All Cash or Loan-Enabled Home Purchase

The trend of homebuyers using all cash offers is on the rise. In fact, cash offers for home purchases reached a 10-year high in February, accounting for 32% of all home sales.

“Cash offers are certainly appealing to home sellers and they can make an offer more competitive,” says Kevin Kaminski, vice president, regional residential sales manager at Northwest Bank. “But whether they make sense for the buyer depends on multiple factors.”

Cash offers do provide some advantages during the homebuying process. However, over the long term, using a loan enables buyers to preserve their cash and leverage it for other purposes, such as retirement investments or college savings. There’s no right answer; instead, homebuyers need to determine which path makes sense for their financial plan and goals.

The all-cash crush

According to the National Association of Realtors, most cash buyers are investors or people purchasing second homes. All-cash transactions comprised 56% of the sales among vacation homebuyers, while 42% of buyers purchasing investment properties paid cash.  

“In those situations, using cash can be a smart move,” Kaminski said. “For example, buyers may be purchasing a property that doesn’t qualify for traditional financing, or they’re planning to flip the property and sell it quickly.”

However, for the past two years, the number of primary residence buyers using cash has increased to 19%. The NAR reports that these buyers usually owned and sold a home, using the proceeds to purchase their next one. The ability to pay cash is largely due to the significant increase in home prices in many parts of the country, giving owners a lot of equity to leverage.

Interestingly, people using cash to buy their primary residence were more likely to move far distances. Nearly 30% of cash buyers of primary residences reported moving 500 miles or more from their previous home. Their ability to use cash suggests they’re moving into a market with relatively lower median home prices than where they were before.

Cash advantages and consideration

As Kaminski noted, cash offers do provide buyers with some advantages. For instance, in a competitive real estate market, an all-cash offer is often more enticing to sellers. That’s because a cash offer doesn’t require the sellers to wait for the buyers to get an appraisal and obtain a loan.

What’s more, cash offers aren’t contingent on another property selling. “In a hot real estate market where multiple offers are common, a cash offer is going to stand out,” Kaminski says. With cash, the sale can close within a week or two — instead of the standard month (or more) that financed purchases require.

But while cash may be king to sellers, whether to use cash or a loan is an important question for buyers. If cash is an option, Kaminski says homebuyers should consider what else they have planned for those funds. “If you have a near-term need, such as paying for a wedding or college, or a longer-term need, such as retirement savings, then you may want to keep that cash,” he says.

It’s also important to consider the cost of using your cash versus investing it. Multiple factors inform your return on investments, including your risk tolerance, investment vehicles, advisory fees, interest rates and, obviously, market performance. In some scenarios, spending your cash is an opportunity cost — you’d earn more keeping it in the market versus using a loan to finance your home sale.  

“There’s often an advantage to using the bank’s money, though it’s more significant in a lower interest rate environment,” Kaminski said. Currently, the higher interest rate environment makes using cash more appealing. However, buyers should still consider the tradeoffs of cash versus financing.

The case for financing

For most homebuyers, cash is not an option. This is especially true in regions where median home prices have skyrocketed, and buyers don’t have six or seven figures worth of cash at their disposal. In this case, traditional financing — home mortgages — remains the only option.

And homebuyers who do have cash should still consider financing as an option. “The number of loan programs and different types of financing available means buyers can often tailor their financing to what works for them,” Kaminski said. Taking advantage of a mortgage to buy a home lets you preserve your cash and continue earning money from your investments.

Buyers can often combine cash and financing to make their home purchase a reality. With a substantial cash nest egg, buyers may be able to put more money down on their home and reduce the amount they need to borrow.

In addition, buyers who want to make a more competitive offer in a hot real estate market can explore delayed financing. These products enable buyers to pay cash for their homes upfront and refinance into a mortgage afterward.

 “It’s good to know about all your options,” Kaminski said. “The option that works best for you may not be the best for someone else and vice versa.”

Asking the right questions

If you’re debating whether to use cash or a loan to purchase a home, Kaminski recommends asking yourself the following questions:

• What is the purpose of the property you’re buying and how long will you own it?
• Do you need that cash for another purpose?
• Are there any penalties for accessing that cash (i.e., are you pulling it out of a retirement fund, etc.), and what impact does that have on your financial plan?
• What interest rate is available to you?
• How does that compare with the rate of return you could earn by investing the cash?
• Can you explore delayed financing, and would that make your home offers more competitive?

Cash offers make up a key component of today’s real estate economy. But whether they’re the right move for you depends on your own financial circumstances, needs and goals. Interested in learning more about ways to finance a home purchase? Connect with Northwest Bank today.