Making an All-Cash Offer: Should I Still Get a Mortgage?

So you’re in a bidding war, and you know your offer needs to stand out. For homebuyers who have the cash, making an all-cash offer can get you across the finish line and into your dream home fast. Making an all-cash offer removes the financing contingency and puts you in a competitive position. When sellers are comparing offers, your all-cash offer will show the seller you’re serious and provide a fast close.

Benefits of an All-Cash Offer

All-cash offers can be a strategic move, especially if you’re in a bidding war. Of course, this assumes you have enough cash to make the offer, and it won’t leave you house-poor after you become a new homeowner.

First, making an all-cash offer can give you a competitive edge against other buyers and makes your offer stand out. All-cash offers show the buyer that you’re serious and don’t need approval from any lenders to close. All financial contingencies are removed at the onset.

Second, you don’t have to worry about financing or paying a mortgage once you’re a new homeowner. Living mortgage-free is a goal for many people for various reasons. Living mortgage-free might give you more freedom in your career, open up lifestyle choices, or even the opportunity to invest your monthly cash flow.

Is it smart to make an all-cash offer and live mortgage-free?

This is the question our clients have been asking recently. Cash offers are attractive to sellers, period. Making a cash offer promises a fast close, fewer contingencies, and gives the buyer a competitive edge.

However, once you’ve won the bidding war, are there better options for all that cash? What if you don’t want to tie up hundreds of thousands of dollars in one asset? Paying cash to own your primary residence outright might not be the best move for a handful of reasons.

Years ago, homeowners celebrated the day they could pay off their mortgage and live debt-free.

Today, borrowing against your home with a low-rate mortgage can be a faster path to financial freedom. The right mortgage can help you leverage low-interest debt to invest in a second property, securities, or start a business. What’s more, there are financial and tax advantages in carrying a mortgage on your principal residence.

If you’d like to invest elsewhere, applying for a mortgage after you own your home is a smart alternative.

Cash-Out Refinancing vs. Delayed Financing

Once you own a home outright through an all-cash offer, you can still refinance. Basically, instead of replacing one mortgage with another, you’d be applying for a new mortgage. As with any mortgage, your home is the collateral for the loan. What’s more, your loan-to-value ratio is already in perfect shape. 100% value and 0% loan.

Now you have options.

Borrowing against a home you already own that doesn’t have a mortgage is considered a cash-out loan. However, mortgage lenders only allow cash-out refinances to owners whose name has been on the title for at least six months.

Delayed financing is a new option that makes it easier for all-cash buyers to turn around and apply for a mortgage right away after closing.

In most cases, the homeowner will pay a slightly higher rate (0.125 to .25 percentage points higher). You might also need to provide additional documentation and verify the source of funds used when you made an all-cash offer.

The Appraisal Conflict

One of the issues that often comes up is the appraisal. Home appraisals are still a requirement for most mortgage lenders. If you over-paid when you purchased your new home, the appraisal might come in lower than anticipated.

This isn’t necessarily a bad thing. It simply means you should be prepared for a lower value when you apply for a mortgage. That said, if there is a disconnect between the value of your home and what you paid for it, the underwriting process might be slightly more strict.

If the value of your home has jumped since your purchase, appraisers remain cautious. Home appraisers will look for comparable sales within the area over a specified time period.

Regardless of how much you paid for the house or what Zillow might say, the formal home appraisal will determine the value of your home in the eyes of the mortgage lender.

What’s Next

Making an all-cash offer can give you a competitive edge in today’s housing market. Refinance with delayed financing for the best of both worlds: win the bidding war and still take advantage of low mortgage rates. We partner with mortgage lenders in California, Oregon, Washington, and Colorado, and we can help you get the right mortgage. Give us a call to get started.