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If you're looking to buy a house in Los Angeles, one of the major things that you have to think about is how to finance the purchase. Is it best to buy your house with cash or using a mortgage?
Each option has its own set of advantages and disadvantages that can greatly impact your long-term financial situation and lifestyle. Whether you choose to buy a house with cash or a mortgage, be sure to consult a financial advisor and real estate professional so they can help you make the best financial decision.
If you would like to understand the pros and cons of buying a house with cash versus a mortgage, then keep reading.
Key Takeaways
- The Los Angeles real estate market is very competitive and on average, homes sell in approximately 37 days and at around 1% above the listing price.
- Whether you choose to buy a home with cash or with a mortgage, first consult a financial advisor and real estate professional so they can help you make the best financial decision.
- Advantages of buying a house using cash are: cash transactions are faster and more straightforward and you get more negotiating power. A disadvantage is that you might miss out on other investment opportunities and your investment portfolio might lack diversification.
- Advantages of using a mortgage to buy a house are: mortgage financing can help you build your credit score and you can also enjoy some tax benefits. Some disadvantages are that you face the risk of foreclosure if you fail to make your mortgage payments and you'll end up paying a significant amount in interest over the life of the mortgage.
Disclaimers
The contents of this article are for educational purposes only. They are not intended to be a source of professional real estate advice. You will find experts on real estate investing here.
Buying a home with cash
Buying a house with cash in Los Angeles might seem like a hustle free process for homebuyers as you won't have to think about getting pre-approved for a mortgage and the closing costs associated with a home purchase. However, before you decide to pay cash for a house, here are a few things you should think about.
Ensure that you have liquid cash in the same place. If you have it invested in different places like stocks and bonds, consolidate it and keep it in a safe place. But before you do so, first speak to your financial advisor so that you can understand the impact of this move on your investment portfolio.
As a cash buyer, it is important that you get a qualified real estate agent who has a deep understanding of the local Los Angeles real estate market to guide you throughout the home buying process. It's one thing to have cash to buy a house, but it's another thing to find a good house that you like.
Since you'll be paying a significant amount for the house, it is important that you get an official bank check that will enable you to easily facilitate payment to the seller. No seller is looking to have several stacks of money stashed away in their home or office.
Next thing would be to get a letter of proof of funds from your bank. This will give you an upper hand over other potential buyers interested in the same house as you. It will also save you the need to share your bank statements with the seller, as they might contain confidential information.
Once you've found your dream house, the final step would be to get a settlement agent. A settlement agent is a third party that can help you transfer the funds to the seller as well as put in record the details of the real estate transaction once everything has been finalized.
Pros of buying a house with cash
Some advantages of buying a house with cash are:
Simplicity and speed of transaction
Buying a home with cash eliminates the need for a homebuyer to go through a lengthy mortgage approval process. This makes the transaction faster and more straightforward. Sellers who receive an all cash offer are also more likely to give you a discount and sell the house for a lower price.
No interest payments
By paying cash and not taking out mortgage debt to finance the purchase of your house, you'll avoid paying mortgage interest payments over the life of the loan, and any closing costs. In the long run, this can help you save a substantial amount of money as the fees charged by mortgage lenders can add up to a few thousand dollars.
Negotiating power
In the housing market, many sellers usually prefer to deal with cash buyers. That is because there is less risk of the deal falling through as a result of the buyer not getting financing as expected from their mortgage lender. As a cash buyer, this gives you more negotiating power in real estate transactions.
Cons of buying a house with cash
Some disadvantages of buying a house with cash are:
Opportunity cost
Buying a house does require a significant amount of money. When you pay cash for a house, it could mean that you're missing out on other investment opportunities that could give you higher returns. Another thing to consider is whether you'll be left with enough money to sustain yourself, to invest or for use in case of an emergency.
You might miss out on tax benefits
Having a mortgage can help reduce the taxes that you pay as payments for mortgage interest are subject to tax deductions. Therefore, if you need to reduce your tax bill, mortgage financing might be a better option for you.
Less portfolio diversification
By investing a significant amount of money in buying a house, your investment portfolio might lack diversification, which is important for minimizing risk in your investment portfolio. In the unfortunate event that the value of the house depreciates, that means you could incur serious losses.
Buying a house using a mortgage
For many potential homebuyers in Los Angeles, buying a house using a mortgage loan is a more sustainable way of acquiring property. This is because a mortgage loan can offer tax benefits and allow for greater financial flexibility as homebuyers can repay the loan in monthly installments.
As a homebuyer in Los Angeles considering mortgage financing as an option, here are some important things to consider.
Your credit score. If you're planning to buy a house using a mortgage, a good credit score can determine how much you can borrow from a mortgage lender. Before you begin the home buying process, be sure to check your credit report and address any issues at hand. If your credit score is below 620, which is considered the minimum by most lenders, then work on ways of improving it so you can meet the loan qualifications.
Before you decide on the mortgage amount that you want to take, first determine how much you can afford. Begin by calculating how much in total you need for the purchase of the house and then look at how much you can comfortably afford to pay back your mortgage lender each month, plus interest. Lenders often use the 28/36 rule whereby, your housing costs should not exceed 28% of your gross monthly income, and your total debt payments should not exceed 36%.
The other thing that you should think about is how much you can put down as a down payment. While 20% is often recommended to avoid private mortgage insurance (PMI), there are other options available for lower downpayment like VA and (FHA) loans.
Consider getting pre-approved for a mortgage before you start searching for a house to buy. This will help you understand how much you can borrow from a lender, and it is also an indication to sellers that you're a serious buyer.
Before you take a mortgage, check and compare different interest rates from different lenders. As you consider the different options, check whether your mortgage loan will have a fixed interest rate or a variable rate over the agreed duration. Ensure that you stay updated on current mortgage interest rates so as to find the most favorable option for you.
As you consider the best mortgage options for you, be sure to account for closing costs, which can include fees for things like an appraisal, home inspection and title searches. These costs can vary significantly.
Pros of buying a house using a mortgage
Some advantages of buying a house using a mortgage are:
A mortgage can help you build your credit
Debt, especially if it's good debt might not always be a bad thing. Taking a mortgage to buy a house can actually help you improve your credit score, as long as you make your regular payments on time each month.
Asset diversification
Before you think about paying cash for a house, consider if you'll be left with any money to cover your living expenses and investments or if you'll be left stranded financially.
Taking out a mortgage can help you get the house that you want, while also taking care of important things like saving up for your retirement, building your investment portfolio and paying for your kids' college. By not tying up all your funds in a single property, you can diversify your investments across various assets and reduce the overall risk.
Tax benefits
Another major benefit of using a mortgage to buy a house is the fact that you'll get to enjoy some tax benefits. Mortgage interest and property tax payments are often tax-deductible, and these deductions can help to lower your overall tax bill.
Cons of buying a house using a mortgage
Some disadvantages of buying a house using a mortgage are:
Interest payments
Over the life of the mortgage, you'll end up paying a significant amount in interest, which can substantially drive up your budget as well as increase the overall cost of the home.
The mortgage process isn't easy to navigate
Getting a mortgage can be a lengthy and strict process as a huge amount of money is involved. After the housing crisis in 2008, banks have enforced very strict regulations when it comes to mortgage lending. However, with a decent income and good credit score, you can still be able to find options that work well for you.
Risk of foreclosure
One of the biggest risks of taking a mortgage is foreclosure. Failing to make mortgage payments because of one reason or another puts you at risk of potentially losing the house.
Consider working with a Los Angeles based real estate agent for a cash or mortgage purchase
The process of buying a home in LA is not easy. Working with an experienced real estate agent who is based in Los Angeles could be of great benefit to you.
Ila Corcoran is a licensed Realtor and the SVP of Real Estate Operations and Advisory services at Bay Street Capital Holdings. With a Bachelor's degree and two minors from California State University Long Beach and a Real Estate License Ila's specialty is in residential real estate.
As a long time resident of Los Angeles, Ila is very conversant with the different neighborhoods in Los Angeles and she can easily help you find your dream house. As a potential homebuyer, purchasing a house with cash or using a mortgage, Ila can help you:
- Find properties that fit your criteria and that are within your budget.
- Negotiate with the seller to get you the best deal in the market.
- As a buyer considering mortgage financing, Ila can connect you to reputable lenders.
- Draft and submit offers, ensuring that all the necessary paperwork is included.
- Assist you with the closing process and ensure that all the necessary documents are properly filled for a successful real estate transaction.
So far in her career, Ila has managed to close $10.4+ million in real estate transactions. She has facilitated the purchase of numerous homes in Los Angeles and the greater Southern California.
If you're looking to buy a house in Los Angeles, get in touch with Ila today and she will help you find your perfect house!
Should you buy a house using cash or mortgage in Los Angeles?
Depending on your financial situation as a potential buyer in Los Angeles, you can choose to either buy a house with cash or using a mortgage. However, before you settle on either option, first consult a financial advisor and a real estate professional. They will help you make informed decisions that set you on the path to homeownership in Los Angeles.
Bay Street Capital Holdings
Bay Street Capital Holdings is a successful Black-owned wealth management firm that specializes in investment advisory, financial planning and risk management. Headquartered in Palo Alto, CA the firm was founded by William Hustn who has been recognized as one of Investopedia's Top 100 Financial Advisors from 2021-2023.
In 2023, Bay Street managed to secure a spot as a finalist in the Asset Managers: Diversity, Equity and Inclusion category during the 2023 WealthManagement.com Industry Awards. This was as a result of their partnership with Resthaven Properties in the real estate sector.
Bay Street was established to advocate for diverse founders.
Sources
https://www.mashvisor.com/blog/buying-a-house-in-cash-vs-mortgage/
https://rocketmortgage.ca/learning-centre/home-buying/all-cash-vs-mortgage/
