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Is Cash > Mortgage?

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Posted On: 05/25/2011

QUESTION:

We have the ability to pay cash for a home. Is that a better choice than getting a mortgage?

ANSWER:

It’s a different choice. Whether it’s a better one or not depends on your preferences.

The National Association of Realtors reports that one-third of all February existing home sales were all-cash deals. This means such buyers had substantial savings, did not need lender help and will not benefit from the mortgage interest tax write-off.

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All cash buyers need not worry about qualifying for a loan because there is no mortgage. At a time when the housing market remains fragile, the ability to buy for cash while others face tough underwriting standards can be a substantial negotiating advantage – meaning you may be able to get a big pricing discount and other concessions.

Perhaps most importantly, those who buy for cash need not worry about rising interest rates or falling income levels. If a rental, a mortgage-free rental property should generate significant positive cash flow, plus the owner can still write-off depreciation, property taxes and other ownership costs.

Whether an all-cash purchase makes sense for individual buyers depends on personal preferences, the alternative uses of your funds and the need to have additional capital in case of vacancies, repairs, taxes, etc. For specifics, speak with real estate brokers and fee-only financial planners.

QUESTION:

You recently quoted figures that said that 92 percent of all borrowers have success with their first mortgage application. Given today’s tough underwriting standards can you re-check the number.

ANSWER:

The number is correct, however the context should be that not all borrowers qualify, some purchase for cash, and of those who want and get financing 92 percent succeeded on the first shot. I should have been more clear.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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