How Long Does Closing On A House Usually Take – Everywhere you turn, you hear how bad it is to carry debt. So it naturally makes sense that you’d think buying a home with cash, or putting as much money as possible into your home to avoid massive mortgage debt, is the smartest choice for your financial health.
But there are many things to consider when considering buying a home outright versus financing it. Here are some of the main differences between using cash and taking out a mortgage to buy a home.
How Long Does Closing On A House Usually Take
Paying cash for a home eliminates the need to pay interest on the loan and any closing costs. “There are no mortgage origination fees, appraisal fees, or other fees charged by lenders to appraise buyers,” says Robert Semrad, JD, senior partner and founder of DebtStoppers Bankruptcy Law Firm, based in Chicago.
To Refinance Or Not, That Is The Question…
Paying in cash is usually more attractive to sellers as well. “In a competitive market, a seller is likely to accept a cash offer over other offers because they don’t have to worry about the buyer backing out due to a denial of financing,” says Peter Grabel, managing director, MLO Luxury Mortgage Corp. in Stamford, Connecticut. A cash home purchase also has the flexibility to close faster (if desired) than one involving loans, which can be attractive to the seller.
These seller benefits don’t have to come without a price. “A cash buyer can get the property at a lower price and get something like a ‘cash discount,'” Grabel says. A cash-out buyer can also purchase a home for cash and then still choose to do a cash-out refinance later after they have already completed the home purchase. This allows them to get the best of both worlds: an easier process of buying a home in a hot housing market with many competing offers, and the long-term financial benefits of taking out a low-interest mortgage loan while investing their money.
A cash buyer’s home is not leveraged, allowing the homeowner to sell the house more easily – even at a loss – regardless of market conditions.
On the other hand, obtaining financing also brings significant advantages. “Even if a buyer has the ability to pay cash for a home, it may make sense not to commit a lot of money to buying real estate,” Grabel says. This can limit your options if other needs arise down the road. For example, if the home turns out to be in need of major repairs or renovations, it can be difficult to get a home loan or mortgage because you don’t know what your credit score will look like in the future, how much the home will cost, or other factors that determine the funding approval. While this is definitely something to consider as a possibility, getting a home loan or home equity line of credit (HELOC) is easier the more equity you have in your home.
Buy Homes In Essex With Lawlors
Selling a home that was bought with cash can also be a problem if the owners put a lot of financial effort into buying it. “If cash buyers decide it’s time to sell, they need to make sure they have enough cash reserves to put down as a deposit on the new home,” Grabel says.
In short, “cash buyers need to make sure they leave enough liquidity,” Grabel says. By choosing a mortgage, you can give yourself more financial flexibility. Using a mortgage calculator is a good resource for budgeting for some of the costs.
A mortgage payment can also provide tax breaks for homeowners who itemize deductions over the standard deduction. And while you shouldn’t choose a mortgage just to get a deduction, a reduced tax liability never hurts.
“In most cases, mortgage interest payments are tax deductible,” says Semrad. However, the Tax Cuts and Jobs Act (TCJA) passed in 2017 nearly doubled the standard deduction, making it unnecessary for many taxpayers to itemize, meaning they forgo using the mortgage interest tax deduction entirely.
What Is A Short Sale?
Of course, with a mortgage you end up paying more overall as it comes with interest payments that accumulate over time. But depending on the state of the stock market, Semrad also notes that saving on mortgage interest by paying cash may not make financial sense. You may save less of that money than you would have if you had taken out a mortgage and invested the money you didn’t spend on your house.
The average annual return of the S&P 500. Interest rates have averaged 2.96% to 4.54% over the past decade for a 30-year mortgage. Although individual stocks and years can vary greatly, an investment over 30 years in a low-fee index fund would leave you with a much higher net worth than you would pay in mortgage interest for the same amount.
In addition to the stock market earning far more than you’ll pay in interest, you can also save even more on your taxes than you would with a mortgage interest deduction. If you use your extra money to invest directly in the stock market or live while investing in a tax-advantaged account like a traditional IRA, Health Savings Account (HSA), 401(k) or other workplace plan, you’ll potentially save more than taxes than you would have by listing your mortgage rates.
In some cases, having a mortgage can protect you from certain creditors. Most states provide consumers with some level of creditor protection for their home. Some states, like Florida, completely exempt the house from the reach of certain creditors.
The Peach And Nectarine
Other states set limits ranging from as little as $5,000 to as much as $550,000. “This means that regardless of the value of the house, creditors cannot force the sale of the house to satisfy their claims,” says Semrad. This is known as a homestead exemption, but note that it does not prevent or stop a bank foreclosure if the homeowner defaults on their mortgage.
Here’s how it works: If your home is worth $500,000 and the mortgage on the home is $400,000, your homestead exemption can prevent you from having to sell your home to pay creditors $100,000 of the equity in your home, as long as if your state’s homestead exemption is at least $100,000. If your state’s exemption is less than $100,000, the receiver can still force the sale of your home to pay creditors with the home’s equity in excess the release.
Not having a mortgage can cancel the homestead tax exemption if you find yourself seriously indebted in the future.
However, having a mortgage will not completely protect your money. “If the homeowner leaves the funds in the bank and finances the house, a judgment creditor can seize the bank account and use most of the funds to satisfy their claims,” says Semrad.
Renting Vs. Buying A Home: What’s The Difference?
Paying off your mortgage doesn’t mean your house can never be foreclosed on. You can still go into foreclosure through a tax lien. If you fail to pay your property, state or federal taxes, you could lose your home through a tax lien.
Yes, buying a house is much easier with cash. You don’t have to wait for inspection, evaluation or signature. While an inspection isn’t required when buying a home with cash, it’s still a good idea to get one to make sure your new home doesn’t come with surprise expensive repairs. Home sellers also typically prefer cash buyers so they don’t have to deal with loan deadlines, meaning your cash offer is more likely to be accepted.
No. 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 FHA loan with 10% down if your credit score is at least 500. You may also be able to improve your credit faster than you think to qualify for a conventional mortgage.
If you have some of the money, you’ll mathematically have a higher net worth at the end of 30 years if you invest that money instead of using it to avoid getting a mortgage (assuming mortgage rates stay low and earnings on stock market follow the same average annual return they have since 1929). However, not having a mortgage gives you a sense of freedom that is hard to replicate. If that feeling is worth enough money to you, then buy your house in cash.
Mortgage Guide: What’s The Average Time To Close On A House?
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