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Buying a home is exciting but sometimes daunting. They require putting down thousands of dollars, which often requires a mortgage. Anyone can avoid paying costly interest rates on a future mortgage by buying a house with cash instead. This guide explains the pros and cons of that alternative and how to start the home buying journey.
What Are Home Buying Options?
Some people may think about buying a home with cash because they heard their loved ones mention it as an option. It’s always good to evaluate every financial resource before determining the next best step. There are a few ways to finance a home purchase, including a cash payment.
The first is a traditional mortgage. A mortgage lender or bank will assess a client’s financial history to determine if they qualify for a mortgage specific to the house they’d like to buy. The client’s credit score and payment records would also play into the final cost for their mortgage insurance and interest rates.
There are also loans available at the state and federal levels. Someone may get a bigger mortgage through a localized program or receive debt forgiveness because they qualify for a federal loan.
Some states also have down payment assistance (DPA) programs. Although it’s not a mortgage loan, qualifying candidates could have most or all of their down payment provided to make buying a home easier. Afterward, they would have to pay the loan back with monthly payments in addition to the bills from their mortgage lender.
These options make buying a home with cash much more preferable. There’s no interest rate to worry about or multi-year loans to shoulder. If someone has the time and financial ability to pay with cash, it could be a life-changing investment.
Who Buys Homes With Cash?
More people are buying homes with cash than in previous years. Given the hyper-competitive state of the housing market, 25% of buyers are putting down cash to compete with other interested parties. It’s an immediate payment for anyone selling their home and allows buyers to pay a higher deposit after learning what other buyers are offering.
All-cash home buyers can be people of all ages and backgrounds. Some may use inheritance money to establish themselves in a home that a bank doesn’t own. Others may accept donations from family members or save for many years through strategic investments.
What Are the Best Saving Methods?
Putting money aside to buy a house is one plan, but where people put that money determines when they can move into their dream home. Most banks offer savings accounts that are easy to open for existing customers and are often the first resource people use for their home savings. However, those accounts likely have low interest rates that add pennies to annual accumulated funds.
Numerous resources maximize savings without requiring extra work. Anyone can look into these resources to purchase their home faster.
A High-Yield Savings Account
High-yield savings accounts have FDIC protection against financial loss and much higher interest rates. Instead of a client receiving a dollar after a year of saving, they may get hundreds. It depends on how much each client puts away before the bank calculates the interest.
A Certificate of Deposit
People with long-term savings plans could look into a Certificate of Deposit (CD). It’s an account provided by specific banks that hold money for a designated period, typically between six months to five years. After the period expires, the client can withdraw their money. It’s best for individuals who know how much time they need to save before starting their real estate search.
An Investment Account
Meeting with a broker is another option for putting money away. They meet with clients to discuss how much money they can invest. Their investors could double or triple their savings without waiting numerous years if they build a diverse portfolio and utilize strategic market timing.
The only downside may be that certain brokers require that investment accounts remain open for a specified period. It depends on the company or brand.
A Collection of Bonds
When someone purchases a bond, they buy a low-risk debt investment. The issuer — which could be state governments, federal governments, companies or municipalities — then pays the bond’s fixed interest for its entire lifespan. When the bond reaches maturity, the issuer pays it in full.
It’s another guaranteed way to make more money for a home purchase, but there can be penalties. Anyone who withdraws early will pay fees and may have to pay commissions to receive the final payment. Additionally, corporate bonds can be riskier than others because the company could go bankrupt and default on all bond payments.
Things to Consider While Saving
Paying for a home with cash can be the most significant investment in a person’s life, but it isn’t always the smartest. These are a few things every potential homeowner should consider while putting money away.
Will the Property Value Increase?
Homes don’t always increase in value. Sometimes they exist in areas where no one wants to live, like a swampy or rural environment. If no one wants to move to the area, there won’t be local developments to increase the property value. That increase determines if the homeowner will make their money back upon resale.
Researching a city or neighborhood’s real estate history can make it easier to tell if the property value is worth a buyer’s time. Buyers can also evaluate the property’s promise based on other factors like how many registered sex offenders live nearby or if there’s a history of paranormal activity reports in the house.
The only thing that could affect property value outside of local issues is a housing market crash. Given that the market has only experienced three significant crashes in U.S. history, it may not be a concern in a buyer’s lifetime. However, it’s still worth considering if there’s an investment opportunity.
Will the Property Come With Repairs?
Brand new construction likely won’t require repairs upfront, but homes built in previous decades might. Buyers could experience problems after moving in. Heavy thunderstorms could reveal drainage problems that cause damage like foundational flooding or landscape erosion.
The electrical wiring could require replacement or old hardwood floorboards might warp apart. It depends on the age of the property and if the previous owners already spent money on renovations.
Sometimes it’s better to pay cash for brand new construction because the buyer won’t have to worry about expensive repairs after moving in. New homes also come with warranties for things like the roof and appliances, which would also be costly to replace after emptying a savings account on the property.
Will the Property Need Work?
Landscaping also slips the mind of many new homeowners. A dream property could require additional investment in sod or plants. Purchasing plants that are native to the area protects the local environment and maintains a property’s integrity. Root systems keep the soil in place during storms and keep it from sliding away from the home’s foundation.
The home may also exist in a neighborhood with a homeowner’s association (HOA). HOA boards often have strict landscaping rules which go into effect whenever a homeowner moves in. If the property doesn’t meet the HOA’s expectations for curb appeal through modern landscaping and recurring upkeep, the homeowner will have to pay fines that hurt most after buying a house in cash.
Will the Down Payment Become Competitive?
Anyone who wants to move into a new home should research the existing market or consult a real estate agent. Although the traditional down payment is at or under 20% of the home’s value, buyers often offer more to win the property from other interested parties.
Someone may have saved $10,000 for a deposit on a small home, but if it’s in a competitive neighborhood or city, offering an extra $10-20,000 could secure the property. It’s most challenging for first-time buyers to compete with others who have that financial ability, which may change someone’s plans to pay in cash or take out a loan.
Pros of Buying a House With Cash
When people imagine buying a home without taking out a loan, these are the primary benefits that interest them in pursuing that option.
Purchasing a Home is Faster
Buyers who need a lender to pay for their home can sometimes get slowed down by the approval process. It may take a few days to a week to get a pre-qualified letter, which might give other buyers time to swoop in and place a cash offer. Cash allows for immediate down payments and purchasing at whatever speed the seller needs.
There’s No Interest Rate
If there’s no loan to pay off, there’s no interest rate to worry about. Cash offers are a one-time payment. Avoiding a loan saves homeowners from 3-7.84% interest rates that accrue thousands of dollars over the 15-30 year mortgage. That’s a significant amount of money for college funds, vacations and retirement instead.
Banks Can’t Take the Property
If a tragedy occurs and a homeowner can’t make their mortgage payments, the bank can take back the house. There’s always a risk of that possibility as long as a home loan remains. Paying in cash means that the homeowner immediately secures the property and never has to worry about losing where they live if they hit hard financial times.
There Are Lower Closing Costs
Closing costs include things like lender fees and payments for the lender’s title insurance policy. Buyers don’t have to pay for those things when they don’t need a mortgage, so the closing costs are much lower for cash offers.
Cons of Buying a Home With Cash
Even though there are many perks to paying with cash, these are the potential issues that may keep some people from buying a home with their savings alone.
There’s No Money Leftover for Projects
Unless a buyer lives in an area with abundant new construction, it may be hard to find. Buying an older property is much easier when there’s an emergency savings account to cover necessary repairs or upgrades.
There Are No Tax Deductions
People who buy their house with a loan can deduct their interest payments from their annual taxes owed to the federal government. Paying upfront with cash eliminates the possibility of this ongoing deduction.
Credit Scores May Suffer
Credit scores improve when consumers pay monthly debt bills on time. Without a mortgage, there aren’t any monthly payments to prove a buyer’s credit responsibility. It may cause the buyer’s credit score to decrease unless they have other outstanding debt from things like credit cards or student loans.
Buying Can Take Longer
Getting approved for a mortgage might take a few days or longer than a week. Saving enough cash for a home will take years, if not decades. It depends on how much each buyer can put away each month or how well they invest. Trying to buy a house with cash will take much longer and may not fit every individual’s life plan.
Other Potential Home Buying Fees
Besides closing costs, there are other potential fees people may run into when buying a home. These are the most pressing concerns for anyone purchasing a house with cash.
Closing Cost Fees Can Add Up
Closing costs also include fees for checking a buyer’s credit score, appraisal fees and inspection estimates. Most homeowners won’t know the exact cost of these fees until they’ve already put money down on their preferred house.
Cities Still Require Property Taxes
People with mortgages pay their property taxes through their lender, but individuals who buy a home with cash will owe property taxes separately. The method of payment and deadline depends on the city or county’s guidelines, so each homeowner will have to research their local laws.
There May Be HOA Fees
Some HOA fees are monthly bills and others are due quarterly. Homeowners may also find themselves in neighborhoods with annual fees. The payments may clash with an individual’s monthly budget after paying out of pocket for a property.
The Home May Need Appliances
Sellers don’t always include their appliances with their listings. New construction may also lack a few appliances. Buying things like a refrigerator, washer and dryer all at once will be a painful purchase if there’s no money left over after purchasing a home.
Learn About Buying a House With Cash
Anyone can discover helpful tips for buying a house with cash and decide if it’s the right path for their future. After weighing the pros and cons, the best financial choice will reveal itself and help everyone reach their homeownership dreams more quickly.