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The Pros and Cons of Paying Cash for a Home

Pros:

No credit history required - In situations where you do not have the ability to get a reasonable loan, and then paying cash might be the best option.

You actually own your house - Psychologically there is a benefit in knowing that you own your house free and clear. You also free up quite a bit of income monthly because you will have no mortgage.

You are not leveraged - Buying a house with cash means that if the value of the home goes up or down by 10% then the money you put in also goes up or down by 10%.

You can possibly negotiate a better deal - When you have the cash to pay for the full amount of a house then it means that there will be no contingencies on obtaining a home loan. The amount of savings you obtain from a seller from an all cash transaction versus obtaining a home loan needs to be weighed as a significant difference when making your decision.

Cons:

Less liquidity - Having a mortgage lets you free up your cash for other investments. It is also not wise to put all your liquid assets into buying a house with cash because it is harder to free up that money in case you need to use it. There are drawbacks to paying for a house in full, though, the most important of which is illiquidity. If you need to get your hands on cash quickly to cover something unexpected -- sudden illness, a family member in financial trouble, legal entanglements or a natural disaster -- you can only get it out of your home by selling or borrowing against the property. Retirees in particular can find it difficult to obtain a second mortgage, or even a home-equity loan, because they have no source of steady income.

Risk free savings - Depending on your financial situation, that money could be earning much more by sitting in a relatively safe, tax-advantaged investment such as a municipal bond. The outlook in Kitsap, Pierce and Mason Counties are different than other counties across the state or on the other side of the country. Home prices are tied to employment. For example, if the Detroit, Michigan job market is feeling a pinch (which it is), the home prices in Detroit, Michigan may be down as well (which they are). The banks and mortgage companies are currently sitting on a record numbers of shorts sales and foreclosed properties. If they release all of the properties where you are buying a home; prices could plummet. Thus, your monies could also… Leverage goes both ways, so if the value of the home goes up, then the percentage gain of an all cash buyer would be comparably lower than the person who purchased with a mortgage that has less risk in the transaction.

No tax advantage - Mortgage interest is deductible on income taxes in the United States. If you are in a high tax bracket that benefit lessens the bite of the interest by quite a bit. In contrast, buying a home with cash does not give you any tax deductions.

Estate Planning - Another big misconception about buying a home in cash deals with is estate-planning. People often will buy a home with cash and then later add a child's name to the Deed of Trust, believing that when the parent dies the home will transfer to the child tax-free. Think again… If you bought the house, paid cash for it, then put your child's name on the Deed; you'll be subject to gift tax.

In an all cash purchase you need to consider three investment criteria’s:

· Return

· Risk

· Liquidity

Jerry Lampert

Olympic Area Manager USN - RETIRED

104 Tremont Street, Port Orchard, WA 98366

Office: 360-874-1239 E-mail: jlampert@repmtg.com