It’s often drilled into us, as adults looking to be financially responsible, that it’s terrible to carry large amounts of debt. As a general rule, this is true, but what about buying a house?
If the debt is bad, it follows logically that you should try and buy a house outright, or at least have as big a down payment as possible to avoid a massive mortgage, but when it comes to purchasing homes, it’s not always so straightforward.
Let’s explore the benefits of buying a house in cash versus taking out a mortgage.
Cash – the benefits
The most obvious benefit of buying a home in cash is the lack of a mortgage, which eliminates the need to pay interest on a large loan. Paying cash also means you won’t need to pay several other fees, including lender assessment fees, mortgage origination fees, or closing costs. In almost every case, the transaction will be smoother and faster.
Another cost that can be eliminated from cash transactions is the appraisal cost: if you, the buyer, decide to do so. Lenders will always require a home to be appraised before committing to a loan, but if you’re paying cash and decide the home looks worth the price, you can choose to forego the appraisal. It’s less common than other savings, as generally, an appraisal is always a good idea. You don’t want to miss something important for the sake of a few hundred dollars!
As well as lower fees, cash house buyers in Los Angeles don’t pay any interest on the value of their home. Even if interest rates are low, remember that you’re paying that percentage every year, and the money adds up. Some people end up paying more than two-thirds of their total loan in interest alone. Avoiding interest can mean enormous savings over the time you’re in the home.
Your ability to pay in cash also makes you more likely to win over a seller. Selling a home to someone who requires financing, or a loan, is riskier as there’s always a chance the money will be denied before closing. If someone comes along who has the cash to hand, most sellers will opt for that rather than risk it. Cash transactions also tend to close much faster, again making them a more attractive option to sellers.
Getting a loan for a mortgage takes time, money, and hassle. It’s not always a straightforward process. You’ll need to pay your loan origination fee, have your employment and financial history verified, and your rent and credit history checked. If you don’t need a huge loan, you don’t need any of these checks, saving both time and money. You’ll also save your ‘point’ fee, which for most lenders, is charged at 1% of the total loan amount. For expensive homes, this can be quite a lot of money!
The other benefit for cash buyers is that they might be able to secure the home for a slightly lower asking price. This is because when buying a home in cash, you know the idea appeals to sellers. They may be willing to let the home go for a lower price to avoid the longer time period and higher fees of mortgage loan sales.
Mortgage – the benefits
Now that we’ve covered all the benefits of cash transactions, it may seem that getting a mortgage isn’t a great idea. But then, the reality is that most people, especially if they’re buying a house in an expensive area such as Los Angeles or San Francisco, simply don’t have that kind of money to hand.
Fortunately, it doesn’t always make sense to hand over huge amounts of cash in a home purchase. A mortgage can be a better option on a lot of occasions. For example, if down the line, the home needs renovations, you might find it challenging to secure a large loan without a mortgage. In contrast, people who are already in good credit with their mortgage provider will find it easier.
If you can afford to buy a home with cash, but it would be the absolute limit for you financially, you need to think about what happens if you then decide to sell. You might not have the cash for a new down payment to hand, and will end up having to sell your current home before you can even think about buying a new one. Mortgages give homeowners who will find cash purchases a stretch financially more flexibility.
Mortgages can also be a better option for tax reasons. In most cases, mortgage payments are tax-deductible, and if you need a mortgage, a deduction can’t hurt!
Mortgages will always cost more over time than a cash payment. As mentioned above, the interest payments can really add up over time. However, if you do take out a mortgage, you might have much more ready cash to make a different investment – a rental property perhaps, or stocks and shares.
Cash or mortgage – which is right for you?
The best thing to do, as with most major financial decisions, is to do your research and figure out which of the options works best for your individual circumstances. Try and think long-term, too; what will happen if you decide to sell the house down the line? Which option will give you a better return on your investment?
If you do decide to go for a mortgage, make sure you’ll be able to afford your repayments. A lender will loan you an amount they think you’ll be able to repay, but it’s up to you to make sure that you can afford the payments when taking your other household and general expenses into account.
Don’t forget to include homeowner-specific costs, such as property taxes and homeowner insurance.
Whichever you choose, buying a home is a big decision and one not to be taken lightly. Make sure to ask expert advice every step of the way, and you’ll be in your dream home before you know it.