by Matthew Durkee, New England President, Community Bank
In all my years of banking, I never thought I would be writing about home buyers deciding between making a cash offer, or using a mortgage to purchase a home. However, in April 2023, a third of all US home purchases were made entirely in cash. The share of homes bought with cash remains elevated, above pre-pandemic levels, due in part to the current mortgage rate landscape. Elevated mortgage rates are deterring homebuyers who utilize a mortgage more than deterring all-cash buyers, causing the percentage of cash purchases to rise.
Cash-only purchases are common in two notable situations:
- When mortgage rates are considered high and
- When the housing market is extremely competitive, motivating buyers to pay cash to entice sellers to accept their offer
A “cash offer” does not mean purchasing a house with actual cash. A cash buyer is someone who uses their own funds to cover the full purchase price of a home without the need for a loan. The funds could come from savings, investments or the sale of another property. Buying a house with cash can benefit both the buyer and the seller with a faster closing process than utilizing a mortgage loan.
Should anyone who has the capacity to make a cash offer for a home do so? Home buyers should understand the nature of such offers, because it is not as straightforward as it appears. Here are some considerations for determining if you want (and are able) to purchase your next home with cash.
Cash Offers Are Often More Desirable To Seller
Cash is king. Since the current market remains highly competitive, being a cash buyer can give you an advantage over buyers who plan to finance their purchase. Sellers not only want the highest offer price for their house, they want certainty. Often sellers prefer to work with cash buyers to eliminate the contingencies associated with meeting a mortgage loan approval. Sellers also do not like the idea of accepting an offer, taking their home off the market, turning away other offers, and then waiting weeks only to have the contract fall through because of a financing contingency. Since cash-only transactions typically happen faster, seller’s eager to close, may be more willing to negotiate with a cash buyer than they would a buyer requiring financing.
Streamlined Closing
With an all-cash offer, you have more control over the closing timeline. Streamlined closing are typical because the many items required in a mortgage process are eliminated. A typical mortgage process, from application to closing, takes from forty five to sixty days. This can be an important point for sellers who want to move quickly.
Fewer Closing Costs
Saving money on closing costs is a compelling reason to want to buy in cash. With a cash offer, you can avoid some mortgage loan expenses and unforeseen costs including appraisal fees, application fee, and credit report charges, helping home buyers to save on the overall cost of a new home.
While paying cash for a new home certainly has its benefits, financing a home also has significant benefits. Even if a buyer has the means and flexibility to purchase a home with cash, it may make more financial sense to utilize their cash differently than committing their cash to a long term real estate purchase. The advantages need to be weighed against the following potential drawbacks.
Your Money is Tied Up in Your House, Literally
By investing a substantial amount of cash into an asset like a home, you may not have enough remaining liquidity to meet other financial needs. To access the money you invested, you may need to sell the home, take out a mortgage, or a home equity loan. Before making the decision to go all cash, ask yourself: “If I tie up this money, will I still have enough set aside for a potential emergency or just-in-case scenario?” At Community Bank, N.A., our financial experts recommend having at least enough money to cover three to six months’ worth of expenses in savings.
Risk of Overpayment
When you apply for a mortgage, a lender will require a home appraisal, which involves an objective professional evaluating the home to determine its value. Appraisers take many factors into consideration, including the home’s age, size, location, and condition. If your home appraisal comes in lower than expected, it can require you to make a larger down-payment or delay the entire home buying process. Without a lender to require an appraisal, you might be tempted to skip that step, leaving you susceptible to paying a lot more than the property is valued.
There is no one-size-fits-all answer to deciding whether you should purchase a home in cash or finance it with a mortgage. If you decide to finance your home, you will have a choice of mortgage options to select the loan structure that works best for you. If you do consider buying a home with cash, make sure you know what that means for your bottom line and long-term financial goals. Diligently consider your own personal needs and risk tolerance and ensure you are not leaving your emergency fund or retirement savings depleted. An appraisal, title search and survey are requirements that are important to ensure your new home meets your expectations.
If unsure which approach works best for you, or if you are interested in learning more about securing a mortgage, reach out to a mortgage expert. They can assist you with making a decision that is right for you.
Matthew Durkee is the New England regional president and leads Community Bank’s team. A native Vermonter, he has been active in the local banking community for his entire 30+-year career.
