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Chrisman's Corner: Whether to Finance a Home Purchase or Pay All Cash

Realtors report that over 30% of home purchases are all cash. JMAC’s clients consult with buyers who are going through that decision making process. For home buyers who are able to pay all cash for their desired home, there can be some drawbacks and compromises when deciding between a cash deal versus a financed one. 
 
The benefits to purchasing a home in cash include a more straight forward deal, strong negotiating power, no appraisal is required, there are no mortgage payments and there are fewer closing costs. All cash deals often allow for quick and clean transactions. 
 
But JMAC’s top clients know the other side of the story. There are benefits to financing a home such as not allocating as much cash in one investment, being able to readily utilize money that would have been tied up in a property, spreading cash exposure among different investments to reduce risk and having tax deductions. Mortgage interest is tax deductible and can reduce the effective mortgage interest rate by 1 percent in most tax brackets. 
 
When home buyers invest cash in 100 percent of the property, they are tying up that money for a single use; therefore it may make more sense to finance part of the purchase, particularly if they realize a return on investment. Partial cash financing on a home will allow for more financial freedom and can prevent a significant loss if the consumer needed to sell the home at a low price. 
 
Our clients know that there are some options to leverage strategic financing such as Fannie Mae’s delayed financing exemption which allows for an immediate cash-out of 50-60 percent of the all-cash purchase price. Choosing a lower LTV and loan period will allow for the best rate and on Jumbo loans, using enough cash for a down payment to reduce the loan amount below $417,000. It may also be beneficial to consider a 5/1 or 7/1 ARM at 50-60 percent LTV for practicable monthly payments and minimal borrowing cost.