You must make several decisions when you’re buying a home, and how to finance the purchase is arguably the biggest of them all. The choice a buyer makes between a cash offer and a mortgage can have a major impact on their finances both immediately and long-term. Buyers should consider the pros and cons of both options and how they apply to their specific financial situation. A buyer’s goals for the home that they’re purchasing should also be taken into consideration.
What Is a Cash Offer?
A cash offer is when a potential buyer offers to buy a home in cash as opposed to financing the purchase through a mortgage. Like any other offer, the sellers can accept or reject the bid. If the seller accepts an all-cash offer, the buyer will pay the full sale price of the house with a check or a wire transfer.
How Does a Cash Offer Work?
The process of a cash offer home purchase is a bit different than purchasing a home with a mortgage or other financing. In many cases, the process moves along quicker. This is because cash offer purchases tend to have fewer contingencies, and without a lender, buyers usually don’t need to schedule an appraisal. Without a lender, the buyer also will likely need to provide some sort of proof of funds from their bank to assure the seller that they can follow through with their purchase.
The closing process of the home sale is also much simpler and has less paperwork to deal with. Buyers will need to sign the settlement statement, title and deed. They’ll also need to bring a cashier’s check or wire the money to the sellers before receiving the keys to the house.
For the home seller, the process is not that much different. Cash offers are often attractive to sellers because of the quick closing process and fewer contingencies. There is also the additional benefit of there being no risk of the buyer’s financing falling through.
When Does It Make Sense to Pay Cash for a House?
Cash offers can be beneficial to both buyers and sellers, but they are not always the right option for every buyer. Here are some factors to consider if you’re considering making a cash offer on a house.
1. You Have a Large Sum of Money Available
To make a cash offer, you have to have a large amount of money available to you immediately. If you’ve been saving for a while or you receive money as part of a bonus or inheritance, you might consider using the money to make a cash offer. A cash offer can help you save money in the long run because you will avoid paying interest on a mortgage.
2. Faster Transaction
If you have the funds and you want to move into your home as quickly as possible, a cash sale can be beneficial. By using cash to purchase a home, you’ll eliminate the need to take up time going through the mortgage process and waiting for the mortgage lender to get everything together and approve the mortgage.
3. No Monthly Payments
By paying for the home in full at the time of purchase, you’ll avoid making monthly payments on your home. This can free up funds that can be used toward other investments.
4. Avoid Borrowing Costs
Many costs are associated with mortgages, and by paying for a home in cash, buyers can avoid all of them. This includes closing costs, origination fees, private mortgage insurance (PMI) and interest on the monthly mortgage payments.
5. Credit Score Not a Factor
If you’re worried about your credit negatively impacting your ability to purchase a home, a cash sale can help you out. When you pay for a home in cash, there is no need for a lender or anyone else to look into your credit history.
What Is a Mortgage?
To fully compare a cash offer versus a mortgage, it’s important to have a full understanding of what a mortgage is. A mortgage is a form of financing that buyers use to finance the purchase of a home. The buyer makes monthly mortgage payments to their mortgage lender. If the homebuyer fails to keep up on their payments, the lender can seize the property.
How Does a Mortgage Work?
The first step in using a mortgage loan to purchase a home is to get a preapproval letter. Buyers can apply for preapproval from a mortgage lender and receive a letter that will state how much the lender is willing to offer. Buyers must have this letter before they can make an offer on a home because they need to show proof to the sellers that they will be able to get the funds to pay for the home.
When dealing with a mortgage lender, buyers must go through a few extra steps after making an offer on a home. After the offer is accepted, the buyer must submit the official mortgage application. They’ll also need to schedule an appraisal, which lenders require before giving the final mortgage approval.
Because mortgages require a few extra steps, the process of closing on the home can take longer. Sellers take the risk of the buyer’s financing falling through, which would mean they would have to move on to another offer. Financing can fall through for a few reasons, including the appraisal of the home coming back lower than the purchase price or major problems revealed during the home inspection.
When Does it Make Sense to Get a Mortgage?
Mortgages are a common form of financing and can be beneficial for many buyers.
1. Preserve Liquidity
The main reason to get a mortgage is to help buyers achieve homeownership, even if they don’t have enough money saved to pay the purchase price in full. By using a mortgage, buyers can use their additional funds for other purposes.
2. Take Advantage of Tax Benefits
Some aspects of a mortgage can help buyers reduce their total taxable income. This is because mortgage interest payments and property taxes are often tax-deductible.
3. Diversify Investments
Using a mortgage to purchase a home can help buyers keep funds aside for other investments as opposed to putting all of their funds into a single property.
4. Hedge Against Inflation
Mortgages can allow buyers to lock in a fixed monthly payment for a set number of years. As inflation increases over the years, it helps buyers avoid the negative impacts when it comes to paying for their homes.
5. Flexibility in Financing Options
Buyers can choose from several types of mortgages. Using a mortgage offers flexibility in managing how you pay for your home, and buyers can choose the loan that makes the most sense for them based on their financial situation.
Buying a Home: Cash Offer vs. Mortgage
When it comes time to make a home purchase, buyers can choose whether they want to pay for the house in cash or whether they want to obtain financing through a mortgage. Both options have benefits and disadvantages. The biggest factor to consider as a buyer is whether you can afford to pay for the home in full without stretching your finances too thin. Every buyer should consider their financial situation as well as their goals to make the right decision.
Frequently Asked Questions
Can I get a mortgage if I have a cash offer?
In a sense, yes, if you use a cash-offer company. Cash-offer companies purchase the home on the buyer’s behalf, and the buyer uses the mortgage to buy the home from the cash-offer company.
How does a cash offer affect the negotiation process?
A cash buyer generally has more negotiation power than a mortgage buyer in the housing market. Sellers often prefer cash offers, so in theory, a cash offer can help buyers stand out when there are several bids on the table.
Can I use a cash offer to secure a lower purchase price?
In some cases, yes, but it depends on the seller. A seller might accept a cash offer with a lower purchase price because of the other benefits that come with a cash sale.