Few things feel as good as being able to pay for a home in cash. But before you commit to paying cash to purchase the home, make sure you set a little aside for title insurance. You may be able to negotiate that the seller pays closing costs, including title insurance, but you might also be able to negotiate the purchase price of the home down if you’re paying cash.
Paying cash does not eliminate the need to buy title insurance on your new home, but you may be able to negotiate to have the seller pay for it.
Buyers Title Insurance Requirements
When someone purchases a home, regardless of how that buyer will be paying, the title company searches public records to ensure the seller owns the home and there are no issues attached to it. However, even the best title company may miss an issue or two, particularly if errors or fraud were involved.
Title insurance protects you as the owner of your home throughout your time there. If an issue later arises, you can file a claim and that problem will be covered. Since title issues aren’t limited to noncash payers, you’ll need this insurance no matter how you pay. But there may be other ways paying cash will save you, such as moving in quicker and negotiating a lower sale price.
Potential Title Issues
When you buy title insurance for a land purchase, you get protection against a variety of issues, including:
- Liens: There may have been a lien against your property that predates your time there.
- Building permit violations: If the previous owner added on a deck or installed a fence without a permit, you could find yourself responsible for replacing it.
- Property line errors: If your lot wasn’t divided properly, you could find you can’t get a loan or make a modification to the home because of that.
- Encroachment protection: Someone could suddenly decide to build a structure that encroaches on your property.
Types of Title Insurance
You’ll see two types of title insurance included in the costs listed at closing: the lender’s policy and the owner’s policy. The lender’s policy is required, but the owner’s policy is optional. It’s important to note that the lender’s policy covers the financial institution in the event something comes up, while an owner’s policy protects you. Unless you opt out of the owner’s policy, you’ll pay a lump sum as part of your closing costs.
Before you decline owner’s title insurance, though, make sure you know the risks. Once the seller transfers the home to you, it becomes your responsibility. It might seem like any claims should go straight back to the seller, but the legal action will be directed right at you. The lender would be protected, but you would be wide open for legal action, which could happen years, or even decades, after you move in.
How Much Is Title Insurance?
Before you decide whether to opt out of owner's title insurance, though, it can help to know how much you’ll be expected to spend. This can vary widely from one closing to another, but you can generally be expected to pay between $1,000 and $4,000 for your policy. In some states, though, you’ll be allowed to shop around and find the best deal.
The good news is that you may not have to pay for the policy at all. You can negotiate that the seller pays some or all your closing costs when you put an offer on a house. This may work better in a buyer’s market than a seller’s market, but the fact that you’re paying cash will work in your favor in either case.
Cash Purchase and Closing Costs
Whether you’re taking out a mortgage or paying cash for your home, you’ll need to budget a little extra for closing costs. Those costs, including title insurance for a land purchase, will likely be between 2 and 5 percent of the purchase price of the home you’re buying. On a $200,000 home, that means you’ll need to allocate $4,000 to $10,000, which can be a significant additional expense.
Closing costs include a long list of fees, such as inspections, attorney’s fees and homeowners association transfer fees. However, there are expenses you’ll be able to avoid by not taking out a loan, including loan origination fees. You can technically even skip appraisals since you won’t have a lender requiring it, but without an appraisal, you could end up paying more for your new home than it’s actually worth.
Long-Term Cash Savings
Although you may still pay for owner's title insurance, there are many other ways you’ll save money by paying cash. If you take out a 30-year 4 percent loan on a $200,000 house, you’ll pay more than $140,000 in interest, assuming you stay in the home for the entire 30 years. That means a $200,000 purchase will end up costing you more than $340,000.
Another way you may save money on a cash purchase is when you put a contract down on the home in the first place. Even in a seller’s market, it comes down to choosing the best offer from those coming in.
You may offer $180,000 on a $200,000 home but say you’re paying cash, while a competing offer is for the full $200,000, contingent on financing. Your offer is guaranteed, while the $200,000 offer may fall through. The seller also knows with a cash purchase there are fewer hurdles, such as a disappointing appraisal that may result in a lender saying “no” to loaning the money.
Cons of Paying Cash
As financially smart a move as paying cash may seem, buyer's title insurance is only one consideration when you’re purchasing a home that way. You may find that by paying cash, you tie up the vast majority of your disposable income, which puts you in a pinch if you need to make repairs to your new home. Even paying closing costs like title insurance could be difficult if all the money you had in savings went toward buying the house.
Another consideration, whether you buy title insurance for land purchase or not, is whether a home purchase is the best investment for your funds. As secure as it can feel to not have a monthly mortgage payment, you may find that putting those same funds into a 401(k) or Roth IRA will be a better long-term return on your investment, especially if you make a large down payment and opt for a 15-year mortgage rather than one that extends for 30 years.
Recurring Cash Costs
Paying cash for a home doesn’t mean you won’t have ongoing payments. You may pay owner's title insurance at closing, but you’ll see recurring expenses long after you’ve signed on the dotted line. One of the biggest is property tax, which averages $3,296 per year nationwide, or just over $274 a month.
Another expense you’ll see in addition to buyers title insurance at closing is a homeowners association fee, if the home you buy is in a neighborhood with an HOA. Once you’re in the home, though, you’ll probably be hit with a monthly HOA fee, which is usually at least $100 each month. In addition to this is the homeowners insurance you carry on your home to protect against unexpected damage due to events like fires, tornadoes and burglaries. Expect to spend hundreds of dollars on that.
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