In a typical market, cash sales average close to 25% of the real estate purchase transactions, though the number has been much higher during the past few years.  Many of these investors and homeowners 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 winning in a competitive bidding situation or obtaining the home at a lower price, especially when dealing with a bank.

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.

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. Depending upon the level of mortgage rates and the importance of tax deductions for the homeowner, the capital used for alternative investment purposes can be 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? Just contact me for a copy.

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 2008 financial crisis 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. There are programs which will allow the extraction of cash more quickly after a home is bought for cash.

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 financial advisor will be the first step in making an informed decision.