WHAT GIVES YOU THE BIGGEST BANG FOR YOUR BUCK?
Montecito homebuyers sometimes ask if they should pay cash or take out a mortgage when investing in real estate. While most of my clients opt for a cash purchase, that might not be the best option for everyone. Of course, always discuss financial matters with your accountant or financial attorney before you sign any document. Meantime, here is a brief overview of the age-old question: cash vs mortgage.
Advantages of Paying Cash
Homebuyers who pay in cash don’t have to pay interest on a loan. They also avoid paying any closing costs on their real estate investments. Both are good money savers, for sure. Other cash saving advantages include no mortgage origination fees, appraisal fees, or other fees charged by lenders.
Then there is the fact that sellers are usually partial to homebuyers who are paying in cash. That’s a good thing in this climate where inventory is still low. Purchasing a home in cash can put you in front of the line of buyers who are interested in a particular property.
Home sellers also appreciate the fact that a cash buyer’s home is not leveraged in the deal. This allows a homeowner to sell their house a lot easier, even at a loss, regardless of market conditions. Sellers also welcome the fact that a cash real estate purchase has the flexibility of closing faster, if desired, then one involving loans.
“In a competitive market, a seller is likely to take a cash offer over other offers because they don’t have to worry about a buyer backing out due to financing being denied,” says Peter Grabel, managing director, MLO Luxury Mortgage Corp in Stamford, CT. “These benefits to the seller shouldn’t come without a price. A cash buyer might be able to obtain the property for a lower price and receive a ‘cash discount’ of sorts.”
The not so great news about paying in cash is that it could limit your options if your financial outlook changes down the road. For example, if the home turns out to need major repairs or renovations, it may be tough to obtain a home-equity loan or mortgage after you have purchased the property for cash. Think about it. You don’t have a crystal ball to determine what your credit score will look like in the future. You don’t know how much the home will be worth later.
Advantages to Taking Out a Mortgage
On the contrary, Montecito homebuyers who choose to finance their real estate investments can enjoy significant benefits, albeit completely different than if you paid for a property in cash. In addition, there are many financial factors to consider before applying for financing.
“Even if a buyer has the ability to pay cash for a home, it might make sense to not tie up a lot of cash to purchase real estate,” says Grabel.
What do you do when you have paid cash and it comes time to sell? Selling a home purchased with cash can be problematic. Owners who have stretched a lot financially to buy said property can end-up in serious trouble.
By opting to take out a mortgage, you give yourself more flexibility. There used to be tax advantages to mortgages because homeowners could claim their interest rates as tax deductions. These have been substantially modified under the recent tax code changes.
“If cash buyers decide it’s time to sell, they need to make sure they will have sufficient cash reserves to put down as a deposit on the new home,” says Grabel. “Cash buyers need to be sure to leave themselves plenty of liquidity.”
Of course, with a mortgage, you end up paying more overall, since it comes with interest payments that do add up over time. But, depending on the state of the stock market, saving on mortgage interest by paying cash might not be the most financially prudent way to invest. You could actually be saving less than that cash might have earned had you taken out a mortgage and invested the cash you didn’t spend on your house in stocks.
The bottom line, make the decision that is best for you and your financial portfolio. You can’t go wrong by doing that.
Don Nulty-Designed Spanish Masterpiece
Whether you’re paying cash or mortgage, I have an amazing new listing to share featured at the top of this blog. This magnificent Spanish Colonial Revival-style estate, designed by award-winning architect Don Nulty, might be the Montecito home you’ve been looking for.
This very private estate set on approximately two acres is located in our coveted “Golden Quadrangle.” Although it offers supreme privacy in the foothills, the estate is just minutes from the charming Upper Village. That will offer the new owner easy access to schools, services, and our pristine beaches.
Imagine stunning ocean, island and mountain vistas as well as dramatic sunsets right off your balcony! The estate is also conducive to the indoor-outdoor lifestyle so popular in our little slice of heaven.
No expense was spared in creating this masterpiece. In fact, almost $2 million was spent on custom cabinetry and stonework alone. Native sandstone can be found accented throughout. One hundred-fifty-year-old roof tiles, imported from Colombia, were also used. There are Saltillo and Moroccan tiles, antique wood beams, high ceilings, top-of-the-line light fixtures and more.
Then there are the stunning grounds. Mature oaks surround the property, complemented by emerald lawns and meandering walking paths. In the backyard, you’ll find a lap pool, jacuzzi, and outdoor shower, plus a sizable vegetable garden, gardening shed, and secluded pergola. There’s also a guest apartment with its own entry.
I have several additional luxury properties in Montecito listed on my comprehensive website. So, if you’re a Montecito homebuyer and see any you’d like to tour, just call me at +1 805.886.9378 or email me at Cristal@montecito-estate.com and I’ll take care of the rest, whether you pay in cash or take out a mortgage. Remember to talk to your financial advisor about which way is best for you.