Paying cash for a house has many perks. There aren’t, however, an abundance of people with hundreds of thousands of dollars in the bank at the ready for spontaneous purchases of real estate. That’s okay! You don’t have to be a millionaire or a real estate investor to pay cash for your house. Even with an average annual household income, it’s possible to save and prepare in advance so that you can buy your home without a mortgage. Here’s what you need to know about paying cash for your house.
- Your Reason for Considering a Cash Purchase
- The Benefits of Purchasing with Cash
- Money Matters | Financial Preparations for a Cash Purchase
- More Than the Purchase Price
- Start Small; Dream Big
- Inspections and Appraisals
- Working with the Right Real Estate Agent
- The Process of Buying a Home with Cash
Your Reason for Considering a Cash Purchase
You may have the lofty goal of paying cash for your starter home. Paying traditional paper money for a starter home now, even if it’s simple, can bring tremendous benefit later. Not only will you start out your journey into home ownership without a monthly housing payment, but you can also upgrade the property over time and turn a profit for the future sale.
Or, if you’re already a homeowner, you may be considering downsizing, selling your existing house so you can pay cash for something smaller. This option is especially popular with empty nesters who have lived in the same house throughout the raising of children. There’s a lot of equity built up here. The house you’re in may no longer fit. Once the kids have grown and gone, you could feel that there’s no need for a large home. You have the option now to sell the house you’re in and use the profit to pay cash for a home that suits your current lifestyle.
Finally, this may not be your first rodeo. However, as you head into your retirement years, you’d like to focus a little less on paying for your lifestyle and a bit more on what you can extract from the lifestyle you create. Now paying cash for a house is more about security for the future and less about having to worry whether or not retirement benefits will be enough to sustain the costs of living when the time comes. If this is the case, consider lifestyle changes of aging as you shop for homes. For example, you may limit your search to single story houses and avoid properties with yards that have stairway entrances.
The Benefits of Purchasing with Cash
There are numerous reasons it may behoove you to pay paper money for your home instead of applying for a home mortgage loan. Here are just a few:
– Winning offers: When you offer to pay cash for a house instead of obtaining a home mortgage loan, your proposal becomes more appealing to sellers. Sellers are attracted to cash purchases because they’re more firm offers that don’t risk denial of a mortgage. Cash offers can also close faster than bank-funded real estate transactions.
-Better sales price: It’s possible that a cash offer could garner you a sweeter deal with the dollars. Because you’re able to offer the seller a less-complicated transaction with faster closing dates, the seller may be willing to compensate your positioning with a lower sales price.
– Reduced closing costs: Although you won’t be able to eliminate closing costs entirely, paying cash for your property does reduce the amount you’ll pay. You’ll avoid the lending fees associated with processing your home mortgage loan application.
– Zero interest: Traditional home mortgage loans come with interest rates charged monthly on the amount borrowed. Through the life of the loan, those interest rates accumulate, adding up to thousands and thousands of dollars. By the time you pay interest on a 30-year home mortgage loan, you could have paid cash for a luxury car.
– No monthly housing payment: By eliminating the need to pay rent or mortgage for housing, you can save hundreds of dollars each month, which you can add to your savings, or increase your quality of life by having more on hand to spend.
– Financial investment: When you pay cash for your house, it becomes an asset rather than a liability. Rather than owing a debt of $200,000, for example, you’d own an asset worth as much.
-Bypass credit obstacles: Some people may have ample cash for the purchase, but lack the credit required to qualify for a home mortgage loan. When you pay cash for a property, your credit history and debt-to-income ratio have no relevance.
There are many additional reasons you may find benefit in paying cash for your home. Keep in mind, though, that while you may be saving thousands in interest, you’re also trading in the ability to use an interest-based tax-deduction for homeowners.
Money Matters | Financial Preparations for a Cash Purchase
Unless you have the benefit of an established savings from which you can pull cash to purchase your house, you’re going to have to work on a plan to make it happen.
The best plan, of course, is to go into your cash real estate purchase debt-free if you can. If possible, take the time to pay off any outstanding debts. Knock out credit card balances, pay off the auto loan, and avoid financing purchases.
It’s also a wise plan to have an emergency fund in place that is separate and apart from your home-buying budget.
Next, determine how much money you’ll want to save for your purchase. Then, decide how much money you can save each month toward your goal. You may need to sacrifice, re-work your budget, set limits, and cut back your spending to save more. You may find you’re able to stash enough cash away each month that you can reach your goal in just under three years, or it could take you ten years or more. Be realistic, and then be committed.
Divide your goal amount by your monthly savings to establish the timeline for being ready to pay cash for your house.
More Than the Purchase Price
When you pay cash for a house, you’ll need more money than the asking price. Even though you can reduce closing costs by eliminating lending fees, you can still estimate around a three percent total for closing costs. Next, you’ll pay property taxes. Homeowners insurance is mandatory, as are the HOA fees if you move into a community that’s governed by a homeowner’s association. You’ll want to figure in the actual cost of relocating – boxes, moving truck, etc. And, even if the house you’re buying is brand new construction, it’s a good idea for you to have a maintenance fund for repairs when things with the house go awry.
If the house you’re considering is new construction, keep in mind that the base price of the house is not the same as the sales price of the house you buy. Many features in model homes are upgrades and cost extra. When touring model homes, ask if what you’re seeing is included or if its an upgrade. You’ll attend a design meeting in which you select flooring, finishes, and features – all of which will add to your base price. So, if you’re paying cash, you could grow your total beyond your budget. There are ways to save, though, such as purchasing your appliances separately at local appliance stores rather than paying an inflated builder’s price.
Start Small; Dream Big
You don’t have to have the perfect home from the start. One of the beautiful things about homeownership is that homeowners can customize their properties in ways renters cannot. You can put walls up or take them down. You can change the colors, textures, and fabrics of the carpet, paint, cabinets, and fixtures. You can upgrade, add-on, expand, renovate, and customize your home to your taste. Of course, local building laws and permits limit these activities, but the idea is that you can spend less money now to buy something you can grow over time. When the time comes to list your house for sale, you may be surprised at how you’ve built the value, too.
Inspections and Appraisals
Typically, the buyer’s lender requires an appraisal and an inspection as a way to protect their investment. The bank wants to know the house is free of problems, is in excellent condition, and that it holds the market value to substantiate the amount of the loan. When you’re paying cash, however, that process is different because there’s no lender making demands. However, it would still be in your best interest to have the property inspected and appraised before you shell out the dough.
You could choose to save a few hundred bucks by eliminating the appraisal and inspection on the front end only to discover a few months down the road that you’ve got to spend thousands in repairs for problems you didn’t detect when you agreed to buy the house as-is. You may find it a wiser route to invest in the services.
Inspections and appraisals can be more significant when you’re considering purchasing a foreclosure or a distressed property. In most foreclosures, you agree to buy the house as-is, with no warranties or guarantees. Having the house inspected and appraised first could reveal problems that equate to deal breakers. You may decide the investment isn’t worth the risk. You’ll be out the couple hundred dollars for the inspection and appraisal, but you’ll have the peace of mind of knowing you made a wise decision in protecting your cash.
Working with the Right Real Estate Agent
Whether you’re paying with cold, hard cash or a hard-earned home-mortgage loan, you still need to work with a professional real estate agent who can represent you in your purchase. Real estate transactions are complicated, even when there are no lenders involved.
Some agents garner more experience in cash transactions than other agents. Those who have built expertise in cash transactions may know ways to save you money, cut costs, and sweeten the deal.
Take the time to interview agents. Find an agent who not only has experience dealing with cash transactions, but also who specializes in the type of property you’re trying to buy, such as a short sale specialist. Talk with the agents about your expectations, about your readiness to pay cash for your home. Then, choose an agent whose personality is compatible with yours.
The Process of Buying a Home with Cash
When you pay cash for a house instead of obtaining a home mortgage loan, there’s not a whole lot that changes in the way you’ll conduct your transaction.
Your real estate agent will take you on tours of homes that meet your criteria. When you find a house you adore, you submit an offer to the seller with a copy of your bank statement and the inclusion that this is a cash offer. You reach an agreement with the seller, arrange for the appraisal, title transfer, homeowners’ insurance, and other requirements. You have the benefit of being able to close the deal more quickly because you’re not waiting on the agenda of the lender.
There are a lot of reasons people consider paying cash for a house, and many benefits to doing so. To pay cash for a home, you’ve got to devise a plan of how much you can save each month, and how long it’ll take you to get to your desired amount. During that time, you can work on becoming debt-free and setting up your emergency fund so that when it comes time to pay cash for your house, nothing is holding you back. Find a real estate agent with experience working with cash buyers. Start small and buy a house you can grow over time. Protect yourself from a future headache by investing in having the home inspected and appraised.
Call The Wright Choice Team today at 804-307-2589 to tour available homes for sale in the Chesterfield County area.