Everything I Need To Know About Buying My First Home

Everything I Need To Know About Buying My First Home – Paying cash for a home has the major advantage of avoiding additional debt. But, even if you have the cash to pay for the house, there are advantages to taking out a mortgage as well. For example, you may be able to invest the money you save from paying cash in a way that gives you more income than you would pay in interest on the mortgage.

Here are some of the key differences between using cash to buy a home versus taking out a mortgage, including the pros and cons of each payment method.

Everything I Need To Know About Buying My First Home

Paying cash for a home eliminates the cost of interest on the loan and any closing costs, which can total tens of thousands of dollars. “There are no mortgage origination fees, appraisal fees or other fees that lenders charge to appraise buyers,” says Robert Semrad, JD, senior partner and founder of DebtStoppers Bankruptcy Law Firm in Chicago.

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Paying in cash is usually more attractive to the seller as well. “In a competitive market, sellers are more likely to accept cash offers than other offers because they don’t have to worry about buyers pulling out because financing is declined,” said Peter Grabel, managing director, MLO Luxury Mortgage Corp. in Stamford, Conn.

Cash home purchases also have the flexibility to close faster than those involving loans, which may be attractive to sellers. A cash buyer may be able to get the property for a lower price and receive a ‘cash discount’, Grabel said.

Cash buyers can also buy a home in cash and then still do a cash-out refinance after they have closed on the home purchase. This provides:

Cash buyer homes don’t leverage, which allows homeowners to sell homes more easily—even at a loss—regardless of market conditions.

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Home financing also has great benefits. Even if you can pay cash for a home, it may make sense to save your cash instead of using it to buy real estate.

If the home turns out to be in need of major repairs or renovations, it may be difficult to get a home equity loan or mortgage. You don’t know what your credit score will look like in the future, how much the home is worth, or other factors that determine approval for financing. However, getting a home equity loan or home equity line of credit (HELOC) is easier the more equity you have in your home.

Paying cash can also cause problems if the owner wants to buy a new home but has already used their cash to buy their current home. “If cash buyers decide it’s time to sell, they need to make sure they have enough cash reserves to put toward a deposit on a new home,” says Grabel.

In short, cash buyers need to make sure they have enough liquidity to meet their other financial needs. By choosing to use a mortgage, you can give yourself more financial flexibility.

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Paying off a mortgage can also provide tax benefits for homeowners who itemize deductions because mortgage interest payments are tax deductible.

Of course, with a mortgage, you end up paying more overall, because it comes with interest payments that add up over time. But, depending on the state of the stock market, you could save less money than you might if you took out the mortgage and invested the cash.

The average annual return of the S&P 500 is about 10% from its inception to 2022. Of course, each year the return can be much higher or lower than 10%. But over the long term, a 30-year investment in a low-fee index fund tracking the S&P 500 will give you a higher net worth than you’d pay in interest on a mortgage of the same amount.

You may also save more on your taxes than you save with the mortgage interest deduction. If you use your extra cash to invest in the stock market directly or to survive investing in a tax-advantaged account such as a traditional IRA, Health Savings Account (HSA), 401(k) or other workplace plan, you could potentially save more tax than you have by listing your mortgage interest.

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In some cases, having a mortgage can protect you from certain creditors. Most states provide consumers with some level of protection from creditors regarding their home. Some states, such as Florida, completely exclude the home from the reach of certain creditors.

Other states set limits as low as $5,000 to $550,000. “This means that, regardless of the value of the house, creditors cannot force its sale to meet their demands,” said Semrad. This is known as the home foreclosure, but keep in mind that it does not prevent or stop a bank foreclosure if the homeowner defaults on their mortgage.

If your home, for example, is worth $500,000 and the home’s mortgage is $400,000, your homestead exemption can prevent a forced sale of your home to pay creditors the $100,000 equity in your home, as long as your state’s homestead exemption is at least $100,000.

If your state’s exemption is less than $100,000, the bankruptcy trustee can still force the sale of your home to pay creditors with home equity that exceeds the exemption.

Buying A House With Cash Vs. Getting A Mortgage

Paying off your mortgage doesn’t mean your home can’t be foreclosed on. You can still foreclose through a tax lien. For example, if you fail to pay your property, state or federal taxes, you can lose your home through a tax lien.

Buying a home is easier with cash. You don’t have to wait for an inspection, appraisal or underwriting. Home sellers will also usually favor cash buyers so they don’t have to deal with loan timelines, which means your cash offer is more likely to be accepted. While an inspection isn’t required when you buy a home with cash, it’s still a good idea to get one to make sure your new home won’t come with expensive surprise repairs.

Cash isn’t your only option for buying a home if you have bad credit. You can still be approved for a mortgage through a Federal Housing Administration Loan with 10% down if your credit score is at least 500.

On the one hand, you can have a higher net worth at the end of 30 years if you invest the extra money instead of using cash for a home. However, not having a mortgage gives you freedom from mortgage debt. Consider the pros and cons of paying cash versus using a mortgage for your situation and consider consulting a financial advisor for further guidance.

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