In
today’s environment the number of “all cash-deals” are increasing as compared
to the overall number of real estate transactions in the United States. Why is
that so? Well, there are several reasons. For one, lenders have tightened up on
credit requirements. Secondly, investors are dominating many of the sales
today, scooping up foreclosures and short-sales. Many of these investors could
purchase the homes for cash or they could finance. The next question is—which
is better?
The
major advantage of purchasing for cash is that an investor or someone
purchasing their primary home can act more quickly and the process of
purchasing will also be simpler because there is less paperwork. Many times
closing quickly can result in a lower price, especially when dealing with a
bank. On the other hand, some banks have a tedious contract approval process
and therefore, it may take more time than the buyer would envision.
Getting
approved for financing before making an offer can often times mitigate the time
factor with regard to cash purchases. If someone has already applied and been
approved, then the time between contract acceptance and closing can be
shortened significantly.
What
is the major advantage of financing a home? For one, a home mortgage is the
number one tax benefit available in America. Depending upon the tax bracket of
the homeowner, one may get anywhere from 15% to 30% of the interest paid back
from the government. There are situations in which a tax advantage is not
important. If the homeowner does not pay taxes or is in a very low tax bracket,
they will not reap the tax benefits. Many investors are self-employed and fall
into this category.
The
second advantage of financing the home is that the homeowner will not tie up
their money. This will help those who are purchasing for investment and those
purchasing a home to live in as well. Investors who finance the homes they purchase
can obviously purchase more homes if they leverage these purchases. Even if
obtaining more homes is not an objective, there are also other uses of this
money. Since home loan rates are very low at the present time and there are
deductions for homeowners who are investors and those who are purchasing their
residences, the capital used for other investment purposes is more likely to
achieve positive returns over and above the net cost of interest paid. The
advice of a financial planner or other advisor is very important in this
regard. Interested in an article listing the tax benefits of owning a home? My
contact information is on the bottom of this page.
Even
if there is not a goal of investing the money that will be freed up through
financing the home, having money in reserve is also important for many
homeowners. One thing that the financial crisis has highlighted is the
importance of cash reserves. Many seniors indicate that they are uncomfortable
with a large mortgage payment. Others recognize that having a few hundred
thousand dollars in the bank is another source of comfort. And these reserves
that are earning returns can actually be put to use by enabling a prepayment of
the mortgage in the long run.
Many
with cash will use it to consummate a quick purchase and then look to leverage
the home later through a “cash-out refinance.” While this strategy can be
sound, we would always recommend meeting with a mortgage professional and
financial advisor before setting up that plan and completing the purchase. Not
only will you get advice on whether a cash deal makes sense, but also will be
able to obtain advice on whether a cash-out refinance is possible and what the
terms will be down the road.
Should
you finance your purchase or pay cash? Obviously, there are several factors to
consider. We would recommend that you not only consider these factors, but make
your decision before you purchase the home. Assessing the best use of your
money in an environment of low rates with your f financial advisor will be the
first step in making an informed decision.
Mike
Ervin
Senior
Mortgage Banker
NMLS # 282715
Office: 650-735-5261
Cell:
650-766-8500
mike@mikeervin.com
Some real estate buyers can confuse the fair market value of a
property with its appraisal value. However, the two terms are not synonymous.
Basically, the fair market value of a property is defined as the highest price
a buyer will pay and the lowest amount a seller will receive for a piece of
real estate that neither party is obligated to buy or sell. Area demand for
real estate also factors into the equation. On the other hand, appraisal value
concerns the value of a home as it relates to square footage, condition, and
age. In fact the appraisal value of a home is an important aspect of real
estate financing as it determines how much a buyer can borrow and if he'll also
need to buy private mortgage insurance for the real estate. That's because the
appraisal value also determines the loan-to-value ratio or LTV. If the LTV is
more than 80%, the borrower will need to buy the insurance. Otherwise, he can
forego the coverage. A good lending company can clear up any confusion you may
have about values and costs too. 
