Offering a variety of benefits, buying a home with cash prevents the need to seek out financing. Without the requirement to secure a mortgage, buying a home with cash avoids the interest payments needed for a mortgage. The cost of the home may be significantly reduced by avoiding interest payments. Carefully evaluating a buying opportunity, cash buyers should thoroughly assess their financial situation before investing in a home. Once cash funds are used to purchase a home, they will be inaccessible until the home sells.
Evaluate Your Finances
The most crucial step before buying a home with cash is evaluating your finances. Accurately assessing your overall financial health will give you a clear picture of what you can afford. Considering income, liquid assets, investments, financial obligations, etc. are all vital to evaluating your finances. Beyond the cash to buy a home, you should at least have comprehensive life and health insurance and enough liquid assets to support yourself through six to twelve months of living expenses.
In addition to financial health, plans for the future matter. Retirement needs, care of elderly parents, college tuition, vacation expenses, etc. are common life occurrences that may require large influxes of cash. If your finances are healthy and you can afford to pay for a home in cash, your next step is to create a budget.
Determine Your Budget
Outlining precisely how much of a home you can afford is a key step as you seek real estate. Calculate a rough price by considering the general size and type of house you are looking for and the area in which is sitting. If the amount you come up with is too expensive, consider altering your requirements for a home.
Once you arrive at a rough idea of the kind of home you’re looking for, you can properly assess if your finances can afford it. Ultimately aiming for an amount that is slightly less than the rough figure you come up is best when seeking out actual properties. Aiming for an amount lower than your budget allows you to factor in miscellaneous expenses and the cost of moving.
Consider First-Time Homebuyer Benefits
Your first time buying a home may include a variety of federal and state incentives. Gaining complete control over your living situation for the first time, buying a home can seem like an overwhelming and complicated experience. When paying with cash, your main goal should be to get the best value possible.
First-time homebuyers are formally classified as individuals who have not owned or occupied their own home within the previous three years. Therefore, people who have never bought a home and people who have sold a home more than three years prior are equally as eligible for first-time homebuyer incentives. The most popular benefit, first-time homebuyers are eligible for a one-time federal tax credit.
Assess Your Needs
The real estate market can be difficult to navigate. Making a list of items you need and want in a house will help you narrow down the neighborhoods and areas to view property. You should list the size of a home, amenities, local stores, schools, etc. you are looking to find. Expectations should be adjusted based on the health of the real estate market in the state at the time you begin seeking a property.
If the cost of your ideal home exceeds the reality of your finances, you can consider a mortgage.
Obtaining a mortgage loan is always an option, but if you are set on buying your home with cash that is the path you should explore. By adjusting your budget and property desires continuously, your housing needs will often change throughout the home buying process.
Search for Real Estate
Once you’ve created a budget, the next step is to start viewing real estate in the neighborhood of your choice. There are several options for locating homes for sale. Working with a real estate agent is the most popular option. A real estate agent will work within your budget to locate the best properties possible. Actively viewing properties, you can adjust your budget as needed. One of the most enjoyable steps to buying a home, house hunting can be a fun experience that helps you further narrow your real estate needs and wants.
In contrast to working with a real estate agent, some buyers choose to represent themselves. However, this option limits your opportunities. In addition to locating properties, when working with a real estate agent, you will benefit from their negotiating power and expertise. Due to not being at the mercy of a mortgage lender, real estate agents and sellers will be more enthusiastic to work with you.
Evaluate a Home
Before a sale, and often an offer, an inspection and an appraisal must be done on a prospective home. The types of inspections done on a property vary but often include a pest inspection, chimney inspection, sewer inspection, general contractor inspection, roof inspection, etc. Cash buyers often make an appraisal a contingency of a deal. In contrast, if you were applying for a mortgage loan the lender would automatically require an appraisal. Therefore, it is best to make sure one is performed and the home is worth its sale price.
The peace of mind provided by a comprehensive inspection and appraisal is unmatched. If an appraisal comes in lower than projected, an offer can be adjusted as needed or you can choose to walk away completely. An appraisal costs a few hundred, but it has the potential to save you thousands. A professional appraiser will fully assess the condition and size of a home while comparing it to equivalent properties. The market value submitted by an appraiser will be an accurate representation of a home’s true value.
Make an Offer
Often, making an offer on a property does not obligate a buyer to purchase it. Contingencies, such as a bad title or necessary repair work, may invalidate the offer. Considering you are making a cash offer, a seller may be willing to lower the price of a home. When requiring an appraisal, a cash offer should not be placed before formally assessing a home. Your real estate agent will need to perform a title search for the prospective home. Confirming the home is in good condition and has a clear title, your cash offer can be placed.
Both a real estate agent and an appraiser can be consulted on the final sale price of a house. If they agree that it is a fair price you can feel confident. A deposit may be required with a cash offer. Proof of financial resources and employment may also be necessary. All parties involved should be confident that your finances can handle buying the prospective home in cash.
It’s not unusual to get a counteroffer. Negotiation between a buyer and seller is common. Often significantly low, a first offer may be intentionally placed as a starting point for negotiations. A seller may submit a counter offer asking for a higher price or a division of any projected closing costs. A buyer can accept a counteroffer or submit yet another counter offer with their terms. No penalty results from an offer rejection by the buyer or seller and, if necessary, the buyer can immediately continue house hunting.
Close the Deal
A major benefit to paying with cash, there are often little to no closing costs on a home bought without a mortgage. With no mortgage, the actual closing of a home sale is at both the buyer’s and seller’s convenience. Offering flexibility, you won’t need to wait for a lender to schedule a closing date. Arranging a time to close the sale, your real estate agent will help you gather any materials needed.
You should prepare a bank or cashier’s check for the total amount of the home’s agreed upon selling price. Otherwise, you may choose to wire the money to an escrow account.
If using an escrow account, an escrow agent or a lawyer creates a contract. Signed by both parties, the contract will include all necessary information to facilitate the sale and exchange of funds. Once the contract is signed and the money paid, keys change hands.
Though not required when buying a home with cash, homeowners’ insurance can protect against theft, fire, and liability. Insurance protecting against fire damage may be vital to homes in certain parts of the state. Similarly, certain areas are prone to earthquakes. Paying extra for a policy that covers against earthquake damage can protect your new investment. If you do not know where to obtain insurance or you need recommendations, a real estate agent can refer you to local insurance agencies.
Pros of Paying Cash for a Home
With no need for a mortgage, paying cash for a home is an investment with numerous benefits. Saving a substantial amount of money, lack of interest payments attached to a mortgage loan increases the value of a home. For example, if a buyer purchases a home for $100,000 with 5 percent interest the buyer would be required to spent thousands extra to eventually own the home at the end of their payment schedule. Buying a property with cash saves money in both the short-term and long-term.
Lack of Closing Costs
Lenders often charge several thousand dollars to take out a mortgage loan. Underwriting fees, mortgage insurance, legal costs, application fees, etc. add up quickly. A homebuyer who pays cash for a home doesn’t have to pay any of these costs. The lack of closing costs reduces the overall expense of buying a new home.
Paying cash for a home requires a sizeable investment. In the event of job loss or similar finance mishap, your home will be there to provide security. The peace of mind that comes from not having a mortgage or any balance due on your home can de-stress your life.
Cons of Paying Cash for a Home
Reduced Investment Money
A homebuyer paying with cash will ultimately have less money to invest elsewhere. Losing out on a variety of, possibly lucrative, long-term investments, cash used to buy a house will be tied-up in the house till it is sold. Additionally, various long-term investments often outperform the amount of money saved by paying cash for a home.
Loss of Liquidity
Once you purchase a home, the cash is tied up in the property. A home is not a liquid asset and must be sold to liquidate. Often taking several months or years, selling a home can be a lengthy process. It’s important to assess your finances and confirm that you can afford to have a lot of funds tied up in a home before purchasing one with cash.
Lack of Tax Deductions
Tax deductions are offered, at the federal level, for mortgage interest payments. Because of a yearly deduction, buyers who pay for a home with cash will continuously miss out on the popular tax incentive. Depending on a person’s income, the yearly tax deduction can be a substantial long-term benefit.
Purchasing a home with cash comes with many benefits. Primarily, the money saved by avoiding a mortgage can enhance a buyer’s life. Providing security, a home that is fully owned can prove to be an asset in the event of financial mishaps, such as losing a job, a divorce, illness, etc. Carefully evaluate your finances and thoroughly research the pros and cons of paying cash for a home. If paying cash is the best option for you, your new home could prove to be a highly lucrative, long-term financial asset.
This information is provided courtesy of The Eastside Real Estate Team. Keep us in mind for all your real estate needs. Call us today at 425-200-4093.