Would you buy a house with cash if you had the financial means?
Cash purchases of homes are becoming increasingly scarce, especially when real estate values are rising faster than income. The median home sale price is currently $324,900, making it difficult for even the most serious savers to save up enough money to completely buy their home. For the National Association of Realtors Profile 2021 for Home Buyers and Sellers, the vast majority of buyers (87 percent of new homebuyers) finance their purchases with a loan.
However, if you have money in your bank account, making a cash offer on a house may seem like the best financial decision. Here are some things to consider if you are thinking of buying something with money.
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| Buying a house2023 |
Can you buy a house with cash?
We don't mean literally when we say you can buy a house with cash.
A cash buyer is someone who pays for a home with their own money rather than taking out a loan. This money can come from a combination of savings, investments, and the sale of another home.
Why do you want to buy a house without getting a loan?
When compared to a mortgage loan, buying a home with "cash" may benefit both the buyer and seller by allowing for a faster closing. In addition to avoiding interest, paying with cash can save on closing fees.
Advantages of paying cash for a house
Here are some pros of buying a home with cash that you should consider.
1 Cash home buyers are often more attractive to sellers
Being a cash buyer gives you an advantage over buyers who plan to fund their purchases in a competitive market.
Sellers often prefer to work with cash buyers if possible as they don't have to worry about a buyer's financing failure at the last minute, as can happen with mortgages if the buyer is unable to get approved.
Furthermore, because cash-only transactions are often faster, sellers eager to close may be more likely to negotiate with a cash buyer than with a mortgage borrower.
2 No mortgage payments, interest, or other fees
It's a great bonus not to have monthly payments for the house. When you pay with cash, you avoid the mortgage process and all associated fees and charges, such as interest rates and mortgage insurance.
- Interest savings may add up quickly. Let's say you borrow $300,000 over 30 years at 3.5 percent interest.
- When you've finished 30 and you've paid off the $300,000 principal, you'll spend an additional $184,968 in interest. You can keep your money if you pay with cash.
- Avoiding monthly mortgage payments can be especially beneficial if you are buying a second home or investment property with cash; This means no extra mortgage payments to worry about every month and a higher profit margin on your rental income.
3 Lower closing costs
When you secure a mortgage, your lender will charge you a fee for certain services, which will be added to the amount you owe upon closing. Examples include lender fees, application costs, loan origination fees, and discount points. The lender may need other expenses associated with the loan. Or a home purchase, such as a lender's title insurance policy.
You won't have to deal with lender-related closing fees if you pay with cash, which means you'll save money on closing costs.
4 faster shutdown
The process of closing a mortgage-backed home purchase can take up to a month from start to finish. When you buy a home with cash, you can close it in a week or two.
When you don't need a mortgage to buy a home, you don't have to wait for the lender to approve, guarantee, and process your loan, which reduces the time you have to wait for closing.
5 Simpler closing process
If there are no unexpected complications, then it is likely that paying in cash will make the closing process easier for you because you will not be responsible for keeping track of all the paperwork that borrowers have to hand to mortgage lenders.
6 Your home is yours
When you own your entire home, you don't have to worry about losing it (as long as you make payments on other things that could put your home at risk if left unpaid, like your property taxes).
One of the biggest and most important advantages of buying a home with cash is the peace of mind that comes with knowing that you will always have a roof over your head. If you need quick access to your home equity, you can always switch to a home purchase loan through late financing.
Cons of paying cash for a house
Now that you've heard about some of the pros, let's take a look at some of the cons of buying a home with cash.
1 Your money is tied up in the house
- When you pay for a home with cash, you are investing a large percentage of your money in an asset that is somewhat illiquid, which means that you cannot access it easily or quickly.
- If you need money quickly, for example, withdrawing money from a savings account is faster than selling your property and using the proceeds.
- If you have enough cash to buy a home without taking out a loan, think about your goals and whether that money would be better spent elsewhere. You could, for example, get better returns by investing money or increasing retirement savings. Alternatively, You may take out a mortgage and then use some of your money to make additions or repairs to your new home.
- While owning your entire home may bring you peace of mind, it shouldn't come at the expense of your overall financial security. If you have to use all of your resources to do so, you may find yourself with no emergency savings and no money to make the needed repairs to your new property.
2 Cash Buyers Miss Mortgage Tax Deductions
If you itemize your deductions, you may ignore the mortgage interest deduction, which allows homeowners with a mortgage to deduct the interest paid on the first $750,000 of their loan, reducing their taxable income.
Obviously, this option is not available if you have not taken out a mortgage.
3 Additional charges still apply
You are not completely free from normal housing-related payments simply because you don't have a mortgage.
You will continue to pay property taxes, homeowners insurance, utilities, and, if applicable, homeowners association dues. You will also need to set aside a set amount of money each year for regular home repairs and maintenance.
Conclusion: Should You Buy a Home with Cash?
If you are thinking of buying a home with money, you should talk to a financial advisor or tax professional first to see how this could affect your finances.
Consider the opportunity cost, the amount of liquidity you need in your portfolio, and potential tax benefits and penalties.
Ready to start the home-buying process? Pre-approval and estimating how many homes you can buy are the initial steps. Pre-approval is easy with Rocket Mortgage®