In a competitive market like Colorado, we see anxious homebuyers turning to cash offers to win their bids. Every year, about 15% of the successful bids on homes here are made all in cash, according to the statistics from the Denver Metro Association of Realtors. It’s likely an even higher percentage in the luxury home market.
Some buyers liquidate an investment, buy the home, and then finance afterward. But there’s a high cost to going all cash, or even using more cash than you need to.
Here are four reasons to consider financing your home rather than using cash. If you decide to keep your hard-earned money in the markets, Eave can help you craft a financed bid with a 10-20% down payment. We’ve built in the features, from a guaranteed close to some of the fastest approvals, that help you compete with cash buyers.
- Reason One: The transaction costs you pay when you cash out and/or buy back in. Say you intend to put your cash back into the market in a few months, after you’ve finished mounting the TV and planting your first flowers. But you will have paid transaction costs to sell whatever your investments were, and then to buy them again. Depending on your brokerage and exactly what you’re cashing out, those costs can be as high as a few hundred or a few thousand dollars. But this is just the beginning.
- Reason Two: You may face tax liabilities. If you withdraw money you have invested through a taxable account that’s been quietly growing at 6 – 10% a year, you might face a nasty surprise when it comes time to file your taxes. If you’re using money from a tax-deferred account, like a 401(k) or an IRA, you’ll face an even nastier one: a 10% penalty on top of the taxes you owe. We recommend that you talk a decision like this over with your accountant before hand.
- Reason Three: You can lose a lot if you miss the biggest day in the market. Some things you can’t control. You might one day have a great reason to cash out some of your investments – paying for a wedding, helping your mom move into a nursing home, or getting the downpayment you need. But cashing out so you can buy a house all in cash, when you don’t need to, is something you might regret later. Many studies show that, as The New York Times pointed out in 2008, if you miss a handful of the best days in the market, you could lose as much as half your gains.
- Reason Four: You could be hurting your financial future if you sacrifice too much of the chance to invest in order to put more cash into your house. The 10-year annual average return of the S&P 500 is 8.04 percent; mortgage interest rates have been between 3 and 7 percent over the same time period. Meanwhile, returns on real estate vary widely by locale.
And remember an even more basic rule: The likelihood of punting. Even if you intend to take cash out of your house and put it back into the market, inertia could well take over. You have a lot to do, after all, now that you’re a homeowner.
We understand why people want to use cash: They worry an offer backed by a typical mortgage company (Eave is far from typical) won’t be accepted as readily. For qualified buyers, we create offers as good as cash by enabling buyers, with their advice of their agents and lawyers, to remove the financing and appraisal contingencies. For advice and information on how Eave can help you craft a winning bid that competes with the cash buyers in Colorado, start an application with us: https://helloeave.com/referral/