In the last few years, we have dealt with more cash offers than I have ever had in my long career as a San Diego real estate broker.
On a national level and according to Market Watch, 43% of homebuyers in 2014 so far have purchased with all cash. While some analysts believe that the cash offers are a temporary phenomenon, there is always more room for negotiation when the buyer makes a cash offer (ideally with no appraisal contingency). When it comes to buying a home in a hot real estate market, sometimes cash offer can net you a lower price than one with a mortgage. So, if you’ve just sold your home and are looking to buy a new one with cash or are otherwise planning your estate, here are some things to remember.
Why buy with cash?
As an empty nester or retiree looking to downsize, you often have cash from the sale of your larger home to purchase a new home. This allows you to choose a smaller home, pay cash, and possibly have money left over. Or, you may choose to buy into a better community for retirement or simple downsizing. So while you may end up with a smaller home, the potential advantages can be very appealing.
Gifting a home to your children as a wedding gift, or as part of your estate planning can also result in a cash purchase. After all, homeownership is part of the American dream we may want to share with our kids. However, gifting only a down payment may pressure your loved ones to purchase a San Diego home when they are not ready to be homeowners. A better option for them would be to purchase a home for them with all cash. The home is paid-for and their obligation would extend only to yearly taxes,insurance and HOA fees–but not the heavy burden of a mortgage. A paid-for starter house protects them from the ups and downs of the market as well, and gives them a basis for a mortgage when the time is right for them.
Investment property that is completely paid for can be a “cash cow” for your San Diego retirement. The ongoing income from a rental that does not have a mortgage can make your retirement a little more comfortable, and is less problematic in probate than properties with mortgages.
Reasons to have a mortgage:
If you have a financial instrument that might give you a higher rate of return than the mortgage will cost you, it might make more sense for you to invest your cash in the higher return and to take out a low cost mortgage on the property. This is using real estate leverage at its best.
If you need to improve your credit report, it might be better for you to take a mortgage. This type of “good debt” can improve credit scores and make it easier to borrow money for other reasons in the future.
Additionally, there are current tax benefits from holding a mortgage that, depending on your financial situation, may be more beneficial than owning the home free and clear. Of course, before you make this decision you should check with your tax accountant or financial advisor–and stay tuned to economic news.