Bank Home Loan vs. Spot Cash when buying a real estate property

Cash payment

     Securing a house and lot in the Philippines is a goal that many Filipinos strive to achieve. A property purchase is a significant financial accomplishment for anyone, whether they are newlyweds who want to start a family in their own home or young-adult children who want to give back to their parents with a house and lot. However, buying a home is not going to be a walk in the park. It’s a tediously long drive with a few major potholes in the road. There are several options to consider, such as buying a house with cash vs. getting a mortgage or getting a bank home loan vs. using spot cash when buying real estate.

As a result, aspiring real estate property owners seek and are provided with excellent alternatives that would best suit their current financial situation while still allowing them to secure the affordable house and lot of their dreams. If you have more than enough money to buy a home outright, we’re sure you’ve heard of spot cash down payments, which cater to property buyers who can offer a relatively higher down payment amount in order to qualify for discounts and other benefits.

Buying a house and lot requires a lot of decision-making, which is why many people regard the process as complicated or even exhausting. Once you’ve decided on a location and a house and lot for sale that suit your tastes and budget, you must pay the reservation fee and decide whether you want to pay for it in the short or long term.

Buying a house with cash vs. Getting a Mortgage

Everywhere you look, you hear about how bad it is to be in debt. So, it’s natural to believe that buying a home with cash—or sinking as much cash as possible into your home to avoid the massive debt associated with a mortgage—is the optimal financial choice.

However, there are numerous factors to consider when deciding whether to buy a home outright or finance it. Here are some of the key differences between buying a home with cash and using a mortgage.

Spot cash

      Spot cash real estate is a one-time, upfront payment for the entire purchase price. Paying in spot cash eliminates the need to make monthly payments or deal with additional costs such as interest and fees. However, it also implies that you must have a large sum of money on hand to purchase the spot cash real estate.

Advantages of paying spot cash in a real estate purchase:

1. A faster purchasing processes  

When you pay in spot cash, you don’t need to go through a lengthy qualification process compared to applying for a loan.

2. Not leveraged

If you ever need to sell, it will be much easier.

3. Interest rates have been reduced

Borrowers and homebuyers who are deemed risky by lending institutions face higher interest rates. When a buyer offers a lower down payment, this is already evident. The buyer will be charged higher interest rates as a result of it. This is in addition to the fact that the property will be paid in full over a longer period of time. As a result, paying spot cash results in lower interest costs, making it an appealing financing option for buyers.

4. Foreclosure is never a cause for concern

When a house is purchased with cash, it belongs to the homeowner rather than the mortgage institution. As a result, they never have to worry about going into foreclosure or losing their home due to nonpayment.

5. You do not have to wait for a mortgage approval

When you rely on a mortgage, you must wait for it to be approved and closed. When you pay cash for a home, you can close much faster, giving you more flexibility.

6. You will not be saddled with debt

Some people dislike the idea of debt, even healthy debt, which is what a mortgage is considered to be. If you are anti-debt, then paying cash for a home eliminates the stress of loan repayment.

7. The house can be closed on much more quickly

When you pay cash, you can close on a house in as little as 1–2 weeks because you won’t have to wait for a lender to approve and underwrite your loan.

Read also: Is It a Good Idea to Pay a Spot Cash Down Payment?

Drawbacks of paying spot cash in a real estate transaction

1. Large Upfront Cost

The biggest disadvantage of paying in spot cash is the high upfront cost, which may be prohibitive for some buyers even if the price gets lowered during the negotiation.

2. The property provides no liquidity

Unless a homeowner has other financial resources aside from the money they put into the home, buying a house with cash, limits their available funds for other possible investments or expenses.

3. Mortgage tax deductions are not available

When a homeowner mortgages a home, the government provides a tax incentive to help them reduce the amount of taxes they owe. Unfortunately, cash home buyers are not eligible for this tax break.

4. Property taxes and homeowner’s insurance are still due

As a cash buyer, it’s important to keep in mind that you won’t have a lender to assist you with homeowner’s insurance and property taxes. You must make sure you are paying these costs on your own if your mortgage company is not depositing funds into an escrow account on your behalf to cover your homeowner’s insurance and property taxes.

Even when the benefits of paying cash outweigh the risks, spot cash buyers should exercise caution when making their purchase. It may be tempting to rush through the process of buying a home with cash, but this could lead to problems later. To avoid losing money in a bad deal, a cash buyer is better off using the same amount of discretion that a mortgage lender uses in the approval process.

Paying through mortgage

Although a mortgage and a bank loan are both types of borrowing money, there are some significant differences between the two. Compared to a mortgage, a bank loan typically has a smaller loan amount and a shorter repayment period.

Advantages of mortgage payments

A mortgage is a secured loan, which means the borrower must pledge collateral—such as their home—as security for the loan. This implies that the lender may seize the collateral in the event of a borrower default.

1. Flexibility

Because there are so many different kinds of mortgages available, you can usually find one that fits your situation and personal preferences. These include fixed or variable rate mortgages, as well as the option of extending the mortgage term to reduce repayments.

2. Makes home ownership possible

For many people, taking out a mortgage loan makes buying a home affordable because saving up would take too long. A mortgage lets you spread the cost over several years.

Disadvantages of a mortgage loan

1. There may be fees and other costs.

With a mortgage, you must consider not only the interest rate but also any mortgage fees, such as arrangement fees, valuation fees, remortgaging fees (if remortgaging), and conveyancing costs. If you want to pay off your mortgage sooner, you may have to pay an early repayment penalty.

2. If you fall behind on your mortgage payments, your home is at risk.

Because a mortgage is secured by the value of your home, if your situation changes and you are unable to make the payments, your home may be repossessed to satisfy your debt. If your financial circumstances change and you find yourself struggling to meet repayments, contact your lender as soon as possible. They may be able to assist you by allowing you to pause payments for a period of time to give you some breathing space, or even restructure your deal to make it more affordable.

3. Return more than you borrowed

As with any loan, you’ll have to repay the principal plus interest. While mortgage interest rates can be relatively low (compared to some loans and credit cards, for example), you will still be paying interest over the long term, which will add up – with some mortgage deals lasting up to 30 years.

Bank home loan vs. spot cash when buying real estate

1. Bank Home/Housing Loan

A housing loan is a loan that can be used to buy real estate or land. This type of loan is typically secured by a mortgage, which means that if you fail to make payments on your home loan, the lender may seize your property or land as compensation for their losses. A potential borrower must meet certain criteria set by lenders, including financial and legal requirements, in order to secure a home loan.

While both paying in cash and applying for a home loan have advantages and disadvantages, most people find that taking out a home loan is the better option. Home loans are a more affordable way to buy a home and also provide tax benefits. Spot cash, on the other hand, has a high upfront cost that can be difficult to save for. Finally, when deciding how to finance your dream home, do your research and consider all of your options.

Advantages of a bank housing loan

1. Tax Advantages and Low-Interest Rate

Because interest payments on a home loan are tax-deductible, you can save money while paying off your loan. Home loans typically have lower interest rates than other types of financing, making them more affordable over time.

2. Flexible Repayment Options

Many lenders offer flexible repayment plans that allow you to shorten the term of your loan or make extra payments when you are able.

3. Good credit score

Making consistent, on-time payments can help you build a good credit score, which is useful for future financial endeavors. A good credit score makes it easier to finance future purchases like personal loans or a home loan. Even if they have set minimum income levels that you haven’t yet met, you may have a better chance of getting approved for credit cards with better rewards.

Being a responsible borrower will give you a advantage in future investments.

4. Additional Funds

Obtaining a home loan can provide you with additional funds for repairs or other projects related to your new home. This is especially useful if you’re just starting out and don’t have much extra cash.

5. Reduced Financial Risk

You won’t have to make the entire payment up front if you get a home loan. Because you won’t be putting all of your money into one investment, this can help you avoid a lot of financial risks.

Drawbacks of a housing loan

1. Difficult Qualifications

Some lenders have strict criteria for who can qualify for a home loan, and even if you meet the requirements, getting approval can be difficult. You must meet certain qualifications and submit certain documents when applying for a home loan. That would entail a lot of paperwork.

2. Long-term Commitment

A home loan is a long-term commitment; failing to make payments can harm your credit score and financial situation.

3. Additional fees and charges

Fees for processing, cancellation, mortgage registration, notarial fees, documentary stamp tax, and fire insurance premiums are some of the fees that you might expect to encounter when applying for a housing loan.

Read Also: Your Step-by-Step Guide in Bank Housing Loan

Home Loan in the Philippines

When looking for a housing loan in the Philippines, it’s critical to do your homework and compare various lenders. To ensure you get the best deal, consider factors such as interest rates, repayment terms, fees, and other features. In general, choosing a lender with competitive interest rates, flexible repayment terms, and low fees is always preferable.

Furthermore, ensure that your lender provides excellent customer service and can answer any questions you may have throughout the process. With the right home loan provider, you may reap all of the advantages of taking out a loan and paying it off in cash.

When compared to paying in cash, taking out a home loan has numerous advantages, ranging from tax breaks to lower interest rates and budgeting flexibility. With careful planning and research into the various options available, you may discover that obtaining a loan makes this large purchase much easier and more financially manageable over its entire life cycle

4 Types of home loans in the Philippines

Based on the financing scheme, there are four types of home loans in the Philippines: Bank Financing, Pag-IBIG Housing loan, In-house or Owner Financing, and SSS Housing Loan.

1. Bank Financing

The majority of Philippine banks provide housing loans. Different banks may have different loan terms, interest rates, and loan amounts. Therefore, prior to submitting an application for a home loan through bank financing, research is advised.

2. Pag-IBIG Housing Loan

The government-run Home Development Mutual Fund (HDMF), also known as Pag-IBIG Fund, provides Pag-IBIG housing loans. Members of Pag-IBIG who are self-employed, on a salary, or an OFW under the age of 65 may apply for a housing loan.

3. In-house Financing or Owner Financing

Borrowers can obtain a direct housing loan from the real estate developer through in-house financing or owner financing. In-house financing typically only lasts five to ten years, which is shorter than Pag-IBIG housing loans and bank financing.

4. SSS Housing Loan

The Social Security System, or SSS as it is more commonly known, is another government agency that provides housing loans.

All WOM, Workers’ Organization Members, or employees in the private sector registered with DOLE, the Securities and Exchange Commission, or the Cooperative Development Authority are eligible for an SSS housing loan. The borrower must not be older than 60 at the time of application, have made at least 36 premium contributions, or have made 24 contributions prior to the loan application in order to be eligible for a housing loan.

Both spot cash and installment payments have their own advantages and disadvantages. The simplicity of spot cash payments is an advantage. They are settled and reported in accounting ledgers the same day, immediately increasing the seller’s cash flow. They may, however, have an adverse effect on the buyer’s cash flow. If you spend all of your savings on a large asset, your budget may be limited until your accounts are replenished. Installation payment options, on the other hand, allow you to save more money for emergencies and spread out the cost. In comparison to a spot cash transaction, they frequently include interest rates that raise the cost over time.

Is it possible to buy a house with cash?

You certainly can. However, whether buying a house with cash vs. getting a mortgage or getting a bank home loan vs. using spot cash when buying real estate depends on a buyer’s individual preferences and their financial situation. Because both options have significant advantages and disadvantages, it’s a good idea to seek the advice of tax professionals and financial advisors who can help evaluate how each option may affect your long-term financial goals. If you are thinking about which house to purchase for a home loan, BRIA Homes would definitely be a great choice for you. 

If you intend to make a cash purchase, you should also consider consulting with other professionals, such as attorneys and real estate agents. This can help you avoid becoming a victim of fraud or oversight.