It’s a tempting scenario: having accumulated a considerable amount of cash, you find the ideal property, agree that the asking price is within reason (even in this hayday of seller favorable pricing) and prepare to sit down to make an all-cash offer. By buying it outright with cash, you are definitely in an advantageous position against other possible offers that have a mortgage contingency. The future looks like ultra-smooth sailing, financially speaking. No mortgage payment. No interest. No monthly insurance set-aside or property tax pre-payment impounded into some escrow account the mortgage company insists upon. And you really own the place-- no strings attached.
Although there are undeniable plusses to an all-cash purchase, there are at least three opposing reasons why it would be prudent to at least think twice before writing that offer:
1. Diversification. Investment counselors never fail to preach the advantages of diversification. To the extent that buying your property with cash means you will be funneling the lion’s share of your liquid assets into a single investment, it limits your freedom to explore other avenues. If a business opportunity beckons, you might wind up borrowing against your home equity—in which case you could have saved the trouble (and extra expense) by taking a home loan in the first place.
2. Leveraging your position. You needn’t make an all-cash offer for your solid bank balance to contribute to the way you will be viewed by lenders. The home loan terms you are offered should reflect your substantial financial standing. When lowered interest rates are offered, the financial consequences are worth factoring into the big picture.
3. Taxes. The federal tax reform passed in 2017 may have limited the interest tax deduction to $10,000, but that’s still a five-figure lightening of the load come tax time—one which reduces a home loan’s bottom line cost.
The number of cash offers in Greenwich during this uber-competitive time in real estate has significantly ramped up, and mainly for reason of appealing in the strongest way possible to the seller. It is no secret, that most sellers would choose a cash offer over a competing bid that require lender approval. Be sure to weigh all the pluses and minuses for your own situation, before committing to an all-cash offer.