NEW YORK (MainStreet) -- For most of us, paying cash for a home is unimaginable. We just don’t have that much money lying around. It may surprise you, then, to hear that nearly 30% of homes are bought with cash. Some of these buyers are wealthy, and others are retirees who have paid off their mortgages and can use the equity from the old home to buy the new one flat out.
But is a cash purchase for real estate a good idea? What if you paid cash and then wish you hadn’t? In that case, you’ll be glad to know that a new Fannie Mae rule is making life a little easier for cash buyers with homebuyer’s remorse.
The clear benefit of paying cash is that you don’t have to qualify for a mortgage or pay interest on top of your purchase price. Interest, depending on the rate, can double or triple the cost of buying a home, whereas by paying cash you won’t have to shoulder monthly mortgage payments, leaving more of your income for other things.Also, a buyer offering cash presents the home seller with a guaranteed deal, while a bidder requiring a mortgage could have the loan denied. The cash buyer is therefore in a position to negotiate a better price.
But there’s a big downside to the cash purchase: Your money will be tied up in the home, unavailable for living expenses, vacations or other purposes.
A cash purchase may be the only option for a retiree without enough income to qualify for a mortgage, but buyers who could take either course are generally told to consider investment returns. Avoiding a mortgage that charges 4.5% is like earning a guaranteed 4.5% on the cash put into the home. If you can invest elsewhere at a higher return, that would be the best option on a purely financial basis.
What would happen if you opted for the cash purchase and then decided you would prefer a mortgage?