Are you considering paying cash for a house? “Using cash is better than borrowing”. “Pay off your debt and do not take out new loans”. “Save for the things you want, if you don’t have the cash you cannot afford. There are people who live by these financial mantras!
Many home buyers believe it’s easier to purchase a home for cash than to take on a home loan, but this isn’t always true!
That’s the prevailing advice these days as many SA households are dealing with ever-increasing living costs. So it’s not surprising that a lot of people think it would be a good idea if they could pay cash when buying a home rather than taking out a home loan. While paying cash for a home is for many people still a far-fetched idea, it is increasingly becoming more popular on the real estate market.
Paying all the cash will work for some people but not others and the best compromise is usually to pay a large deposit to reduce the size of the home loan needed and thus the interest due while keeping some cash free for emergencies and other investments. It will also increase the odds of being approved for a home loan-with the best interest rate available.
Pros and cons of buying a property for cash
Advantages of paying cash for a house
Although the factors causing the rise in buying homes cash are not well understood, there is speculation that the rise is motivated by a combination of declining home prices that can be caused by a recession or the current global pandemic we’re going through, the complicated funding and tighter banking loan requirements and probably negotiating hunting among wealthy buyers looking to cash in on a possible regain. However, regardless of the factors, paying cash for a home is becoming increasingly popular within the economy today.
Even for those with enough cash on hand to buy a home straight away, the question remains: Is it a smart idea? A reasonable way to start deciding whether it makes financial sense to purchase a home with cold hard cash is with the cost of buying a home outright versus the time-based loan payments that will be made with regular financing choices. When you can afford the initial cost, paying cash for a home would save a lot of money over time, but there are also other advantages.
Of course, a cash purchase eliminates the need to pay thousands of interest rands on a home loan over 20 years, and cuts the bond registration fee, even though you will still have to pay the transfer duty and legal fees. Paying cash for a house is also likely to make the bid to purchase more appealing to buyers, as they don’t have to fear that if you don’t qualify for a home loan, you’ll be back out. This could even allow you to purchase the house at a discounted price, especially if it’s an urgent sell. Moreover, buying a home for cash usually shortens the transition time and helps you to take up work faster.
Paying cash for a house eliminates the need to pay interest on the loan and the cost of closing. There are no originating mortgage fees, appraisal fees or other fees paid by lenders to appraisal buyers. Such advantages shouldn’t come without a price for the seller. A cash buyer could be able to get the property at a lower price and receive a sort of ‘cash discount.’
Realty Times reports that homebuyers should opt to pay cash on the basis of their financial status and long-term investment strategies. For one buyer what’s right may not be right for the next. Here are more pros of paying cash for a house:
Easy to buy and sell
You are taking away a major source of confusion by cutting out the bank. Bypass the approval procedures as it can be difficult and time-consuming to apply for a mortgage. You won’t have to sit in front of a mortgage broker and hope your credit score leads to favourable terms on loans. The opportunity to pay cash for a home, or accept cash as a seller, takes a lot of tension out of the financial transaction and speeds up the purchase process.
Paying cash can also help you secure a better buying price because the seller is assured of a fast and painless offer. There is a stronger negotiating power as paying cash may allow you to negotiate even better deals. You will also have an easier time to contend with buyers plunking cash down for enticing assets. Without a mortgage, you will bear the mortgage and pace of the next buyer along with the selling. If your credit score is low, you might still be able to buy a cash home.
No paying the mortgage or rent
Housing costs constitute a large part of our monthly expenses. Imagine the potential return you ‘d benefit from diverting that capital into saving and investing in the stock market, a type with a much greater potential return. The security of owning your own home is not to be overlooked. There are great psychological benefits to owning your home without any debt.
Sense of security and ownership
If you lose your job or hit hard financial times, you can’t be foreclosed on because you already own the house entirely. That means you have assured a place for your family home, no matter how bad things can get financially. Paying cash means they don’t have to find a way to pay the mortgage if the homeowner loses his employment. The peace of mind for many buyers that they will not have years of mortgage payments outweighs all other factors.
You’ll have total equity in your home so you can tap in an extreme emergency. However, the first step will be to have an appropriate emergency fund.
Less market fluctuation concerns
The truth is that you can not get upside down on your mortgage loan unless you buy a house outright. No matter what the market is doing, you can make value-based decisions about what to do with your property. When you’re going to have to transfer to rent the house as a landlord, you don’t have to think about saving up money to cover the mortgage. If you have to sell for a loss, as long as you’ve lived at home for several years, chances are that the money you’ve received from failing to pay the mortgage for several years would be enough to cover the principal loss on the house.
Not paying interest
Homebuyers do not have to pay interest on a cash purchase and that is a sort of investment.
No closing costs
Lenders will typically charge a mortgage including application fees, underwriting fees, mortgage insurance and legal costs. A buyer paying cash does not have to pay the closing costs, which can be 3 to 4 % of the home price.
Disadvantages of paying cash for a home
While it seems like a no-lose situation to buy a home for cash, there are a few downsides to consider. Buying a property for cash would obviously mean you ‘re locking up much of your money in one asset and you may lose the option of being able to use it in an emergency or spend it more profitably.
You are losing liquidity, so buying a home with cash is probably a smart idea only if you can afford it without emptying your emergency fund. A property can take months to sell, so investing against the value of your home is generally risky unless you have a mortgage if you need cash urgently. It’s like investing that house at the current rate of interest on home loans – and when rates are low, you may feel like you can get a better return on your cash by investing in shares or commodities, although your risk will be higher as well.
Cash buyers also need to keep an eye on their credit records. Not having a home loan might prevent you from getting one for a future purchase of a property as there will be no history of regular and responsible repayments. You need to remember that you will bear the entire loss if the economy turns down and property prices crash. If you have a home loan, you are only going to suffer a loss on the portion of the purchase price you paid as a deposit and have since paid off.
Loss of liquidity
Paying so much money upfront for something would cost you a lot of liquid assets in cash form. This is why you should only buy a home straight away if you still have a comfortable emergencies account. In the case of financial troubles, cash locked up in real estate is not quickly accessed either through a selling or taping equity.
A homebuyer who pays cash for a house has less money than to invest in. If there is a financial crisis the owner would need a home-equity loan down the road. That means that after all, she would have to pay loan fees and accept a higher interest rate than she would have had on a mortgage. Paying cash for a house ties that money together.
There may be better options, stock market returns typically outstrip most investments. Current other investment opportunities, like investing in a small business? It takes years for low-interest rates to replenish the savings. And locking up all your money in a home decreases your liquidity overall.
Loss of leverage
While most of us are in a rush to pay off debt, leveraging in real estate can potentially be one place where there is an upside to holding some debt. Since your mortgage payment is locked in, if you can get a very good interest rate, you may potentially make money during inflationary times by getting a mortgage due to the inflationary impact.
No tax advantages
For many homebuyers, the tax status of mortgage interest is one of the main rewards. Buying a cash home doesn’t have any tax deductions. A homebuyer paying in cash does not earn the mortgage interest tax deduction. That advantage is only provided by homeowners who itemize their deductions.
A mortgage will provide you with tax advantages, and ensures that a borrower would actually have more cash in the bank to use when needed. Paying cash for a home means you will not have to pay interest on a loan and any costs of closing it. Choose the option that gives you the bigger bang for your buck when considering whether cash or a mortgage is most sensible.
In general, investing in mortgage money is more sensible than paying cash. Assuming your finances are in good shape: a healthy emergency fund, completed college savings and on-going pension account funding, purchasing a house in cash outright may be an option.