But this is not the case in all situations. In fact, the National Association of Realtors recently reported that almost a third of all home sales are cash transactions. This begs the question of why so many people pay cash – and whether you should use this method of shopping if you can afford it.
Why are there so many cash buyers?
According to a March report from the National Association of Realtors, 28% of people buying a home paid for it in cash during the month. This figure was 25% the previous month and 23% a year ago.
There are a number of reasons why a higher percentage of home buyers are paying cash. One problem is that mortgage rates increased. Since it is more expensive to buy, people who can afford to pay cash may choose to do so. At the same time, some people who need to borrow may stay out of the market and wait for conditions to become more favorable. This would reduce the percentage of buyers getting mortgages.
Another reason has to do with the challenge of getting an offer accepted. Competition still remains intense for properties in some parts of the country, which could motivate people to pay cash for homes. When you pay in cash, you have more flexibility. You can close whenever you want and you don’t have to wait for a mortgage lender. It gives you a leg up on the competition if you enter a bidding war.
Cash purchasers can also waive the Evaluation contingency. The NAR study found that 28% of all buyers took this route. This can make an offer much more attractive. Lenders will require an appraisal before approving a mortgage because they want to make sure there is enough collateral to secure the loan. But if the house does not value itself enough, the business can collapse. Sellers often prefer to accept an offer from cash buyers that has no valuation contingency so they don’t have to worry about it.
Should you pay cash for a house?
As mentioned above, there are clear reasons why paying cash for a home can be an advantage. This may allow you to forgo the possibility of an appraisal and make an offer that is more likely to be accepted. And it can save you from paying a mortgage, which is more expensive today than a few months ago due to rising rates.
But there are also big drawbacks. Tied up a lot of money in a house means you can’t invest it in other assets that could have produced better rates of return. It also means that you will trap your money in the house and cannot easily access it.
For many people, even those who can afford it, it just doesn’t make sense to pay cash for a house, because the cons outweigh the pros.
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