“Should I pay cash or get a bank loan to buy a house?” is everyone’s headache while purchasing a real estate asset.
In the world of Real Estate Investing Strategy, Cash is the king, as most of the investors focus on taking a cash-out for a property. But, it is not the truth.
And even it is not that simple for a majority of the population to throw a few hundred thousand rupees for a property. So, for many, this would not be the best option.
However, it is worth knowing both the options for buying a property as the two have their own merits and demerits. So, why not check? The situations under which an investor should buy a property either using cash or a mortgage. And, also know why despite plenty of money, the wealthiest investors opt for a home loan.
What is a Cash Offer?
As the name suggests, a cash offer means the home buyer is willing to purchase the property without the mortgage loan or other financial methods. Due to this, there are no contingencies and delays with the purchase of the property. That is often associated with when you purchase the property with a mortgage loan.
However, choosing this method of Financing mostly depends on your financial situation. But still, being in a position to pay cash while buying a rental property can be rewarding. At the end of the day, not carrying a loan for the real estate investment can give you great relief since you need not have to worry about the payment of the mortgage every month.
When to buy Real Estate via Cash?
Buying a property in real estate using your fund gives an advantage of staying debt-free without the stress of paying EMIs. Moreover, if you want to invest in a property and book quick profits without any financial assistance, it’s always better to use your cash.
Secondly, if the financial institution is charging an interest that is higher than the return you are expecting from the fund, it is good to use your money to buy the property instead of the loan.
Financing A Home Purchase with a Mortgage
Real estate financing involves the investor’s method of securing funds for an impending deal. As the name itself suggests, this method allows the investors to buy a home under the mortgage and slowly pay it off over one or several decades. In this way, investors can invest quickly in a home that will gain worth over a lifetime.
Usually, referring to home equity is the value of the home minus the sum of your mortgage due.
When to buy Real Estate via a Mortgage?
When you want to buy a property in real estate and do not have sufficient liquidity in hand, then a loan is a good option for the arrangement of the funds. In this way, you can invest in a property you wished for, and generate higher returns. Also, you can get liquidity in your hand, and don’t need to run around for the arrangement of the fund for achieving your financial objectives.
Secondly, when the interest on a loan is lower than the return you expect to generate from the funds after adjusting the tax obligations, it is better to opt for a loan. Using the loan options can leverage your financial capacity, and investing in multiple properties can also make you earn attractive returns as well as capital gain in the long run.
Cash Vs Mortgage: Key variations in Buying Home?
- Interest Payment
Buying a home with cash makes you free from the payment of interest on the mortgage amount.
But, buying a home with a mortgage, you become bound to pay interest. However, it can be a good option if the rates of interest are low.
- Competitive Offer
Buying a house in real estate with cash flow can give you a competitive advantage over the market.
While buying a house in real estate with finance takes a longer time to close, and you get bounded with one mortgage.
Buying a home with cash in real estate provides faster hold over the property with fewer restrictions of inspection of the property.
On the other hand, Financing for a real estate development is harder to qualify, and win if there are more homebuyers with more credit scores.
- Invest Anywhere
Buying a house with cash doesn’t require any approval from any financial institution or investing company.
While financing a house with a mortgage requires qualifying and approval from the lending institutions.
- Tax benefits
In cash offers, mostly as you have paid money in cash, you are not able to deduct any amount thus paid while filing a tax return. In this way, you have knocked out a high chunk of money. And, as a result, you are unable to claim tax benefits as you have not paid interest on the mortgage.
While choosing this option, can make the homeowners claim tax deductions of the mortgage interest for the first and second homes. It can be a good option even for retired people who are no longer able to reduce their taxable income.
What Are Things to consider before finalizing your home purchase?
Consider other financial objectives, such as retirement, college savings plans, and so on. If you aren’t confident in your other savings, you might not want to invest a large sum of money in real estate. If you have enough money to cover the associated taxes, fees, and maintenance costs, it may be worth buying the home in cash, especially if you want to increase the amount of cash you have on hand month to month. If you have the ability to purchase the property outright, you can avoid the interest and fees that come with mortgages, as well as the often lengthy approval and closing process.
Make sure you have enough cash to last at least several months; if your financial situation changes, you may require access to funds. If paying cash for a home would completely deplete your savings, this could increase your risk if a major life event, such as job loss or hospitalization, occurred. It is critical that you keep a basic level of savings to cover any unexpected costs that may arise.
Finally, if you’re in a hot real estate market and on the verge of a bidding war, you might want to consider a full cash offer as a way to close the deal quickly. If two identical offers are placed on the table, one of which is a cash offer and the other requires financing, home sellers will vastly prefer the cash offer due to the certainty that cash offers provide. There is always the possibility that a buyer will be rejected by a mortgage lender at the last minute.
Now that you have weighed the pros and cons of buying a house either in cash or mortgage, you must have a solid idea for your next steps. Whether you would move forward with a cash offer or Financing for investment, you need to use your money wisely to drive out the best financial situation.
Moreover, a buyer who is not in a position to pay cash for property has many financing options within the real estate. So, you must be aware while putting in a direct cash offer. And don’t think it is immaterial and can be revised sometime in the future. Because, once you go with the cash offer, you can’t take back your decision.
And you will further lose the chance of getting a hold on the property that will gain worth with time, just for a few hundred rupees. Hence, my advice is, please do take a step, study the market and comply with your financial goals before heading to any decision.
Do you want to own Real Estate? Connect to Assetmonk, a smart crowdfunding platform that comes up with high-growth investment options in real estate.
Cash Vs Financing FAQ's:
All cash offers mean the home buyer is willing to purchase the property without the mortgage loan or other financial methods. As a result of this, there are no contingencies and delays associated during the purchase of the property with a mortgage loan.
Buying an investment property in cash can allow you to earn money quickly and lead to the positive cash flow in real estate. This is so as you are not bound to pay the monthly mortgage, which eats a larger portion of income.
Mortgages aren’t passed out like free candies. The developers have learned they can lend money to anybody. It does require to qualify for a mortgage, and thus it sometimes becomes harder.
If the financial institution is charging an interest that is higher than the return you are expecting from the fund, it is good to use your money to buy the property instead of the loan.