My wife and I have paid cash for the last few homes we’ve bought, and hope to do the same on future purchases (we move a lot).
You can probably guess some reasons we prefer paying cash instead of getting a mortgage loan.
Negotiating a better price is a nice start, and it feels good to go to sleep knowing no bank can ever take our home.
But that’s not all.
Take a good look at the following reasons to buy a house for cash. You might find a few advantages you haven’t considered.
1. You Can Negotiate a Better Purchase Price
How much will you save by offering cash?
There’s no definitive data. But when shopping for a home, our real estate agent told us banks selling foreclosures routinely accepted cash offers thousands of dollars less than financing offers.
Private sellers also prefer cash.
A borrower might have to back out of a contract because the appraisal comes in too low and the bank won’t make the loan. The loan may fall through for other reasons, too — including things found during inspections.
Cash buyers can buy, regardless of any appraisal or inspection findings — and the competition from these buyers is one reason millennials aren’t buying houses, according to Forbes.
2. You Avoid the Hassle of a Mortgage
The last time we applied for a mortgage loan (three houses ago), it was a nightmare.
There have been many reports about borrowing getting tougher due to higher lending standards.
But that wasn’t our problem. There are just so many hoops to jump through.
We had to fight the lender on issues like hidden costs and why we would have a higher interest rate if my wife and I were both on the loan instead of just one of us.
Getting a mortgage loan is a hassle.
Despite what the law says, our experience is you’ll never know the real loan-related costs until a day or two before you close — when it’s too late to do much about them.
3. You Can Close Faster
You typically close much faster when you offer cash.
This is one reason sellers like cash offers. And you might find it nice to quickly move into your new home.
A recent survey found the average mortgage loan-closing time is 37 days. It’s an improvement over last year, but still significantly longer than it’s taken us to close any of our cash home purchases.
4. Your Credit Report is Not an Issue
If your credit report shows a foreclosure or even late payments on credit cards, you might not get a mortgage loan.
Even if you do, your interest rate can be much higher because of a low credit score.
When you pay cash for a home, credit problems are not an issue.
5. You Save Money on Interest
Today’s low interest rates make mortgage loans seem pretty cheap, but check out the numbers using a mortgage calculator.
Even at 4%, a 30-year mortgage loan of $100,000 will cost you $70,786 in interest.
And if rates have climbed to 6% by the time you read this, the interest on that loan will total $114,338 over 30 years. It’ll more than double the cost of your home.
Prefer a visual representation? Check out the pie charts for each year of your mortgage repayment on this mortgage calculator to see how much of your payment will go to interest, rather than the principal:
6. You Save Money on Closing Costs
When you pay with cash, you don’t have to pay certain closing costs related to mortgage loans.
These can include:
- Loan processing fee
- Loan discount points
- Loan closing fee
- Appraisal
- Mortgage taxes (in some states)
- Lender’s policy title insurance
- Recording fees for loan documents
- Courier fees
- Credit reports
They can add up to thousands of dollars.
If you pay cash for your home, you won’t pay any of them, although you could still get an appraisal.
7. You Save on Future Costs
In addition to helping you save money by not paying interest, paying cash for a home lets you reduce or eliminate two other future expenses.
The first is private mortgage insurance (PMI), which many lenders require.
PMI can add hundreds of dollars a year to your loan, but you can cancel it once you owe less than 78% of the home’s original value.
You can also reduce the cost of homeowner’s insurance when you pay cash.
We went without insurance when we owned a condo. The outside of the building was insured by the condo association and we could afford the potential loss from damage inside.
We were only able to do this because we paid cash, since almost all lenders require condo insurance.
We insured our current house, but declined flood insurance because we’re in a low-risk area. Lenders still can require flood insurance in low risk areas.
In general, you have more control when you don’t have to play by lender rules, and this allows you to make money-saving choices.
8. You’ll Have Permanently Lower Housing Costs
You have no interest, no mortgage insurance and total control over what kind of homeowner insurance you buy when you pay cash.
That means ongoing costs will be lower from the start, and possibly for the entire time you own your home.
Just think what you can do with the money that would’ve gone to monthly payments.
9. Your Home May Be Easier to Sell
When homeowners owe more than their homes are worth, selling is difficult.
They’re effectively trapped, unless they’re willing to walk away without paying. And there are millions of these “underwater” mortgages.
You may not think this is relevant if you plan to buy a home with a healthy down payment.
But keep in mind most of those millions of homes did not start out swimming. Prices could drop again, quickly eliminating your equity.
Also, owing anything on your home can make it psychologically tougher to sell.
You tend to focus on what you want to get after paying off the loan, rather than on the true market value of the house.
If you get to keep everything from the sale (after closing costs), you’re less likely to succumb to the dangers of pricing your home too high.
10. You’re Unlikely to Ever Lose Your House
Life happens. You can have unexpected medical expenses, lose a job or run into other financial difficulties.
But no mortgage means no foreclosure by a lender.
Of course you can lose your home if you don’t pay your property tax, but that takes a while in most states.
Florida law, for example, allows for a tax lien after you miss a payment, but it takes two more years before a tax deed can be issued.
In other words, you usually have a few years after your last property tax payment to figure things out before you lose your home.
You can also lose your home if you declare bankruptcy, but even that’s not always the case.
In Florida and Texas, you can go bankrupt and still keep your home — even if it’s worth a million dollars.
Problems With Paying Cash
There are some drawbacks to paying cash for a home, though.
Investopedia points out three problems with cash purchases:
- You tie up a lot of money in one asset class
- You give up a degree of liquidity
- You give up leverage
The first problem exists to some extent whether you pay cash or not. You still hold an asset of the same value whether or not you owe money on it.
If you’re concerned about being too heavily invested in real estate, the solution is not to not get a mortgage — it’s to buy a less expensive home.
You definitely tie up your money when you put it in a home, and that’s something to think about if you have other potential plans for your savings.
Of course, if you need to access your equity in the future, you can borrow against the home. Or you can sell it.
Leverage is more important in true investments.
It’s true if you put $20,000 down on a $160,000 house and its value increases by $20,000, you make 100% on your “investment,” versus just 12.5% if you paid cash.
You make the same $20,000 either way, and you’ll pay more in interest than you’ll collect on the rest of the money if it’s just in the bank.
So unless you plan to split your money to buy several rental homes, giving up leverage is irrelevant.
The Verdict
It all depends on your particular situation and goals.
For example, if you can guarantee a safe return of 8% on your money, why not invest it and borrow at 4% to buy your home?
You also might use your cash to start or buy a business and then borrow for a home — the interest rate will be lower than on a business loan.
But if you don’t have a good reason to borrow, look again at the list above.
A better price, easier and cheaper closing, lower monthly costs and security of having no debt on your home all add up to peace of mind — the best reason to buy a house for cash rather than borrow for one.
Of course, the biggest reason you might have for not paying cash is that you simply can’t. We’ll tackle that issue in an upcoming post.
Your Turn: Would you prefer to pay cash for a home instead of borrowing?
Disclosure: We don’t hesitate to pick pennies off the sidewalk when we spot them. But the affiliate links in this post help our earnings grow even quicker. Plus, it’s a lot cleaner than sidewalk money.
Steve Gillman is the author of “101 Weird Ways to Make Money” and creator of EveryWayToMakeMoney.com. He’s been a repo-man, walking stick carver, search engine evaluator, house flipper, tram driver, process server, mock juror, and roulette croupier, but of more than 100 ways he has made money, writing is his favorite (so far).
The post Buying a House? Here’s Why You Shouldn’t Get a Mortgage… and What to Do Instead appeared first on The Penny Hoarder.
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