When you purchase a home, there are two options for paying for it: you can finance it with a mortgage or you can make a cash offer. Of course, not every person can pay cash, but those that can often wonder if they should and if there is any benefit in doing so aside from the fact that they will not have a mortgage. Of course, the largest benefit is the fact that you do not pay any interest costs, but beyond that, let’s look at why a cash offer might be better.
Lower Risk
One of the largest benefits of a cash offer is the lower risk it poses. This is because there are no contingencies when a person pays cash for a home. If you were to get financing, there is another party involved in the decision. That party, which is the lender, gets to decide what value the home must come back at and what condition the home must be in. With a cash offer, the only person calling the shots is the buyer, which means that whatever he puts in the sales contract is it – there are no further contingencies that anyone else can place on the process.
Appraised Value Doesn’t Matter as Much
As odd as it might sound, the appraised value of the home does not matter as much to the seller when you pay cash as it does when you finance the home. When you are borrowing money from the bank to purchase the home, you need a specific value of the home in order to qualify for financing. If the appraisal does not come in high enough to meet the sales price, either the seller has to agree to lower the price or the buyer has to come up with the difference between the appraised value and the sales price in cash in order to secure financing. With a cash deal, however, if the buyer is willing to pay a specific price regardless of the value, it does not matter as much.
Higher Chance of Getting the Home
If there are multiple bids on the home and you are in a bidding war, chances are the cash offer will win unless it is well below the sales price. Typically, sellers concede between 2 and 3 percent of the sales price to a discount for paying cash, but beyond that, they want the highest amount they can obtain from the sale of their home. If there is a buyer bidding full price with financing, it could win over your cash bid if you bid too low, so make sure to keep that in mind. Of course, if the buyer with the higher bid has his financing fall through, chances are the seller would turn to your cash offer next.
If you have the ability to pay cash for a home and it will not completely deplete your savings and put you in a financial bind, you do have a higher position against most other bidders. Of course, every seller is different – some may prefer cash buyers while others may prefer the financing because they know that the funds are guaranteed. Whatever the case may be, the seller is typically looking for the highest price he can obtain from the sale of his home, cash or not. It is up to you to do your homework and see what homes are selling for in the area in order to determine if you are making an appropriate bid that will seem attractive to the seller in order to be able to purchase the home.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.
