Almost a Third of Home Sales Are Cash Deals. Should You Pay Cash for a House?
- Close to a third of all home buyers pay for their property in cash.
- A cash offer can be more competitive.
- There are downsides to buying a home without borrowing.
Should you join the group of buyers who pay cash for their properties?
When most people buy a home, they don't pay for it outright. Mortgages are very common because they are an affordable type of debt and because most people don't have the money to just pay cash for a property.
But that's not the case in all situations. In fact, the National Association of Realtors recently reported that close to a third of all home sales are cash deals. This raises the question of why so many people are paying cash -- and whether you should employ this purchasing method if you can afford to do so.
Why are there so many cash buyers?
According to a March report from the National Association of Realtors, 28% of people purchasing a home paid cash for it over the course of the month. This was up from 25% the prior month, and up from 23% a year ago.
There are a number of reasons why a larger percentage of home buyers are paying cash. One issue is that mortgage rates have gone up. Since it's more expensive to buy, people who can afford to pay cash may be choosing to do so. At the same time, some people who have to borrow may be sitting out of the market and waiting until conditions become more favorable. This would reduce the percentage of buyers getting mortgages.
Another reason relates to the challenge in getting an accepted offer. Competition still remains intense for properties in some areas of the country, and this could be motivating people to pay cash for homes. When you pay cash, you have more flexibility. You can close when you want to and you don't have to wait for a mortgage lender. This gives you a leg up on the competition if you get in a bidding war.
Cash buyers can also waive the appraisal contingency. The NAR Study revealed 28% of all buyers took this route. This can make an offer much more attractive. Lenders will require an appraisal before approving a mortgage loan because lenders want to ensure there is sufficient collateral to guarantee the loan. But if the home doesn't appraise for enough, the deal can fall apart. Sellers often prefer to accept an offer from cash buyers that doesn't have an appraisal contingency so they don't have to worry about this.
Should you pay for a home in cash?
As mentioned above, there are some clear reasons why paying cash for a home can be an advantage. It can allow you to waive the appraisal contingency and make an offer that's more likely to be accepted. And it can allow you to avoid paying for a mortgage, which is more expensive now than it was a few months ago due to rising rates.
But there are also big downsides. Tying up a lot of money in a house means you can't invest it in other assets that might have produced better rates of return. It also means you will be trapping your money in the house and won't easily be able to access it.
For many people, even those who can afford it, it simply doesn't make sense to pay for a house in cash because the disadvantages outweigh the benefits.
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