How and When It Makes Sense To Buy a House With Cash

When you’re ready to buy a home, there are many questions you’ll need to answer. One of them is how you’ll pay for your upcoming purchase. For most aspiring home buyers, there are two popular ways to buy a home: with a mortgage or cash.

Homes are expensive, and most of us can’t afford to be all-cash buyers. But if you can join the growing numbers of cash buyers in this country, you may gain an edge over your home buying competition.

Can You Buy a House With Cash?

In short, yes. As long as you have the cold, hard cash in your bank account(s), you can. And no, that doesn’t mean you’ll find yourself at a closing table sliding over a suitcase stuffed with hundreds of thousands of dollars.

You might successfully secure a house with a cash offer in a competitive seller’s market. But not many home buyers are cash buyers. 

Today, the average price of a home in the U.S. runs north of $400,000,^[1] and many of us don’t have enough cash in our savings accounts to cover such a large purchase. Among recent home buyers, 13% purchased their homes with cash, and the vast majority, 87% of home buyers, opted to finance their homes using a mortgage.^[2]

Should You Buy a Home With Cash or a Mortgage?

If you’re trying to decide between buying a home with cash or with a mortgage loan, you should know that each payment option has its pros and cons. If buying a home with cash is something you can do, you should consider these factors:

Reasons to buy a house with cash

Home buying with cash offers several advantages, including:

No mortgage payments or interest

You don’t have to worry about making monthly mortgage payments when you buy a home with cash. And because there is no mortgage to pay, there is no loan interest to pay either. Interest makes loans more expensive. By avoiding it, you can save, on average, $1,000 or more a month.

More attractive offer

If your competition is a buyer financing their purchase with a mortgage, a cash offer can give you a winning edge, especially in a competitive housing market. Sometimes a cash buyer will pay a seller’s closing costs to help make their offer more appealing.

Easier real estate closing

The real estate closing process will likely be much easier. With a cash offer, you don’t need to worry about a mortgage lender and their requirements, credit checks, income verification and other parts of a traditional closing process. Cash closures tend to be easier and quicker. 

Sellers love working with buyers who can close quickly and cut out third parties, including real estate agents, in some cases. 

No appraisal

Mortgage lenders typically want a home appraisal done to ensure the home’s value lines up with the amount you wish to borrow. But the result of the appraisal could derail the deal. When it’s a cash deal, you’re not waiting on a lender’s verdict to get the money you need to buy the home. The seller can feel more confident that the deal won’t fall through. 

Reasons to buy a home with a mortgage

Financing your home purchase with a home loan offers a few advantages, including:

Having cash on hand

With cash on hand, your money is available for emergencies, saving or investing, including investing in a new or second home.

Buying a house with cash is a huge commitment. If you choose this route, a large amount of your available funds will be sunk into your home – and it won’t be easy to get money out in case of an emergency or unexpected expense. You’ll be less financially flexible because you’ll have less cash on hand. 

Investment opportunities

It is essential to think about your return on investment. If you can buy a house with cash, bypassing a mortgage doesn’t always make good financial sense. Getting a mortgage would allow you to keep some money you can invest in making more money. If you put all your money into your home, you won’t be able to invest elsewhere.

Let’s say you’re buying a $400,000 home with a loan, and the loan’s interest rate is 5%. The mortgage would cost you an average of $12,000 in interest payments yearly. 

But if you invested the $400,000 and earned an average of 8% per year – a historically reasonable expectation – you could generate $32,000 from that investment. So in this situation, the decision to pay in cash would cost you $20,000 per year in lost interest income.

While returns like this are never guaranteed, it is clear that there is an opportunity cost for home buyers who pay in cash. 

Tax incentives

If you buy a home with cash, you can’t claim mortgage interest tax breaks, and your tax bill might be higher.

How To Buy a House With Cash

Buying a house with cash will look a lot like buying a house with a mortgage – with a few important exceptions. Here are the main steps to buying a house with cash:

• Contract indicating cash purchase: To buy a house with cash, you usually need to include a stipulation in your purchase agreement stating that you will be using cash.
• Proof of funds: Once you have agreed on a purchase price and other details, you must show proof of funds, which will likely come from your bank, credit union or other financial institution. 
• Earnest money: As long as there are no issues, you will set aside earnest money in escrow. Your deposit is proof to the seller that you are serious about following through with your offer.
• Funds and deed transfer: As soon as the house is cleared for closing, you will put the remaining funds in escrow. On closing day, the money will be transferred to the seller, and the deed will be transferred to you.

Cash is King … Sometimes

About 1 in 8 buyers pay for their home with cash, so an all-cash buy is not unusual. And cash buys are appealing for many reasons, including skipping the mortgage, avoiding interest and fast-tracking the closing. What’s not to like, right? 

But if using all your cash to buy a home means you’ll have barely enough left over to build an emergency fund or a retirement nest egg or pay off your high-interest debt – is it worth it? 

Keep your goals in mind to help you achieve an exciting life milestone: homeownership.