Home Buying in Pittsburgh>Question Details

skyhigh621, Home Buyer in Pittsburgh, PA

What advantages/disadvantages are there to paying cash for a house?

Asked by skyhigh621, Pittsburgh, PA Sat Dec 17, 2011

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Paying for most things with cash is a great idea because then it's debt free however, borrowing a litlle money for a home, at a time when rates are so low, makes good sense as well. I feel keeping it depends on your situation. Having some savings in the bank for emergencies is important and borrowing a little money and having a small mortgage contingency in a contract can be protective. Generally, an all cash deal is preferred by most sellers for obvious reasons, but only you must evaluate the risks/benefits inherent in each strategy.
Web Reference: http://donnascragg.com
0 votes Thank Flag Link Wed Dec 21, 2011
Hi Skyhigh621, based on the responses, unless agents don't do as many cash deals as me, we are missing the ultimate advantage when paying cash... you will pay less for the home. Cash gives you a much stronger hand to negotiate with often saving you an extra 3 to 4% just off the purchase price.

I was working with a buyer earlier this year in a multiple offer situation. My buyer was cash, the other I'm guessing FHA. Our offer came in below asking price, their offer was above asking (by alot.) Our offer was accepted because the way it was presented. So pay cash = no interest payments + pay less for the home you want.
0 votes Thank Flag Link Tue Dec 20, 2011
With that being said, what was the advantage to the seller by receiving cash and therefore taking lesser for the home?
Flag Sat Dec 26, 2015
This comment is a continuation of thee one below.
I meant if you lose your job will you have money for several months of expenses till you find another job?
Web Reference: http://www.gitabantwal.com
0 votes Thank Flag Link Sun Dec 18, 2011
If you pay cash for the house will you still have a lot of money in savings and for a rainy day? If you have a job will you have enough for few months of expenses?
How much return on investment are you earning right now? Can you invest the money elsewhere if you can get a mortgage for around 4% and may be get a tax deduction on the interest? Can you buy more than one investment property by using money for down payment and borrowing the rest?
Sit down with a financial cosultant for help.
Web Reference: http://www.gitabantwal.com
0 votes Thank Flag Link Sun Dec 18, 2011
Skyhigh,
Congrats on demonstrating the discipline needed to be in a position to pay cash for a home. The choice before you is significant. Others have done well to identify the financial advantages in a cash purchase.

It is, however, strategically important to know what your long term goals are. Perhaps this is your first step in a plan to acquire multiple homes? Maybe you have the trade skills needed to evaluate a homes condition and the cost of rehabilitation and can use this knowledge to your advantage. The home you have selected may be purchased at 40% of community ceiling and therefore provides incredible equity protection. There are too many unknowns to provide the best guidance for the best outcome for you.

The most simplistic response would be that avoiding the most expensive part of home ownership, the cost of financing (and associated financing requirements), would most likely benefit you immediately and dramatically. But your long term goals may compel a change in this strategy.

Best of success in acquiring your new home.
0 votes Thank Flag Link Sun Dec 18, 2011
For any advantage/disadvantage as it applies to you, do consult with your tax professional, and or financial planner; either party can better advise....
0 votes Thank Flag Link Sun Dec 18, 2011
Skyhigh - if you've got the cash, in the Pittsburgh region, to purchase a home outright, go for it! Not sure of your individual situation, but if your desire to buy a home is to have a place to live, there is NO price tag that can be put on knowing that you own the home outright. There could be SOME tax advantages to having a mortgage, but for the majority of home buyers, who find that they get a better tax deduction by taking the standard deduction vs. itemizing, the tax advantage is NILL. Unless they have tons of deductions, I always recommend to my buyers to pay off their mortgage as soon as they are able. I did that myself, and am doing it now in the purchase of my vacation home. You'll hear all about how low interest rates are, but so VERY few investments are paying anywhere near even 4%, so freeing up that cash for some other "more profitable" investment isn't likely either. If you already own a home, and have the cash to buy another home for the purpose of seeking rental income - please make sure you understand what you are getting into by being a landlord. Do your homework. If you are still comfortable, after your research, in jumping into that market, rental rates are at a premium, and there is good income to be made. One other thing to keep in mind is that if you have good credit and own your real estate outright, there is a good chance you can qualify to borrow on the equity in the future, should you need to - so the option of a "mortgage' doesn't go away just because you paid cash at this particular time.
0 votes Thank Flag Link Sun Dec 18, 2011
These are pretty comprehensive answers. The only thing I could add would be that you also have the option of doing "both". If you have the cash, you can safely apply for a mortgage without making it a contingency in the agreement. This preserves the main advantages for the seller -- faster closing and lower risk -- while also letting you keep your cash for investment or other purposes. (As Larry points out, you can also pay cash now and mortgage it later, though you risk higher future interest rates -- they pretty much have nowhere to go but up at this point.)

Some buyers in very competitive markets may do this even when they don't have the cash, if they're "sure" they'll get the mortgage, but this is very risky. If for any reason they don't get the mortgage, without the contingency they have no way to terminate for financing. They would either need to come up with the cash to close somehow, or default and lose their hand money.

Another dangerous practice I've seen is people getting undisclosed second mortgages -- the agreement will say 20% down with abc lender, but they're really doing an 80-10-10, and have a 10% second with the same or a different lender. The mortgage contingency only applies to loans that are disclosed on the agreement, so if they fail to get the second loan, they must once again either come up with cash or default and lose their deposit.
0 votes Thank Flag Link Sun Dec 18, 2011
The first an most significant is you won't have a mortgage, it's like paying yourself the interest you'd otherwise be paying the lender.

Cash purchases offer the Seller the ability to close quickly and this can be very appealing to some. It also signals the Seller that other than an appraisal and your home inspection you're able to close and there will be no delays or problems with a loan.

Please note: regardless of the fact that you're paying cash, you should have an appraisal done to confirm that the price your paying is at or below market value. When I am working with cash buyers I always have an appraisal ordered and unlike the banks I force the appraiser to do it blind; in other words they do not get a copy of the purchase agreement which gives them the price you paid before they've ever seen the property and results {in my opinion} in a much better valuation.

Less closing costs, Many attorneys will charge less to handle a cash closing and you'll avoid all the generally irritating and generally nonsensical charges lenders tack on to a loan.

Depending on where you are at in your life, you may want to check with your accountant or financial adviser to see if they recommend your have a small mortgage for tax purposes, everyone is different so there's no hard and fast rule. You could still purchase with cash and then after the fact do a mortgage, and free up some of your cash if this was to your advantage.

Hope this helps and good luck.
0 votes Thank Flag Link Sun Dec 18, 2011
Both have their benifits. Cash sales are a little easier as there is no lender to deal with and no lender fees making closing costs lower and you may close quicker. There of course are no monthly mortgage payments. Interest rates currently are very low on mortgages and if your money is invested and you are not getting a good return as (money market accounts, CD's, etc.) those rates may be low a mortgage may make sense plus it keeps your funds more liquid as well as potentially being able to deduct the interest paid on a mortgage. Consult your licensed professional tax advisor.
0 votes Thank Flag Link Sun Dec 18, 2011
I agree with Roland. Another advantage is if/when you sell, your closing costs don't include a payoff to the bank. In the long run, you pay less for a home because you weren't paying interest for years.
Web Reference: http://YourRealtor4PA.com
0 votes Thank Flag Link Sat Dec 17, 2011
First, in response to David's comment regarding the market dropping and continuing a downward spiral is like saying, the average temperature in the United States today was 65 degrees. Real Estate is very localized, and some markets are rebounding much faster than others. Real Estate may or may not be a good investment at this time in your particular market, or in a particular market segment in your market. Talk to a local Realtor to find out the facts.

Sky High, to answer your question. Advantages to paying cash are that you can usually close much quicker, which is enticing to sellers typically, and therefore you may be able to get a better price than you would by financing. You will save a considerable amount of money over the time period that you own the property by not paying interest to a lender, nor will you have to worry about them breathing down your neck each month when the mortgage payment is due. Disadvantages would be that you have now tied up your money in an asset that is probably not very liquid. You will not get the mortgage interest tax break either, which can be considerable depending on the price of the home you intend to purchase.

If it were my money, I'd get financing with rates as low as they are. Keep your cash for another endeavor.

Mark Meissner
Sales Associate
ERA Landmark
Bozeman, Montana
0 votes Thank Flag Link Sat Dec 17, 2011
There is a disadvantage if you pay cash, because the market is dropping. Banks are requiring cash for a reason. They know that the owner will strategically default if the market continues to spiral downward.

Purchasing a house is a bad financial investment. If you finance it, some of your risk is spread to the lender. If you pay cash you may be stuck with a house you cannot sell or don't want to sell because the price is so low.
0 votes Thank Flag Link Sat Dec 17, 2011
One of the primary advantages is that you can close quicker than having a mortgage. Knowing that, sellers may prefer a lower cash offer to a higher offer needing a mortgage.

A disadvantage may be cash flow and not having money for improvements, appliances, or other needs unrelated to a home.
0 votes Thank Flag Link Sat Dec 17, 2011
No bank's cost, no mortgage, low overhead, no fears if you pay cash. You get a mortgage tax deduction if you finance.

I would look at the interest my money earns where it is versus the interest rate you'd pay at the bank, then factor in what else I might need my money for and how easy it is for me to afford payments. In my own case, when I had the money, I have always strongly preferred to pay cash. But I am financially pretty conservative, too.
0 votes Thank Flag Link Sat Dec 17, 2011
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