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Want to buy a house with cash? Read this first

Peter Warden
The Mortgage Reports editor

Cash home buying is rare for a reason

Not many people can afford to buy a house with cash. With the median sales price of homes coming in above $320,000, that’s not much of a surprise.

Even those who could buy a house with cash often choose not to.

Why? Because your money might be more accessible (and net you bigger returns) if it’s not tied up in your home.

That said, there are still big benefits to cash home buying — like saving thousands in mortgage interest.

If you’re thinking about making a cash offer on a house, here’s what to consider first.

See how much mortgage you qualify for (Nov 25th, 2020)

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Can you pay all cash for a house?

When most people talk about buying a home with cash, they mean without any loan money. Instead, the buyer will use a cashier’s check or wire transfer to close the transaction. That’s absolutely fine.

Can you buy a home with bags full of actual bills? Well, maybe. But few have a reason to try. And you can be sure you’ll raise some eyebrows on closing.

As importantly, why would you? Storing and moving physical cash is hugely risky.

So, as long as you came by the money legally, pay it into a bank. And give straight answers to any questions bankers or officials raise.

Benefits of buying a house with cash

Being debt-free might be appealing in and of itself. But it’s not the only reason some people decide to buy a house with cash.

No mortgage interest

Not having a mortgage doesn’t just free up your monthly budget. It saves you thousands — potentially hundreds of thousands — in mortgage interest payments.

For example: Borrow $200,000 over 30 years at 3.5% and you will have paid $123,300 in interest. That’s more than half what you borrowed in the first place.

Don’t borrow it, and you’ll keep all that money in your pocket.

More leverage when you make an offer

Cash buyers are in a uniquely strong position when they buy a home.

Those with mortgages have to make their purchase offers “contingent” upon getting their financing approved. If they aren’t approved for a mortgage in time, or something on their application changes before closing day, the home sale could fall through.

But cash offers can be made without that contingency.

Because it’s a sure thing, most owners will accept a cash offer over one for the same price from someone requiring a mortgage.

And in some markets, they may take a lower offer from a cash buyer in preference to a higher one from someone who needs financing.

Other pros of buying a house with cash

What else makes some people dream of being a cash buyer? Well, here are some other pros:

  • Lower closing costs, no lender fees — There are no loan origination fees when you buy a house with cash. This can save you thousands. And you get to choose most of the other costs you incur
  • No loan officer or admin headaches — Getting a mortgage through to closing isn’t easy and typically requires you to provide a mountain of paperwork. That doesn’t apply when you pay cash
  • Faster closing — It’s often the mortgage lender crossing t’s and dotting i’s that delays closing. When you pay with cash, you can be in residence as fast as you can get your essential paperwork done (title check, insurance, and so on), which may be as little as two weeks
  • Fewer fears — If the housing market were suddenly to collapse and home values to plummet, you will, of course, lose money — on paper. But you won’t be trapped in your home owing to an underwater mortgage or foreclosed on by the bank. And you can likely ride things out until the next recovery

So being a cash buyer comes with a whole pile of advantages. But what are those potential downsides we mentioned?

Downsides of buying a house with cash

Sometimes, those who could buy a house with cash choose to get a mortgage anyway. That’s because there are drawbacks as well as benefits to cash purchases.

Your money is tied up in your home

To some, this is the most serious drawback of all. As long as your money’s tied up in your home, it can’t be out there earning you more money.

So you can’t invest that part of your assets by expanding your stock portfolio, buying into your pal’s amazing startup, or purchasing bigger items that, when chosen carefully, can appreciate in value quickly.

How much this bothers you may depend on your appetite for risk.

Your home, once you own it outright, is very unlikely to go anywhere — whereas investments with a high rate of return typically have a higher risk of failure as well.

And with mortgage rates at or near all-time lows (at the time of writing), the argument for having at least a small one can be compelling.

Why tie up more money than you need to when you can borrow so cheaply?

Verify your new rate (Nov 25th, 2020)

It can be harder to tap your home equity

What happens if things go wrong? Maybe you suddenly have large medical bills or perhaps you suffer a big, uninsured loss. And you can’t access much of your money because it’s already invested in your home.

Yes, you can sell your home and cash in. But that can take months.

And you might be in line for a home equity loan, a home equity line of credit (HELOC), or even a mortgage — providing you’ve kept your credit score at a healthy level. But, again, that often takes several weeks. Owning property is illiquid.

The solution? Don’t tie up so much of your money in your home that you can’t deal with emergencies. That might mean a smaller home or a small mortgage.

You might miss out on tax breaks

There was a time when a big disadvantage of buying a home with cash was that you missed out on your mortgage interest deductions.

But that advantage partly evaporated with the 2017 tax overhaul. According to The Wall Street Journal (reprinted by The Brookings Institution):

“The Tax Cuts and Jobs Act of 2017 raised the standard deduction, capped deductible state and local taxes at $10,000, and reduced the maximum mortgage principal eligible for deductible interest to $750,000 (from $1 million) for new loans.

“As a result, according to Tax Policy Center estimates, the number of taxpayers who take the mortgage-interest deduction will fall from 34 million (20% of returns) in tax year 2017 to 14 million (8% of returns) in 2018.”

So only a limited number of those with mortgages now take advantage of these tax breaks.

But you should still calculate what they could mean to you — or speak to your accountant.

Should you buy a house with cash or a mortgage?

The wisdom of buying a home with cash depends on you and your circumstances:

  • How much does the added security mean to you?
  • Will you have enough money left over to cope in an emergency?
  • How important is a cheaper and easier purchase?
  • What investments might you miss out on once your money’s tied up?

As you read through the pros and cons, remember this: It’s not all or nothing.

You could compromise with a large down payment and a small mortgage — saving yourself much of the interest paid, but keeping more of your funds liquid in case of emergency.

If you’re having a tough time making the decision, talk with a financial advisor or another professional who can help you understand your options and choose the best one for you.

Buying a house with cash FAQ

Is it a good idea to buy a house with cash?

It certainly can be. But even those who can easily afford to do so often keep a small mortgage for tax purposes, or to invest elsewhere. It’s a personal matter that only you can decide.

How fast can you close on a cash transaction?

Typically, much faster than you can on one involving a mortgage. There is still some paperwork involved, but it’s not unusual to take possession of the house after a couple of weeks.

Are there closing costs with a cash offer?

That’s largely up to you. You’ll certainly avoid lenders’ fees and discount points. But most cash buyers will want a title search, an appraisal, and often a home inspection. These are things you’ll pay for out of pocket.

Who pays closing costs on a cash sale?

The burden of closing costs is usually on the homebuyer, though in some states sellers pick up part of the tab. And that applies whether or not you have a mortgage. But anyone can, of course, negotiate a credit from the seller to cover some or all costs. Build it into your offer.

Do cash buyers have an advantage?

You bet! Even in a seller’s market, you have much more leverage than someone who needs a mortgage. And in a buyer’s market, you may be able to negotiate an amazing deal.

Who pays cash for a home?

The National Association of Realtors publishes an annual survey of homebuyers. In 2020, it found that only 14% of transactions were cash ones.

As you’ll have guessed, the vast majority of those paying cash were older buyers, who have perhaps spent decades acquiring equity in their homes and building up their savings.

Selling a former house when you move makes it much more possible to pay cash for your next one.

By contrast, 96% of buyers under the age of 40 use a mortgage to cover some or all of their home purchase.

Mortgages are more affordable than ever

Although there are benefits to buying a house with cash, it is by no means the expectation or the norm.

And with mortgage rates resting near all-time lows, the appeal of cash buying is becoming smaller and smaller.

Many home buyers are opting for a low-interest home loan so they can invest their cash elsewhere.

Verify your new rate (Nov 25th, 2020)