I adopted a dog a bit ago and while I’ve been out walking him, I’ve seen a lot of for sale signs on houses and the prices are shockingly low on a lot of 'em. In fact, some are so low that I could just buy one with the cash in my savings and get out of the apartment life and have all the problems and issues of a home owner.
I’m not using a real estate agent (or REALTOR®) and have legal insurance through ARAG which covers:
So what else should I know or prepare financially for when it comes to the buying part (as opposed to what to do when I actually own the home)?
I bought a house (in South Minneapolis) last summer for cash. Use an agent and its no different really than having a mortgage. But if you want to arrange for the closing and title search yourself, you can do that. And if you are writing a check (well, getting a cashiers check) it won’t be a big deal financially at all to buy the house. Note that without a loan, you won’t be required to get an appraiser - you want one anyway. And an inspector. A good one (I can look up the woman who did my inspection if you want).
The big problem is a lot of the houses where the prices are shockingly low have issues. We looked at a LOT of homes last year to find one that was in a condition we were willing to accept. (OK, I looked at a lot of homes - I don’t live in the one we bought, my Brother In Law does). The one we purchased was clean, with a new roof, newer furnace, and in good shape - and the neighborhood is a pretty nice South Minneapolis working class neighborhood with well maintained, but small, homes. Of course, they just did a drug raid on one of the houses down the street.
Make sure you have an inspection so you know what you’re getting into structurally. The inspector should also check the furnace, AC, water heater, plumbing, and so on.
For some reason, property taxes are easy for me to remember. Its the homeowners insurance I forget. The property tax comes in a different envelope - the insurance looks like my car insurance, which I autopay.
If you have the cash to buy the home, and doing so would not jeopardize your future financial security (e.g. dipping into retirement funds), then why *wouldn’t *you pay cash? Paying the purchase price in cash is better than paying the purchase price plus interest on credit.
I can’t think of a downside, either - if you look at the figures, paying a mortgage on a house costs you practically (if not the whole) price of the house over again in interest. Screw the banks - don’t give them their cut. Paying cash puts you in a better position to sell in the future, too - you would only be concerned with how much money you can recoup, not how much you still owe and walk away having sold the house and still owing money to the bank if you had to move.
I’d still use a lawyer (or the legal insurance you mentioned) and a home inspector.
I have thrown away tens of thousands of dollars on mortgage interest. If you want a house and find one you like, buy it with cash. I am very jealous of your position.
Depending on what you’re doing with your savings, it might be worthwhile to get a small mortgage for a short term. Interest rates are very very low right now. And if you do something like a 50% down payment, you’ll be able to get the very best rates. Since you don’t need the mortgage, you will be in an excellent bargaining position with the bank when it comes to negotiating the loan. Be sure to shop around.
If the house is listed on MLS, get a buying agent. This is what we did when I bought my condo. He doesn’t get paid off the top, so it may make the asking price less negotiable, but he does everything…inspections, real estate lawyer, the works. If you’re as clueless as me (and perhaps you’re not), I’d say it’s the way to go.
You aren’t factoring in the cost of not using the cash for something else. The stock market has earned around 10% over every rolling 20-year period since 1929. Mortgage rates are somewhere south of 10%. So, by investing in the broad stock market and getting a loan, you can pocket the difference (essentially).
Some people get their jollies by not having any debt, and that’s fine, but those jollies aren’t free.
Money sitting in an account is worthless. It does absolutely nothing for you until you withdraw it and spend it. So considering that, the real question you want to ask yourself if whether you want to spend the money on a potential disaster (layoff, house fire) or a home.
Then you want to consider if the tax implications are better for you or worse. Interest is tax-deductible right now. So for every dollar you give to the bank in interest, you get a quarter back from Uncle Sam from the federal government and possibly more from your state. Reminder: This only counts if you itemize your deductions. If the standard deduction is more than you current itemized list, then this bonus is weaker, or nonexistent in the case that this deduction still doesn’t put you higher than the standard deduction.
Then consider what you could do with the money in the bank if you took the mortgage. Can you invest it in something? A CD? Stocks? Social lending? If you can earn yourself a higher return (minus the capital gains taxes!) than the bank will charge in interest, then go ahead and borrow the money. Hell, in that case, borrow the money whether you buy the house or not!
Finally, remember that there’s usually an origination fee of, like, 3% on any mortgage you take out, so you’re already in the hole 3% right from the start.
I’ll leave the math and risk analysis up to you, but just remember that you can’t borrow money any cheaper than with a mortgage, so if you ever want to borrow money, this is the way to do it.
Investments (historically ;)) are more volatile than real estate.
And take out a HELOC when you buy the house. Instant access to your money.
Mortgage vs. paying cash - when you have the luxury of choice - really comes down to personal preference. And it depends on your discipline regarding investing, your need for security, and your personal cash flow situation. If you aren’t disciplined regarding your money, you might do better tying it all up in something that isn’t very liquid. If you crave security, knowing your house is paid for is a great stress reliever. And if your cash flow is uncertain, not having house payments each month can make it a little easier to plan.
A financial and tax advisor would be a good thing to have for this transaction. Likewise, a real estate agent would, too. Do you really feel confident to pit your limited experience in this minefield against a professional who works with it everyday?
It depends upon your state, but it may be possible for you to hire a real estate agent to represent your interests over the seller’s. He may see things that you overlooked, and you’ll be glad you did.
My bias: I am not a financial advisor, but I am a real estate agent.
I’m pretty disciplined. I paid off my mortgage for the cash flow. Then bought a house in cash. Then got my mortgage back because interest rates were 4% and good blue chip companies were paying 6% in dividends.
But mortgage rates might be significantly higher later. Waiting is good if you expect rates to drop, but that doesn’t seem very likely. If you get a mortgage now, you lock in a low rate and can manage a portfolio to get a higher rate.
Another thing to consider: this really low priced house may need a lot of work. Having some cash left over can be used for improvements, which will also increase the value of the house.
