You have heard of the adage “cash is king,” and you may agree on this, but how do you think it applies when it comes to buying a house? This may be something that you haven’t thought about before, but it’s certainly worth considering. And in this post, Ottawa Mortgage Services will tell you why:
The Obvious Reason
When you are ready to pay cash for the house, you have the edge over other interested buyers because the seller will be motivated to close the deal with you. This can be helpful, especially if several bidders are competing for the house you like.
That said, you should know that while paying cash for a home makes sense for many people in specific real estate markets, it might not be the best option for some. This downside includes getting a huge chunk of your investment capital tied up with a single asset class. It also means you’re sacrificing liquidity.
The Process of Purchasing a Property with Cash
The first step in purchasing a property all in cash is raising the amount that you need. Unless you already have the money ready in your bank, you’ll likely have to liquidate other assets and have the proceeds deposited into your bank account.
The seller might ask for proof that you do have the cash, like a bank statement. After that, the process is pretty much the same as how it is when you buy a home with a mortgage, except that there won’t be a mortgage lender in the picture.
Pros of Paying All Cash for a Property
You’ll Be a More Attractive Buyer
As mentioned earlier, sellers are more interested in buyers who don’t need to apply for a mortgage to make the purchase. You are likely to be taken more seriously when you can prove that you can buy their house in cash.
You’re Likely to Get a Better Deal
Because you’re more appealing to sellers, you are in a better position to get yourself an excellent deal. This is especially the case if the seller needs to sell the house fast.
You Won’t Have to Worry About Applying for a Mortgage (and Paying for It)
A mortgage application requires a lot of documents – from proof of income to records of credit history. The process can be tedious, especially if you don’t have those documents ready. There are mortgage companies that are not too strict with the approval process, but they’re still going to request the necessary documentation from you.
If you pay for the house in cash, you won’t have to worry about monthly payments for many years either.
Cons of Paying All Cash for a New Property
You’ll Tie Up All Your Money in One Asset Class
If the amount needed for the new house equates to most of your savings, then you’d be breaking one of the rules of smart personal finance, which is diversification. Also, the ROI of residential real estate lags behind stocks and other types of assets.
You’ll Lose the Financial Leverage You Can Get From a Mortgage
When you buy a property using borrowed money, the potential return is higher. That is assuming the property increases in value over time. Note that this could go the other way, too, if your home’s value declines. Of course, that may not matter if you’re planning to live in the house anyway.
You’ll Give Up Liquidity
Liquidity refers to how fast you can turn your investment into cash if you need to. One example would be your savings in the bank, which you can get in cash almost instantly. Brokerage and mutual funds could take longer, but they can still be turned into cash when needed. A home, on the other hand, can take months to even years to sell.
We want to impart with you in this post that the idea of paying for your next home all in cash should be approached with consideration. There are pros and cons to it, and depending on your particular situation, it could be the right solution for you or not. You need to weigh things carefully. You should also speak to a reputable company that offers excellent mortgage services to know if there are more desirable options than paying for a home in cash.
Ottawa Mortgage Services can answer all your questions about mortgages and provide help with pre-approval, refinancing, and more. Contact us today to know more about our expert mortgage services!