In a competitive housing market, buyers are pulling out all the stops. While you may have saved enough money to purchase a house with cash, there are several things to consider. Here are the pros & cons of a cash offer.
PROS
Interest Rates
Paying cash will save money on the overall cost of a new home. The amount paid in interest over a 30-year mortgage will most likely be more than the initial purchase price of the house. Refinancing is an option if interest rates drop, which lowers monthly payments but extends the life of the loan.
Multiple Offer Advantage
A cash offer will likely give you an advantage in a multiple offer situation where everyone else is financing the purchase. Sellers will be more likely to accept a cash offer than one with a financing contingency. For example, a cash offer doesn’t require an appraisal on the property, so there is no risk of the deal going south.
Closing Considerations
Cash offers take less time to close and come with fewer closing costs. Cash buyers don’t have to deal with lenders or underwriters, nor do they have to pay for an appraisal.
CONS
Long-Term Cost
While you will save money by not paying mortgage interest, spending all of your liquidity on one asset could cause you to miss out on a higher rate of return than investing in other endeavors. In other words, putting all of your eggs in one basket might not be a wise financial decision. One broker explained it best: “you could be making money with your money instead of locking it all up in your home.”
Emergency Funds
How will you cover maintenance and emergency expenses if you spend all or most of your available cash to purchase a house? Homes aren’t always what they seem when glistening on the market. Overtaxing yourself by buying a home with cash could leave you with no additional funds to fix it up and make it yours.
Taxes & Deductions
Lenders often roll property taxes in with monthly mortgage bills. The FHA requires it, and private lenders typically do it to protect themselves in case of a default. Cash buyers are on the hook for paying property taxes out of pocket each year. In Texas, and many other states, delinquent property taxes, including interest and penalties, become a lien on the property. The taxing authority can also foreclose your property if the amount owed goes unpaid.
The mortgage interest deduction (MID) is a tax incentive for homeowners who have a mortgage. It’s an itemized deduction that allows homeowners to count the interest they pay on their home loan against their taxable income, which lowers the amount of taxes owed. Cash buyers do not get the benefit of a MID.
Paying cash for a home instead of financing is a big decision that needs to be made with the help of a trusted financial advisor. It is essential to consider the pros & cons of a cash offer to ensure your short-term intentions align with your long-term goals.
If you have questions about real estate, I will guide you through the home buying and selling process. Email me at krista@bloomrealtytx.com, contact me here, or call me at (830) 305-5248.
