BlogHomebuyingFinancial IQ October 27 2021

Should You Buy a Home with Cash?

It seems like cash deals are everywhere these days—but are they always the best option for a buyer?

As the real estate market has boomed in the last year, buyers have scrambled to find a way to make their offers the most attractive—resulting in a record-setting number of cash offers. A whopping 30% of U.S. home purchases in the first four months of 2021 were all cash, up from 25% the year before.

Paying upfront instead of obtaining financing is often seen as a way of getting a leg up on other potential buyers. But is it always the best idea? And why is it so common?

Why Are There So Many Cash Buyers?

A few reasons are impacting the cash-buyer market right now:

Many buyers are leaving pricier housing markets like California, Florida, and New York and cashing out with enough equity to pay cash in less-expensive regions.

Home values spiked 14.6% from a year earlier, the largest increase in more than 30 years, creating a huge jump in home values and equity for would-be sellers to translate into a cash offer.

The stock market surged in the last year, leaving many potential buyers of primary and second homes flush with more cash than expected.

Why Are People Buying Homes with Cash?

Quite simply, a cash offer can put you at the top of the pile in a competitive market because the seller knows for certain that the buyer's financing is a go. A cash offer can seem less risky to a seller for that reason.

Also, cash deals close faster. A mortgage is an important transaction, and loan underwriting done carefully and professionally takes time. When securing a mortgage, buyers need to allow time for things like income verification and home appraisals. The average timeline for closing on a house with a standard mortgage is 48 days. The fastest a cash deal can close is about two weeks. If a seller is in a hurry to close, relocate, or purchase a new home, a cash deal can be appealing.

What You Need to Consider Before Making a Cash Offer

Given the low inventory and surging home prices, buyers can feel pressured to use whatever tactic they can to get their offer accepted, including making a cash offer. But is a cash offer right for you?

Cash offers can have some significant drawbacks; make sure you understand all the potential implications before you decide to pursue one.

Cash Deals Can Have Delays

Handing over a large sum of money isn't quite so simple. Here's where delays can come up:

Wiring the money to a seller's account can take several days to two weeks. Be sure to check with your financial institution about their requirements and timeline.

Inspections take time. Even most cash buyers will still want an inspection contingency on their offer, meaning if a significant repair issue is revealed, they can negotiate to have it solved or walk away from the deal without losing their earnest money.

Issues with the title or deed. Whether or not your deal is financed or paid in cash, issues such as liens or recording the deed can make for delays.

The value of your assets change. Let's say you are counting on liquidating some stock to purchase the home, and you make a cash offer for a set amount. Then the stock market takes a tumble. You're suddenly short a significant amount of cash you were counting on to make the deal go through.

Not enough money for closing costs. Don't forget that even cash deals have closing costs, and if you don't budget an additional 3% for these expenses you could come up short at closing.

Cash Offers Can Make Your Investments Dangerously Unbalanced

You know the saying about putting all your eggs in one basket? It can be tempting to snag your dream house by scraping together all your cash and beating out the competition, but if your home is your primary and only investment, you open yourself up to risk. After all, one of the basic rules of investing wisely is diversifying your assets. Your home could plunge in value due to a shift in the economy, a major employer pulling out and leaving town, even the closure of a local school.

Cash Offers Can Affect Your Ability to Use Your Money

The amount of cash you have on hand is called liquidity—meaning this is an asset you can freely access and spend. Money tied up in your house isn't liquid, and if you have a sudden emergency like an illness, injury, or job loss, you may not be able to access the cash you need to get by.

Cash Offers Mean You Miss Out on the Benefits of Having a Mortgage

Despite the growing debt-free movement, buying a house with cash or paying off your house at all costs isn't always the most financially savvy move for every homeowner.

If you itemize your deductions, you could be missing out on the mortgage interest deduction, which allows homeowners with a mortgage to deduct interest paid on the first $750,000 of their mortgage, reducing their taxable income.

If you pay cash and don't have a mortgage, you'll lose this deduction.

Cash Offers Won't Get Rid of Your Monthly Payment

As tempting as it may be to think about a "mortgage-free" lifestyle, you'll still need to budget for and pay a monthly payment—it will include your local taxes, any HOA dues, and your homeowner's insurance.

At the end of the day, a home purchase and home financing are highly individualized situations; make sure you speak to a lending professional to give you the full picture of what a cash offer might mean for your unique financial position and to consider a wide variety of financing options that could be a fit.

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