Especially in today’s low-inventory housing market, homebuyers are looking for any way to get a leg up on the competition when putting in an offer on their desired home. If you have the means, an…
Especially in today’s low-inventory housing market, homebuyers are looking for any way to get a leg up on the competition when putting in an offer on their desired home.
If you have the means, an all-cash offer is a great way to fast-track a deal. A seller is more likely to accept your offer, the success of the deal isn’t reliant on a lender’s OK following an appraisal, and you’ll own the home outright after the transaction with no mortgage.
“All things being equal, it’s very likely that your offer would be the most attractive that they’d be considering with limited risk for the seller,” says Marcy Keckler, vice president of financial advice strategy for Ameriprise Financial, a financial planning and investment advice company.
Cash transactions make up a minority of home purchases: Just 23 percent of U.S. homebuyers pay cash for their homes, according to real estate information site Zillow’s Consumer Housing Trends Report 2018.
But even if you have enough liquid assets to purchase a home without a loan, is it always a good idea? Here are five reasons not to buy a home with cash.
You need to keep some liquidity. It’s not wise to purchase a home with cash if you have just enough liquidity to pay for it. Cash is important to have on hand for any number of unexpected needs, from a new roof to a medical emergency. You want to have enough money to sustain you for at least a few months if you were to lose your income.
“It’s especially important that if you’re a homeowner that you have enough other money available to pay for things that might come up,” Keckler says.
You qualify for a solid mortgage. If you have enough cash to purchase a home outright, lenders will likely view you favorably for mortgage options. With a down payment of 20 percent or more, you don’t have to worry about mortgage insurance when it comes to a conventional loan, and you’re more likely to get a lower interest rate due to the lower risk lenders perceive that you’ll default on the loan.
For the younger generations that make up the lion’s share of homebuyers today — millennials alone comprise 42 percent of homebuyers, according to the Zillow report — financing is a natural move. Both generations are unlikely to buy a home with cash, according to Zillow report; just 19 percent of Gen Xers and 16 percent of millennials purchased homes without financing.
“People are pretty comfortable with taking on debt,” says Justin Vedder, chief operating officer of origination solutions at Altisource. He notes the younger generations’ familiarity with student loans and other financing make taking on a mortgage an easier choice than for older generations that have built up greater wealth over time but may not be accustomed to having significant debt.
Following the recession’s historic lows, interest rates may be on the rise but they remain low compared to previous decades. With enough cash to put down 20 percent on a home with a fixed-rate mortgage, you could keep a large portion of your assets liquid and pay 4.75 percent interest, the average 30-year fixed-rate mortgage interest at Wells Fargo as of late November 2018. Plus, the significant down payment would prevent you from paying private mortgage insurance. Compare that to October 1981, when mortgage rates hit an all-time high of 18.45 percent, according to FedPrimeRate.com.
Your money may be better invested elsewhere. Even if you’re looking to buy a home outside a pricey metro area, if you have enough cash to pay for a home outright, you’re likely sitting on a pretty big pile of money. But the decision isn’t necessarily between buying a property outright or keeping money idling in the bank. Consider other forms of investment to grow your wealth.
It could be investing in the stock market, mutual funds or a personal business you feel confident will bring greater returns. Keckler is quick to point out, however, that no investment is a sure thing. As with a home purchase, there is risk when investing your money anywhere.
You’ll miss out on a sizable tax break. All homeowners with a mortgage receive a tax break on the interest paid to the lender. “The interest (tax break) you accrue when you pay on the loan is huge,” Vedder says.
Following federal tax reform passed at the end of 2017, the mortgage interest tax deduction has been limited to a total of $10,000. While residents in parts of the U.S. with particularly high local property taxes are affected by this measure, most homeowners in the U.S. do not exceed the $10,000 limit. In addition, changes to the standard deduction make it so there are likely fewer filers opting to itemize their tax returns beginning with 2018 taxes.
There’s no guarantee home values will continue to increase. Home prices are on the rise and in many markets are at an all-time high. They are expected to continue to rise, if at a less intense pace, in 2019, with signs of a slowing market already apparent this fall. But if the housing market crash in 2008 was any indication, there’s no such thing as a guarantee in real estate.
“A lot of people feel that (because) the market fell out in 2008, putting all your money in your home is a big risk,” Vedder says.
Always weigh the pros and cons. Especially in a market where homebuying is extremely competitive, an all-cash offer can provide the needed leg up to get the seller to consider your offer more seriously than others. You may not even be the highest bidder, but the seller knows a cash offer will make the closing process easier.
If you want to set yourself apart from other buyers but still have a mortgage, Vedder suggests using the cash to your advantage in the offer and then financing after closing. “You could differentiate yourself and get a loan later,” he says.
It’s also important to remember that by financing, you’re taking on additional costs with loan origination fees and the interest paid over time.
“Your net cost of purchasing is going to be less if you’re paying cash,” Keckler says.
Whether you decide to purchase your home with cash or take on a mortgage, go with what you feel most comfortable with. Keckler notes that zero financing might provide a greater sense of security emotionally, even if it’s not the same guarantee financially. “It may be a big sigh of relief to just know that you own the home outright, and that you don’t have to worry about mortgage payments,” she says.