Home » Cash vs. Financing

Cash vs. Financing

September 4, 2017

Buying a house? Here’s what you should know about paying cash versus financing.

Making a cash offer

A cash offer usually means that you’ll be paying with certified funds. The escrow holder will require a wire transfer or cashier’s check for the amount of the sale price plus closing costs.

Making a cash offer comes with several benefits:

  • You won’t have to secure a mortgage

Recent changes made by Fannie Mae and Freddie Mac have made it easier to secure financing, but if you already have an existing loan on another property and want to put off applying for a new mortgage, then cash deals are for you.

  • It makes you an attractive buyer

Offering to pay in cash give you an advantage over other buyers, especially if you’re in a competitive market like San Diego. Sellers like the idea that you won’t need to apply for a mortgage, since loan applications can and do get rejected.  Cash deals also mean no appraisals, and with this contingency out of the way, there’s a better chance of the transaction going through.

  • You’ll close the deal faster

Real estate transactions typically close within 30 to 45 days, but a cash deal can close within 7 to 15 days if you sign off on a lead paint waiver. There are fewer contingencies and you don’t need to get approved for a mortgage. This helps you and the seller save time and energy.

  • You’ll cut costs

With no mortgage, you won’t have to pay interest. You won’t have to deal with appraisal fees, mortgage origination fees, and other charges needed to assess your credit-worthiness.

  • It’ll be easier to sell

There will be no restrictions on title transfer, since there’s no underlying loan.

In order to make a cash offer, you must be liquid, meaning you have quick access to cash or assets that can be quickly converted into cash. You might have a personal line of credit or a credit line on another property.

The seller will likely require proof of funds before accepting a cash offer. They’ll check with your bank, money market, and investment account statements. The deposit money will be due within a few days once the seller accepts, and it usually constitutes 1% or 2% of the sale price.

The downside is that you’ll give up liquidity and you’ll be tying up a huge amount of cash in just one asset class.

Making a mortgage offer

Taking out a loan on a home also makes financial sense, even if you can afford to buy one outright. Here are some of the benefits:

  • Financial leverage

Buying a home with borrowed cash could yield higher returns if the property increases in value. While you also risk losing out on a percentage basis if the home depreciates, you’ll hardly feel the effects if you intend to stay in the home for a long period.

  • You won’t be tying up too much cash in real estate

Parking too much cash in a single asset class can tie you down, especially if it takes up a major chunk of your cash reserve. It might also prevent you from diversifying your assets.

  • You’ll stay liquid

Taking out a mortgage on your home will help you stay liquid. You’ll have quick access to funds, giving you more financial freedom and security.

Are you ready to make a purchase in San Diego? Call me, Jeffrey Oneal, at 619.709.3196 or send an email to jeff@downtownjeffrey.com.