Should You Buy a House With Cash?
Before you go all-in with your money, consider these caveats for buying a home with cash.
A cash offer is more enticing to the seller and speeds up the closing process.(Getty Images)
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, and the success of the deal isn’t reliant on a lender’s OK following an appraisal. You'll also own the home outright after the transaction with no mortgage to pay each month.
Cash transactions make up a minority of home purchases: All but just 13% of recent homebuyers financed their purchase, according to the National Association of Realtors’ 2020 Profile of Home Buyers and Sellers.
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Two reasons to pay cash for your home are:
- Cash offers stand out.
- You can avoid taking on debt.
Cash Offers Stand Out
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.
“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.
If you want to set yourself apart from other buyers but still have a mortgage, you could use the cash to your advantage in the offer and then finance after closing. However, you wouldn't want to make this part of your plan unless you can financially handle the possibility of a lender declining a mortgage, on the chance that the market value drops or other unexpected factors affect your credit. “Don’t go into a transaction factoring in assumptions if that’s the only way (you) can afford it,” says Lauren Anastasio, a certified financial planner with financial services company SoFi, who is based in the Philadelphia area.
You Can Avoid Taking on Debt
By paying cash, you won't have to make monthly payments to a lender, and when the house increases in value, that directly boosts your personal wealth.
It’s also important to remember that by financing, you take on additional costs with loan origination fees and the interest paid over time, so “your net cost of purchasing is going to be less if you’re paying cash,” Keckler says.
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Even if you have enough cash on hand to purchase a home without a loan, is it always a good idea? Here are four reasons not to buy a home with cash:
- You need to maintain liquidity.
- You qualify for a favorable mortgage.
- Your money may be better invested elsewhere.
- You could capture a sizable tax break.
You Need to Maintain Liquidity
It’s not wise to purchase a home with cash if you have just enough to pay for it. It's a good idea to maintain an emergency fund that will sustain you for at least a few months if you were to lose your income – covering things like car maintenance, unexpected medical costs and your regular grocery and utility costs for up to six months. You'll also want to have some cash on hand for any number of unexpected house needs, from a new roof to a furnace that's on its last legs.
“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 Favorable 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% or more, you don’t have to worry about mortgage insurance with a conventional loan, and you’re more likely to get a lower interest rate due to the fact that lenders see you as less likely to default on the loan.
First-time homebuyers aren’t just more likely to borrow money – they’re more likely to borrow a greater amount of money since they don’t yet have equity in a house to help cover a down payment. This group, which makes up 31% of recent buyers, also tends to put less cash down in a purchase: The NAR report notes first-time buyers surveyed typically financed 93% of the home, while repeat buyers financed 84%.
Amid the economic uncertainty and recession caused by the COVID-19 pandemic, interest rates are at historic lows. With enough cash to put down 20% on a home with a fixed-rate mortgage, you could keep a large portion of your assets liquid and pay 2.72% in interest, which is the average for a 30-year fixed-rate mortgage as of mid-November 2020, according to Freddie Mac. Plus, with a significant down payment, you can avoid paying private mortgage insurance. Compare that to October 1981, when mortgage rates hit an all-time high of 18.44%, according to Freddie Mac.
With the mortgage interest rates at their current levels, a cash purchase doesn’t have the same appeal it might during a period of rising rates. “Being able to lock in 30-year money at 2% (in interest) is extremely attractive,” Anastasio says.
Your Money May Be Better Invested Elsewhere
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 that may yield higher returns than the interest you'll save by paying cash.
You could consider investing in stocks, 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 Could Capture a Sizable Tax Break
All homeowners with a mortgage can receive a tax break on the interest paid to the lender.
This benefit applies to a small share of homeowners, however. Following federal tax reform passed at the end of 2017, the mortgage interest tax deduction has been limited to interest paid on the first $750,000 in mortgage debt.
In addition, increases to the standard deduction starting in 2018 made it so fewer people need to file itemized tax returns, which is where the mortgage interest deduction would occur. If you're taking the standard deduction, and the vast majority of homeowners are, you do not receive a separate mortgage interest deduction.
If your household will itemize tax returns and get the deduction, Anastasio stresses that this should be more of a perk than a standalone reason to finance a home purchase. “My attitude has always been that you shouldn’t get a mortgage or buy a home just for tax purposes,” she says.
Frequently Asked Questions About Buying a House With Cash
Is it better to buy a house with cash? Whether you should pay with cash or finance your home purchase depends on your financial situation. Paying cash will make your offer more attractive to the buyer, and you will own the property outright. But if you don't have the funds to pay for a house with cash, a mortgage can help you reach homeownership sooner.
Whether you decide to purchase your home with cash or take on a mortgage, go with what makes you feel most comfortable. 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.
How long does it take to buy a house with cash? Instead of taking a month to close for loan underwriting and approval, buying a house with cash can take just a few days. But you shouldn't skip aspects of the due diligence process that lenders often require. An appraisal can help ensure you aren't overpaying for the property, and an inspection will tell you what issues may exist in the home.
What are the closing costs if you buy a house with cash? You won't have a down payment, loan origination fees or points to cover at closing. While many closing costs become optional when there's no lender to require them, paying for a title search and title insurance, inspection, survey and more can help reduce your chances of buyer's remorse down the line.
Mortgage vs. Cash
If you’re still on the fence about whether a mortgage or cash is the best way to pay for your home, here’s a quick breakdown:
Why You Should Buy a Home With Cash:
- Your offer is more enticing to the seller.
- Cash speeds up the closing process.
- You won't take on debt that requires monthly payments.
- When you sell, you keep the profit with no mortgage to pay off.
Why You Should Buy a Home With a Mortgage:
- For most people, it’s the only way to afford a home.
- You won't be tempted to skip due diligence steps like an appraisal, home inspection or title search, which can reveal critical issues before closing.
- You are less likely to deplete your savings.
- There’s a tax break on interest payments if you itemize on your tax returns.
- You don’t have to liquidate other investments to cover the entire home cost.