Should I buy a house with cash?

There are pretty clear advantages to a cash sale if you’re a homebuyer. First and foremost, it will save you interest – lots of interest. Got a monthly mortgage payment now? Look at your statement. Note how much of your payment actually goes to the principal of the loan. A 30-year $100,000 note at a 3.5% mortgage rate requires $61,656.09 in interest payments over the life of the loan.

If you’re putting less than 20% down, you may also need to purchase Homeowner’s Mortgage Insurance (PMI), which can easily cost a few thousand dollars a year and for which you get nothing. Unlike title insurance, which protects you, PMI only protects the mortgage lender.

A cash transaction can also reduce the closing cost. You won’t have to pay mortgage points, for one thing. Also called rebate points, points are the 1% of your mortgage that you are charged for the privilege of lowering the rate and getting a lower monthly payment. There’s also less documentation for paying closing attorneys, if that’s a factor in your market.

You also won’t have to pay any other lender fees or fund an escrow account. (You will receive that property tax bill directly.) And your credit score won’t matter.

Also, if it’s a vacation home or investment property you’re considering, being a cash buyer means that your existing mortgage – if you have one – won’t be a factor. of financing.

And remember, the bidding wars are back. With low rates and very little inventory pushing demand, as well as the median purchase price, to new highs across much of the country, it’s easy to see why a seller would be less inclined to accept an offer that depends on financing – much less financing plus the sale and closing of the buyer’s existing home – when a cash offer is available.

All of this is music to the ears of any real estate agent trying to entice their client to accept your offer, because more importantly, a cash offer without any need for mortgage financing is more likely to result in a purchase agreement. And that’s true for any real estate market.

How to pay cash for a house

While there may be points in the negotiation process when it makes sense to keep your cards close, in a competitive market, if it’s a property you really want – whether as whether as an investment or as a home – being clear from the start that you are paying the money is probably the way to go.

Think about it from the seller’s perspective. There are a lot of potential pitfalls in reaching a deal – completed repairs, title issues, etc. – but the most important thing is funding. A cash offer is much more attractive than an offer with a financing contingency.

That’s why to be pre-approved for a home loan is therefore strongly recommended when submitting an offer. But a lot can go wrong even after getting that pre-approval. It’s not the same as the mortgage that’s actually taken out and approved, and there are appraisals, LTV ratings, employment and income checks, and all sorts of other things that can go wrong .

That’s why cash is king here. You have to prove it’s there, but you don’t have to show the seller your entire ledger; you can create an account, put the purchase amount in it and present it.

If you really want the property and there is a lot of competition in the market and for that house, you can do it in advance instead of waiting to be asked. You can also offer a high amount of serious money, if you are sure it will close with all other factors taken into account.

Disadvantages of buying with cash and what to do

Buying with cash can have different implications depending on whether the property will be an investment or a primary residence. Investors must make choices in the interest of generating income, while owners must consider the bigger picture.

Remember, you can always buy the house with cash, finance it in whole or in part at today’s remarkably low mortgage rates, and then put that cash to work elsewhere. If you can refinance at a 2% interest rate and even make 4% by investing those products elsewhere, that’s a pretty good return on that money.

You lose the mortgage interest deduction, making the mortgage much like any other personal loan. Of course, other tax benefits still apply, including the property tax deduction.

However, with the standard deduction now $12,200 for single filers and $24,400 for married couples filing jointly, it might not make a difference to your personal situation anyway.

There’s also a whole other set of considerations if you plan to pay cash for rental property or other investment property where cash flow is what matters most.

All things being equal, appearances can matter

You may also be worried that it might seem suspicious to be able to buy a house with cash. The seller may not feel comfortable selling his house in a situation that seems suspicious, out of consideration for his neighbors or his neighborhood.

All things being equal and multiple cash offers in hand, this could possibly be a factor. But with so many cash offers these days, I doubt that’s as much of a concern as in the past. Just pick an offer you’re comfortable with, if you’re in that position.

Damn, this blog quotes a realtor from Oakland, Calif., who says almost all of his offers of around $2 million and above are for a cash purchase. In this market, that’s a lot of houses. And with so many cash offers being made these days, they are no longer unusual at any price point.

I remember in the mid 80’s – in the miami vice days — I had relatives in this Florida town who sold a house for about $150,000. Payment was made in cash, in a briefcase. My parents were pretty strict people. That must have been quite a conclusion.