Especially in today’s tight seller’s 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 purchase 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 would own the home outright after the transaction.
“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. In 2016, just 23 percent of U.S. homebuyers paid cash for their homes, according to real estate information site Zillow’s Consumer Housing Trends Report 2016.
But even when 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 your next home with cash.
1. 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 things that might come up – from a new roof
to losing your job 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, which varies based on your lifestyle but should be at least a few thousand dollars.
“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.
2. 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
Plus, the current environment for mortgage lending
is fairly optimistic. The Lenders One Cooperative, an alliance of independent mortgage bankers and lenders and a subsidiary of Altisource, just released its Mortgage Barometer for 2017, which shows 94 percent of 200 mortgage lenders surveyed expect an increase in mortgage purchases this year. Compare that to 2016, when just 62 percent of lenders said the same.
Generation X and millennials are considered two populations with the most potential for growth as borrowers, with at least 85 percent of lenders surveyed noting opportunity in those age groups. Both generations are unlikely to buy a home with cash, according to the Zillow report – just 18 percent of Gen Xers and 22 percent of millennials purchased homes without financing in 2016.
“People are pretty comfortable with taking on debt,” says Justin Vedder, vice president of national sales for origination solutions at Altisource. He notes the younger generations’ familiarity with student loans and other financing make a mortgage an easier choice than older generations, who have built up greater wealth over time but may not be as used to having significant debt.
Vedder also points out that, while on the rise, interest rates
remain near historic lows. With enough cash to put down 20 percent on the home with a fixed-rate mortgage, you could keep a large portion of your liquid assets and pay 4.13 percent interest, 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
3. Your money may be better invested elsewhere.
Even if you’re looking to buy outside a major metro area with steep home prices, if you have enough cash to pay for a home outright, you’re sitting on a pretty big pile of money. But the decision isn’t just between paying for property and having it sit 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.
4. You’ll miss out on a sizable tax break.
“The interest [tax break] you accrue when you pay on the loan is huge,” Vedder says, giving the example of a relative who owns a small business. After doing her taxes for 2016, she told Vedder she’d like to buy a home to help reduce the amount she owes when tax season comes around.
Keckler notes that if President Donald Trump's administration moves forward with tax code reform, the mortgage interest tax deduction may be eliminated. But tax reform has not yet been discussed in detail and remains only a possibility.
5. 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. And they are expected to continue to rise
, if at a less intense pace, in 2017. 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 today’s 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 see the benefits of having a mortgage, Vedder suggests using the cash to your advantage and 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 a mortgage, it’s a matter of 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.
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