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You've probably heard the adage "cash is king," which means that cash is the best method to pay for something. However, does it hold true when purchasing a large purchase like a home? In this article, we'll take a look at some pros and cons involved when buying a house in cash. (As with any large purchase of this nature, you should check in with a real estate attorney CT to help you discuss the viability of this method and other concerns that you should be aware of.)
Applying for a mortgage can be a lengthy process and may have the possibility that you're turned down for a mortgage whatever reason (i.e., poor credit). This affects sellers, as they may have to start all over again with a new buyer, which prolongs the process of them ultimately selling their home. With cash, you can finalize the details of a home purchase as quickly as you can transfer the cash and sign an agreement to close the deal. Also, cash can give you a competitive edge versus other buyers who don't have as much cash or are waiting for pre-approval from their lenders.
Because of the immediacy of cash, it puts you in a much better position to bargain the price and other concessions involved in closing a deal. Sellers intuitively understand that the sooner that they receive money and transfer ownership of their property, the sooner they can make use of that money for their own purposes. Sellers also understand that the longer a property stays on the market and the more effort they involve in selling a property, the more money they're likely to lose. Therefore, cash gives you the flexibility to work with the price and other variables to get you a better deal.
Perhaps the most stressful part of the home-buying process is getting a mortgage. Ever since the housing bubble and financial crisis nearly a decade ago, mortgage underwriters have significantly tightened their standards on who is worthy of receiving a loan on a property. If you have cash, you can circumvent the high standards required for modern mortgages (i.e., high incomes, excellent FICO score) and purchase property without the intervention of a bank.
Also, because mortgages are usually the most significant monthly bill most people have to pay each month—and that comes with the steepest consequences—not having a mortgage can significantly reduce the stress of homeownership. This responsibility can last the average term of a mortgage (i.e., 15 years, 30 years), which can put a damper on your quality of life until the mortgage is fully paid or you move to a new property—where the process starts all over again. Having that peace of mind can be a smart move, especially as you move closer to retirement age and want to focus on your golden years. Of course, you will want to consult a real estate attorney CT to see if this is the wisest financial move to make, particularly if you have other investments and financial options at hand.
Buying a home outright with cash presents a significant problem to your long-term investing strategy: diversification. Considering that real estate prices have been stagnating and that there may be intangibles that may degrade your property (i.e., natural disasters), using your cash reserves comes with a significant amount of risk.
Liquidity is the ability for you to get cash out of investment should you ever need to. By paying cash for a house, you instantly lose the leverage to transfer cash as required. Instead, a home may take months to sell, creating more problems in the interim between deciding to sell the property and selling the property. While most types of bank accounts are entirely liquid, and mutual funds and brokerage accounts can take a little longer, homes can easily require months to sell. You can opt to borrow against the equity in your home (via home-equity loans, reverse mortgage, and/or home-equity line of credit) as a way to add some liquidity to your home, but these methods present drawbacks like borrowing limits and fees.
Of course, with any large purchase and complicated financial decisions, you should consult a real estate attorney CT to guide you through the process and bring to your attention any methods that can save you time and money.