Buying a home is an exciting prospect, but the road to homeownership is rife with challenging decisions and potential pitfalls, one of which is deciding whether to make an all-cash offer or secure a mortgage.
For many potential homeowners, especially first-time buyers, getting a pre-approval for financing is much more plausible than getting together the money necessary to pay cash for the entire sale price.
However, you should consider it before undertaking the home-buying process, even if it means waiting a bit longer.
We’ll explain the pros and cons of an all-cash offer vs. a mortgage, from gaining an edge in an increasingly competitive market to the immense savings on interest.
All Cash Offer vs. Mortgage
The difference between an all-cash offer and a mortgage depends on how you pay for your new home.
All-Cash Offers Explained
An all-cash offer means you have the necessary liquid funds to purchase the property outright without needing mortgage lender approval or the underwriting process.
While making an all-cash offer is a dream scenario for most sellers, it’s not typically feasible for the average buyer.
However, for homebuyers who can afford it, this approach can simplify the home sale and make their offer more attractive to sellers.
Conversely, a mortgage means borrowing money from a financial institution to pay for your home and then repaying that loan over a certain amount of time, usually 15 or 30 years.
When you take out a mortgage loan, a lender provides the funds upfront for the purchase and uses the real estate as the collateral.
Taking out a mortgage allows you to buy a home without having the total purchase price in cash at the outset.
Instead, you’ll need a down payment, which ranges between 5% to 20% of the asking price, depending on factors like your credit score and the current housing market.
Then, you’ll make monthly mortgage payments over time.
Benefits of an All-Cash Offer
Cash purchases have seen rapid growth as mortgage rates continue to rise.
From 2020 to 2022, they increased from 23% of single-family and condo home purchases to 36% as buyers try to avoid the sky-high interest that comes with a financed offer.
Let’s explore a few reasons why paying cash is becoming the go-to home-buying strategy.
More Attractive to Sellers
One of the primary benefits of an all-cash offer is that it’s more appealing to home sellers because they negate the risk of the deal falling through due to issues obtaining a loan.
If your heart is set on a particular home, sellers are more likely to accept a cash offer even if there’s another pre-approved offer in the exact same amount.
That means you’ll stand out amongst other buyers and avoid the inevitable bidding war that tends to crop up in highly competitive real estate markets.
Your Credit Score Isn’t a Factor
A poor credit score isn’t always indicative of low wealth, and with an all-cash purchase, it’s utterly irrelevant to whether or not you can purchase a home.
There are countless instances of people having a sudden windfall or just waiting out the 7-year time frame for derogatory remarks to drop off their report.
With a cash offer, you don’t have to worry about having a particular credit score, nor do you have to deal with the sudden hit to your rating when lenders start pulling your reports. Your credit remains firmly intact.
The process of pre-approving, processing, and underwriting a loan can take months, during which you can’t make any large purchases, change jobs, take out a loan, or do anything that might make the lender question your financial responsibility and stability.
With an all-cash offer, not only do you avoid those stipulations entirely, but the process is much faster.
The transaction can close within a couple of weeks, rather than the minimum 30-45 days it would take with mortgaged buyers.
As a cash buyer, you become the immediate owner of the property as soon as the closing is complete. There’s no risk of foreclosure and no bank holding a lien on your home.
This reduced risk can bring a sense of financial security because if you lose your job, you don’t have to worry about losing your home too.
Savings on Fees
Cash sales can save homebuyers a lot of money in the long run on mortgage-related fees, some of which include:
- Origination Fees: The lender charges an additional 0.5-1.0% fee to process your loan application.
- Appraisal Fees: The cost of hiring a professional appraiser to estimate the property value. Loan agencies use the appraised value to ensure the seller’s asking price is reasonable.
- Private Mortgage Insurance (PMI): A policy that protects your lender if you default. PMI policies typically only come into play if your down payment is less than 20% of the total sale price. You can request to cancel the PMI after your loan balance is 80% of the original value.
- Interest Rates: Mortgage rates vary vastly based on factors like your credit score, the down payment, which state the property is in, the loan life, and the amount borrowed. There are many tools online you can use to check the current national average to get the current rate.
For example, on a 30-year, $100,000 loan at 5%, you’d pay an additional $51,777 in interest alone.
Once you tack on the origination fees ($500-1000 on a $100k loan), appraisal fee ($200-500, on average), and PMI ($100-2,000 per year on a $100k loan), and your $100,000 mortgage suddenly gets much more expensive.
Benefits of a Mortgage
While cash sales are becoming more popular, mortgages still dominate.
Let’s review a few reasons why this long-term home-buying option still aligns with many people’s financial goals.
Mortgage holders can benefit from state and federal incentives allowing homeowners to claim their interest payments and closing costs as deductions on their tax returns.
These incentives help offset some of the cost of homeownership, making it more affordable in the long run.
State-level deductions vary, but federal deductions as of the 2022 filing year can include the following:
- A Mortgage Interest Deduction of $750,000 for joint, single, and head-of-household filers or $375,000 for married couples filing separately.
- The Home Equity Loan Interest Deduction allows homeowners to claim interest paid on HELOC loans up to $750,000 if used to build onto or improve the home.
- Points Deductions for the loan origination fees, but you can only deduct these over the loan’s entire life.
- Property Tax Deductions up to $10,000 in combination with state and local income and sales deductions.
Remember that there are limitations, such as when the loan originated, so carefully review the relevant IRS codes to understand the scope of your possible deductions.
Preserve Liquid Assets
Mortgages allow you to purchase a home without completely depleting your savings account, which can appeal to new homeowners with other upcoming financial obligations or who are worried about paying for unexpected expenses.
Therefore, you should be sure you have a nice nest egg after paying the purchase price to keep your accounts in the black.
Improve Your Credit Score
Creditors prefer borrowers with a varied credit profile rather than only consisting of revolving lines of credit.
Making your monthly mortgage payments can increase your credit score over time, though it will take a hit when lenders are hard-pulling your score during the application process.
A strong credit score makes it easier to obtain loans, so a mortgage can be a solid strategy for broadening your future financial opportunities.
Benefits of an All-Cash Offer Over a Mortgage
If you’re still debating whether you should start applying for a mortgage or save for an all-cash offer, we’ve summarized the benefits of an all-cash offer over a mortgage to put things into perspective.
- Cash offers close faster than a mortgaged offer because they skip the application and approval process.
- Sellers prefer cash offers over mortgaged offers because there’s less risk of the deal falling through due to the buyer having issues securing a loan.
- They offer drastic cost savings by eliminating loan origination fees, private mortgage insurance, and interest payments.
- You don’t have to stress about bank liens, the risk of foreclosure, or defaulting on your loan. Once the closing is complete, the property is yours until you sell it.
- Your credit rating isn’t a factor, and you won’t have to deal with hard pulls lowering your score.
The Bottom Line
Although obtaining a mortgage is a more accessible path to homeownership for many individuals, opting for all-cash offers presents notable advantages that might justify postponing the purchase until you can afford to pay the full price upfront.
Discover the benefits of selling house for cash by contacting Mill City Home Buyers. You can receive a complimentary cash assessment for your Minneapolis property today and liberate yourself from the burden of the selling process by accepting cash offer on your house.