Smart to offer cash now, then mortgage later?

Question

Hi BP community!

I am researching the smartest ways to buy a new condo or apartment for my mom. With the uncertainty in the market and rising interest rates, my initial thought was to wait 3-6 months to see if either house prices or interest rates start to fall.

After doing some research, however, I am now inclined to start looking more aggressively and prepare to make an all-cash offer without a loan. Then, if and when interest rates start to fall back around the 4-5% range in the next 12-18 months, I can always take out a mortgage at that point and use the cash from that loan to invest in something with a >6% return.

With this strategy, I would miss out on investing the cash used for the initial house purchase in the short term, but going from a 7% interest rate to a 5% interest rate on a 15 year mortgage would save me over $70k. Plus, I am guessing I would be able to negotiate a better purchase price with the cash offer. Lastly, there is no guarantee right now that even safe investments would provide a positive return over the next 12-18 months.

Am I missing something? This feels like a no brainer move to me, but are there any downsides to making a cash offer now and taking out a mortgage later?

Appreciate any advice or insights. Thanks!

Ash Hegde · Answer

Agree with the others, I think cash is best used if you need a competitive advantage in a tough market or you're buying something that is distressed and won't qualify for a loan (and some other circumstances). For what you describe, it's likely best to go with a loan now and refi out when the rates come down. There's no guarantee that it will happen any time soon.

Scott E. · Answer

If I were you I would use a loan now (with ~30% down) and refinance down the road if/when interest rates go down.

Also you talk about rates falling back into the 4-5% in the next 12-18 months. Sorry to be the bearer of bad news, but that's not going to happen.

Karl McGarvey · Answer

I don't buy cash because it takes away all leverage and means my money is not working as hard for me. If I can have 100K over 3 properties instead of one, I'm taking 3 properties on most days of the week.

I also think 4-5% interest rates in the next 12-18 months is highly unlikely, which means you are going to spend a lot longer waiting to get your money back out in a refi. If you are ok having your cash sitting there in the asset then Cash is fine, I just prefer to have mine spread out.

Matt N. · Answer

@Jonathan Saft

I think an important piece of info is missing. Is your mom going to pay you rent? Will the rent cover the mortgage + expenses? If YES and YES then put as little down as you can, and make sure the rent is covering mortgage/taxes/insurance/condo fees/ 5% repairs / 0% vacancy (shes going to stay i assume) / 0% management (assuming you manage it).

Make sense?

If you're straight up buying a house for mom, and you have the cash doing nothing else, I like your plan.. It just might take longer to refi than you want.

Eliott Elias · Answer

Keep your cash close to you right now, market is strange and you don't need cash to be competitive anymore. Use as little down as you can

Smart to offer cash now, then mortgage later?

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