The phrase “cash is king” is well-known, but when it comes to buying a house, will cash yield you the best deal? It might or it might not. Before you spend your hard-earned money, know the advantages and disadvantages of using it to buy your home.
Rewards of an all-cash purchase
Paying in cash can come with some appealing benefits.
- Increase the probability of a fast-track deal and avoid bidding wars. A seller may quickly accept your cash offer because you demonstrate you’re a serious buyer. Without lenders to deal with, you decrease chances of the sale falling through, making motivated sellers more apt to accept your offer. In some instances, you may even be able to negotiate a discount to get the deal done fast.
- Simplify the buying process. With no need to wait for mortgage approval where things can go wrong (i.e. low credit scores or poor home appraisals), cash makes the deal more straightforward.
- Save money. By paying in cash you’ll save money on closing costs, title insurance, PMI expenses and, perhaps best of all, no mortgage interest payments.
- Have sole equity in your home. Once you pay for your home, any risk of a bank foreclosure disappears. If something changes in your financial status, you don’t have to worry about someone pushing you out of your home because you missed mortgage payments. Financial freedom at its best.
While the advantages of paying in cash might sound amazing, you’ll still want to examine the pitfalls.
Risks of all-cash purchases
Buying a home with your cash resources does carry some level of risk. You should take the following situations into consideration when making your decision.
- Drains your cash flow. If you don’t have a cash reserve after you buy your house, carefully consider what you’re about to do. If a major home repair or medical emergency arises, could you afford it? What if you lose your job?
- Limits investment opportunity. If you tie up all your cash into your home, you lose out on the ability to diversify your financial portfolio, potentially missing out on lucrative investment opportunities.
- Lose tax deductions. Without a mortgage, you lose the ability to deduct any interest you’ve paid when tax time rolls around. (If this is a consideration, keep in mind new tax law passed this year may affect deductions anyway. Examine your personal situation carefully.)
- Miss out on favorable mortgage conditions. If you have the money to pay in cash, banks are more likely to give you a better interest rate. (With a cash reserve, you could always pay off your mortgage early should you change your mind!)
This article originally appeared on eGundo.com – The Risks & Rewards of an All-Cash Offer When Buying a Home