Especially in today’s low-inventory housing market, homebuyers are looking for any way to get a leg up on the competition when putting in an offer on their desired home.
If you have the means, an all-cash offer is a great way to fast-track a deal. A seller is more likely to accept your offer, the success of the deal isn’t reliant on a lender’s OK following an appraisal, and you'll own the home outright after the transaction with no mortgage.
“All things being equal, it’s very likely that your offer would be the most attractive that they’d be considering with limited risk for the seller,” says Marcy Keckler, vice president of financial advice strategy for Ameriprise Financial, a financial planning and investment advice company.
Cash transactions make up a minority of home purchases: Just 23 percent of U.S. homebuyers pay cash for their homes, according to real estate information site Zillow’s Consumer Housing Trends Report 2018.
But even if you have enough liquid assets to purchase a home without a loan, is it always a good idea? Here are five reasons not to buy a home with cash.
You need to keep some liquidity. It’s not wise to purchase a home with cash if you have just enough liquidity to pay for it. Cash is important to have on hand for any number of unexpected needs, from a new roof to a medical emergency. You want to have enough money to sustain you for at least a few months if you were to lose your income.
“It’s especially important that if you’re a homeowner that you have enough other money available to pay for things that might come up,” Keckler says.
You qualify for a solid mortgage. If you have enough cash to purchase a home outright, lenders will likely view you favorably for mortgage options. With a down payment of 20 percent or more, you don’t have to worry about mortgage insurance when it comes to a conventional loan, and you’re more likely to get a lower interest rate due to the lower risk lenders perceive that you’ll default on the loan.
For the younger generations that make up the lion's share of homebuyers today – millennials alone comprise 42 percent of homebuyers, according to the Zillow report – financing is a natural move. Both generations are unlikely to buy a home with cash, according to Zillow report; just 19 percent of Gen Xers and 16 percent of millennials purchased homes without financing.
“People are pretty comfortable with taking on debt,” says Justin Vedder, chief operating officer of origination solutions at Altisource. He notes the younger generations’ familiarity with student loans and other financing make taking on a mortgage an easier choice than for older generations that have built up greater wealth over time but may not be accustomed to having significant debt.
Following the recession's historic lows, interest rates may be on the rise but they remain low compared to previous decades. With enough cash to put down 20 percent on a home with a fixed-rate mortgage, you could keep a large portion of your assets liquid and pay 4.75 percent interest, the average 30-year fixed-rate mortgage interest at Wells Fargo as of late November 2018. Plus, the significant down payment would prevent you from paying private mortgage insurance. Compare that to October 1981, when mortgage rates hit an all-time high of 18.45 percent, according to FedPrimeRate.com.
[Read: The Guide to Buying a Home.]
Your money may be better invested elsewhere. Even if you’re looking to buy a home outside a pricey metro area, if you have enough cash to pay for a home outright, you’re likely sitting on a pretty big pile of money. But the decision isn’t necessarily between buying a property outright or keeping money idling in the bank. Consider other forms of investment to grow your wealth.
It could be investing in the stock market, mutual funds or a personal business you feel confident will bring greater returns. Keckler is quick to point out, however, that no investment is a sure thing. As with a home purchase, there is risk when investing your money anywhere.
You’ll miss out on a sizable tax break. All homeowners with a mortgage receive a tax break on the interest paid to the lender. "The interest (tax break) you accrue when you pay on the loan is huge,” Vedder says.
Following federal tax reform passed at the end of 2017, the mortgage interest tax deduction has been limited to a total of $10,000. While residents in parts of the U.S. with particularly high local property taxes are affected by this measure, most homeowners in the U.S. do not exceed the $10,000 limit. In addition, changes to the standard deduction make it so there are likely fewer filers opting to itemize their tax returns beginning with 2018 taxes.
There’s no guarantee home values will continue to increase. Home prices are on the rise and in many markets are at an all-time high. They are expected to continue to rise, if at a less intense pace, in 2019, with signs of a slowing market already apparent this fall. But if the housing market crash in 2008 was any indication, there’s no such thing as a guarantee in real estate.
“A lot of people feel that (because) the market fell out in 2008, putting all your money in your home is a big risk,” Vedder says.
[Read: How to Find a Real Estate Agent.]
Always weigh the pros and cons. Especially in a market where homebuying is extremely competitive, an all-cash offer can provide the needed leg up to get the seller to consider your offer more seriously than others. You may not even be the highest bidder, but the seller knows a cash offer will make the closing process easier.
If you want to set yourself apart from other buyers but still have a mortgage, Vedder suggests using the cash to your advantage in the offer and then financing after closing. “You could differentiate yourself and get a loan later,” he says.
It’s also important to remember that by financing, you’re taking on additional costs with loan origination fees and the interest paid over time.
“Your net cost of purchasing is going to be less if you’re paying cash,” Keckler says.
Whether you decide to purchase your home with cash or take on a mortgage, go with what you feel most comfortable with. Keckler notes that zero financing might provide a greater sense of security emotionally, even if it’s not the same guarantee financially. “It may be a big sigh of relief to just know that you own the home outright, and that you don’t have to worry about mortgage payments,” she says.
Are these must-haves on your list?
One of the first steps you take when deciding you want a new home is determining what you need in order to be happy there. The list of your must-haves can get long, and you reasonably can’t expect to find a house that perfectly matches all your criteria. “Someone has a list of 10 things – if they can find a house that has seven or eight of those, they’re doing pretty good,” says Jeff Plotkin, a Texas-licensed Realtor, attorney, certified public accountant and vice president of Habitat Hunters Inc. in Austin, Texas. Deciding what needs win out in your next home search can be tough, but there are a few key features and amenities many buyers seem unwilling to live without.Right in your price range
Right in your price range
Being able to afford your new home is a given, but buyers are often faced with having to choose between stretching their budget to have the master suite they want or having more reasonable monthly mortgage payments. Price often wins out in the end – you’re less likely to enjoy that master suite if you’re eating soup and foregoing vacations for the next five to 10 years to pay it off. In the 2018 National Association of Realtors Home Buyer and Seller Generational Trends report, home affordability was one of the three most important factors for respondents who recently purchased a home – behind only quality of the neighborhood and a location's convenience to work.In your preferred location
In your preferred location
Homebuyers care a lot about being able to get from point A to point B – as well as points C, D and E. Your future neighborhood can dictate what school your kids go to, how long it takes to get to work and how easy it is to stop at the grocery store when you forgot an ingredient for dinner. Plotkin says buyers put a lot of stress on where the house is, rather than what’s in the house itself. They’re looking for “proximity to schools, shopping, entertainment, public transportation,” he says.Interior over curb appeal
Interior over curb appeal
A handsome exterior keeps potential buyers from quickly driving away, but insight from new construction marketing site HomLuv.com reveals that it’s the interior that most often serves as the deal-maker. HomLuv’s website allows homebuyers to begin their search for a new home from the room they care about most, whether that’s the kitchen, living room or master bathroom. The one part of the house people don’t seem too worried about? Outside. In the roughly two months since HomLuv launched, “no one has chosen to look at exteriors first,” says Mark Law, vice president of product management for BDX, a home builder marketing company and parent company of HomLuv.The right number of bedrooms
The right number of bedrooms
While the interior of the home allows more wiggle room to compromise on your needs, there are some details that buyers must have. The right number of bedrooms would be the big one. Family expansion is often a primary reason homeowners start looking for a new house, so leaving out that extra room would defeat the entire purpose of the sale. According to the NAR report, 85 percent of homes purchased by respondents in 2017 had three bedrooms or more.Window treatments for reference
Window treatments for reference
Staging matters in a home. As much as we think we can picture how a vacant house will look with our own furnishings and decor, at the end of the day we need some suggestions. Law says builders will include big picture windows in bedrooms or over the tub in a master bathroom to let in natural light, but if the photos show the space without curtains or blinds, house hunters will inevitably see a design flaw. “They’ll say, ‘I’m not an exhibitionist,’” he explains. To avoid turning homebuyers off, window treatments should be included in listing photos and for home tours.Move-in ready
The condition of the home you shop for often goes hand in hand with your budget and the neighborhood you hope to live in. If your budget is at the lower end of the price range in the hottest community in town, you’ll likely find yourself buying a house that needs a little love. If your budget doesn’t restrict it, chances are you’ll have your pick of properties that have been turned by real estate investors. “The [buyer] demand is for 100 percent move-in ready condition,” says Bobby Montagne, CEO of Walnut Street Finance, a private money lender focused on home flipping in markets in Virginia, North Carolina and the District of Columbia metro area.Possible to picture your vision
Possible to picture your vision
Even if you’re one of the detractors who prefers a fixer-upper, it’s still necessary to be able to envision how the space will look once you’ve added your personal touches. Based on reactions from HomLuv users, details as small as the cabinet color in a photo can change the way a person thinks about a house. Law says he’s found preferences differ from region to region – darker cabinets may see more love in the South, while in California the preference is for white kitchen cabinets. “You could offer a free puppy and free pots and pans with the house, but if the cabinets are dark they still don’t want it,” he says.Warranty available
For newly built homes and those that have been recently flipped with significant work, you want to know that the professionals involved stand by their work. New construction homes often come with a warranty from the builder or the option to get a third-party warranty, and you should ask the investors involved with a flip for the same level of protection. “A good builder [or] a good flipper does not have a problem with that,” Montagne says. If an issue arises within the life of the warranty related to the workmanship, you can rest easy knowing you’re covered financially for the repairs.Potential for value growth
Potential for value growth
Your home isn’t just where you’ll live – it’s also an investment. There are a few easy decisions you can make that reduce the chances of losing out on potential growth in value over time, whether that means buying in a neighborhood where home values are steadily growing, finding a home in a desirable school district or avoiding living next to a strip mall. “When you’re buying a house, you’re not only buying it for yourself, you’re buying it for resale,” Plotkin says. “So most people are not going to want to back up to commercial [property] or a busy road.”Read More
Updated on Nov. 30, 2018: This story was originally published on April 12, 2017, and has been updated with new information.
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at email@example.com.
Teresa Mears | May 3, 2019
Conventional wisdom says 20%, but you can buy your first home with much less down.