sure, but you will need to make a competitive offer, though.
Pros and Cons of Buying a House with Cash
If you’re considering making a cash offer on a home, you need to know about the pros and cons.
– Pros of Paying Cash for A House
Aside from the tens of thousands of dollars in interest savings, homeowners who pay cash enjoy various other benefits. If you have the funds to buy your next house, consider the following benefits.
1. Getting the Chance to Negotiate for a Lower Price
In real estate, there’s an old saying that cash is king. And that still holds true, even in an era when cash purchases are uncommon.
Sellers aren’t simply looking for the greatest possible price. They also want clarity. They dislike the idea of accepting an offer, taking their house off the market, rejecting other offers, and waiting a month for the contract to fall through due to financing aspects.
Cash offers reassure sellers that you will close, that you do not depend on anybody else to do so, and that you will not have to wait for unpredictable underwriters’ approval.
You may also settle much faster by removing the lender from the equation. Many sellers are eager to negotiate on price in exchange for a faster, more certain settlement, often taking far less than their other offers.
2. No Mortgage or Rent Payment
Housing costs are usually the greatest monthly expense for most of us. By removing this cost, you significantly reduce your living expenses. You cannot be foreclosed on if you lose your job or go into financial difficulties because you already own the home free and clear.
In addition, you provide a place for your family to sleep at night, no matter how bad things become financially. That peace of mind is valuable in and of itself.
You can put more money into income-producing investments, vacations, or just a better quality of life if you don’t have to make a monthly housing payment.
3. There is no risk of going upside-down
You cannot go upside-down on your mortgage loan if you own your home outright. So there is no danger of being obliged to stay in the house just because you owe more than it is worth.
Whatever the market does, you may make value-based decisions about what to do with your property.
For example, if you have to relocate and choose to rent out your property as a landlord, you won’t have to worry about having enough money to meet both the mortgage payment and nonmortgage expenses.
4. There is less temptation to overspend
When a buyer gets a mortgage, he or she tends to think in terms of monthly payments rather than the whole cost of purchasing a property. After all, it’s simpler to imagine $1,500 every month than it is to conceive of $300,000.
However, when you have to pay up $300,000 of your own money, the expense becomes more real. Buyers who pay in cash are less likely to overspend because the money no longer represents a commitment to repay it one day — it goes from being yours to belonging to someone else.
Then there’s the truth that you can only spend what you have if you buy in cash.
5. Lower Expenses imply a lower risk
Lower living expenses imply that you require less income to live. This makes achieving financial independence and retiring easier.
Assume you save $1,500 per month by paying cash for a home, which reduces your monthly living costs from $4,500 to $3,000. Then, if you’re using a safe withdrawal rate of 4% for retirement planning, you’ll save $900,000 instead of the $1,350,000 needed to generate enough income to pay your living expenses in retirement.
– Cons of Paying Cash for A House
So, after reading about the benefits, do you think that everyone should just save a couple hundred thousand dollars and buy a house in cash?
No, not exactly. While there are, for sure, some pros to this strategy, you should weigh them against the following cons before deciding what is best for you.
1. Lack of Liquidity
When you pay cash for a property, you lock up all of your money and can’t quickly access it.
You’d have to sell the property or take out a mortgage to get access to it. You’d wind up spending more money than if you’d bought the house with a mortgage in the first place since you’d have to pay for closing costs like title fees all over again.
With such a low level of liquidity, you have limited flexibility in rearranging your asset allocation or shifting money from one investment to another.
2. No Mortgage Interest Deduction
If you itemize your deductions, the mortgage interest deduction is a simple method to reduce your taxable income by hundreds of dollars each year.
It greatly reduces the actual cost of your loan. For example, if you pay a 24 percent tax rate and 4 percent interest, your net cost is closer to 3 percent interest if you can deduct mortgage interest.
Remember, if you use the standard deduction just like many more middle-class taxpayers (as a result of the Tax Cuts and Jobs Act of 2017) – you won’t benefit from this deduction.
3. Missing Out on Forced Savings
Not everyone is diligent when it comes to saving money. Instead, most people just save what is left at the end of the month.
Taking out a mortgage requires you to put money toward equity every month. With each payment, you gradually reduce your principal debt, increasing the difference between what your property is worth and what you owe.
That equity is essential. It’s one of the reasons why the average homeowner has a net worth 44.5 times that of the average renter, at $231,400 vs. $5,200.
4. Additional Expenses Are Still Involved
Simply because you don’t have a mortgage doesn’t mean you’re free of regular housing-related expenses.
Property taxes, homeowners insurance, utilities, and, if applicable, homeowners association dues will remain. You’ll also need to budget a specific amount of money each year for regular property repairs and maintenance.
5. Improve your credit score
Yes, it is not the quickest way to build credit, but owning a mortgage and making on-time payments will benefit your credit score in the long run. Credit reporting companies prefer a greater variety of debt, and house loans are often regarded as a productive type of debt that improves a borrower’s credit score. While it may just be a few points in the short term, not having a mortgage might mean a lost opportunity to improve your credit over time significantly.
– Сan you buy a house with cash?
Technically, you may bring those bags full of cash to the closing table and pay for your home with cash. Aside from IRS reporting requirements, there are no regulations prohibiting a cash real estate transaction, and if you have a seller who is willing to accept actual cash, it may be a quick way to buy. However, as a buyer, paying with cash is probably more trouble than it’s worth.
The safest and simplest option is to initiate a wire transfer from your bank account to the sellers. Your bank may set it up for you, and the funds usually arrive in the seller’s account within a few days, depending on your financial institution. The transaction can be traced through both banks, providing evidence of payment.
– What would be a negative aspect of buying a house with cash instead of a mortgage?
Paying cash for a house might make sense for certain people and some markets, but be careful to evaluate the possible drawbacks. The disadvantages include:
- placing too much investing funds in a single asset class
- losing the leverage provided by a mortgage
- sacrificing liquidity
– Can you buy a house with cash and then get a mortgage?
Yes, and it’s referred to as “delayed financing.” It may be a powerful strategy that avoids tying up a big chunk of money in a non-liquid property if you have the funds.
In most circumstances, refinancing any property with cash out (appropriately referred to as a “cash-out” loan) results in a slight premium over a purchase money loan. Therefore, it is classified as a purchase loan with delayed financing.
This strategy has a number of significant advantages:
First, cash always provides the buyer with a competitive advantage – and, in many cases, a discount.
Second, when your offer includes a five-day closing date and no contingencies, you will be head and shoulders above any competitors looking to buy the same home.
Third, because of the fast-closing and lack of contingencies, you may be able to negotiate a lower price.
To take advantage of this strategy, you need to organize your finances before making an offer. Even if you are paying cash, you may want to recoup some of the funds from the delayed financing to use for other purposes. The loan proceeds will be pretty similar to a regular one from that point forward.
If you can close your loan shortly after completing your cash purchase, you’ll be able to avoid (or at least reduce) any unnecessary title and escrow fees.
If you’re thinking of buying a house with cash, you should first talk to a financial advisor or a tax specialist. They can look at your specific situation and give you an idea of how it will affect your finances.
Consider the opportunity cost, how much liquidity you need in your financial portfolio, and what the tax benefits and drawbacks may be.
The first step is to get a preapproval and determine how much house you can afford.