0

I was wondering what are the best options. Of course if depends so I would like to know what are the pros and cons of each solution.

One obvious that came to mind - buying in cash allows to act at a short notice, without waiting for bank to approve decision.

  • 1
    Why would you get a mortgage if you can buy with cash? – D Stanley Aug 9 '17 at 16:30
  • 2
    @D Stanley: For instance, because you think you can get a better rate of return on your money by investing it in index funds. For the OP, a con would be that you find you can't get a mortgage. perhaps because you're in the "bernanke mortgage trap" where you have lots of money, but not from a W-2 job. – jamesqf Aug 9 '17 at 17:20
  • @DStanley - cash is the king, better to have cash available and pay off cheap mortgage... But there are many pros and cons that I would like to explore. – Mars Robertson Aug 9 '17 at 17:52
  • 2
    So you're willing to pay 3-4% interest to keep that cash, or as james suggests, to invest it in index funds that might make 8%, but can lose as much as 30% in a year? (these are rhetorical questions - I understand the desire to keep the cash but don't believe you should borrow money for things when you can pay for them outright) – D Stanley Aug 9 '17 at 17:58
  • 2
    @D Stanley: In the US, that 3-4% mortgage interest rate can often be decreased significantly due to the mortgage interest tax deduction. – jamesqf Aug 10 '17 at 4:51
3

If you mortgage after the fact you will usually pay an extra .25% higher on the interest rate because a "cash out" refinance is treated as riskier than a new home purchase mortgage. You might save enough on the purchase price of the home with a cash offer to make that higher interest rate worth it, but in most cases, if you are planning to hold the loan for a long time, it's best to get that mortgage at the time of purchase.

You might be able to get the same deal with an offer that says you will pay cash if there are any problems getting the loan approved.

2

Using cash to purchase a home allows you access to certain deals that mortgage buyers cannot take advantage of. These are typically distressed properties and need to be moved off the books quickly. Think of things like foreclosures and auctions.

This does not mean that it gives you an advantage with every house on the market. While you may be able to close quickly, with cash, some buyers may choose to wait for the (presumably) higher offers of mortgage buyers.

There are complications to purchasing in cash then mortgaging to replace that cash. Namely, how was that cash invested? If one were in mutual funds or stocks, with the money, one will have to pay capital gains tax on any profit. If those investments increase in value, during the time the money is tied up, what do you do then? Do you buy at the higher value or hold it back and dollar cost average it in?

2

It may be possible to get more cash than you currently have. For example, If you have $200,000, you could buy a distressed property for $150,000, spend $50,000 on renovations, get it appraised for $300,000 and then cash out refi $240,000 (keeping 20% equity to avoid MIPs) to invest.

This would be analogous to flipping a house for yourself. Normally flippers buy a house for cheap, then sell it to someone else for way more than their total outlay in purchase + improvements. The only difference here is there's no 3rd party - you stay in the house and essentially buy it from yourself with the mortgage.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .