Nowadays, about one-fifth of property buyers pay cash rather than obtain a mortgage. But is it a good idea to buy a house with cash?
The answer is determined by one's objectives and aspirations.
Buying a house with cash provides advantages, such as saving on interest and owning the home outright and debt-free, as well as downsides, such as missing out on mortgage tax deductions.
If you're thinking about making a cash offer on a house, here's what you need to know about the benefits and drawbacks.
Should You Pay Cash For A House? Let's Run the Numbers
When deciding on whether to pay cash for a house, the cost of borrowing is the first factor to consider when deciding to finance or pay with cash.
According to Realtor.com, the median home price in the United States was $392,000 in February 2022. In addition, current 30-year fixed-interest mortgage rates are around 5.268 percent, and 15-year fixed-interest mortgage rates are 4.275 percent.
What would you pay for a house with a median price of $392,000 in the United States? First, let's look at the numbers.
* Payment in Cash: There is no need for math here. You pay the asking price of $392,000. You also won't have to bother with mortgage insurance or monthly mortgage payments.
* 15-Year Fixed-Rate Mortgage: With a 10% down payment, you'll have a mortgage loan of $352,800. A 15-year mortgage at 4.275 percent interest costs $478,530.78 after 15 years of interest and principal payments. That’s $125,730.74 more than the cost of the home.
* 30-Year Fixed-Rate Mortgage: Assuming the same 10% down payment and loan amount of $352,800, a 30-year mortgage at 5.268 percent interest costs a total of $702,759.53 after 30 years of interest and principal payments. That’s $349,959.53 more than the cost of the home.
If you don't need a mortgage, spending cash for a home saves you a lot of money — anything from $100,000 to $350,000 in avoided interest for the average homebuyer. However, the advantages of paying in cash are numerous, and you will learn more about it in the next section.
Advantages of Buying a House With Cash
According to the Washington Post, over 30% of all house buyers in the United States paid in cash in 2021. One of the main benefits of paying cash for a house is that you own it outright, and there are fewer chances of foreclosure if you don't owe a lender anything. If you're thinking about making a cash offer, here are some of its advantages.
1. No Mortgage Payments, Interest, Or Other Fees
The fact that you don't have to pay a monthly mortgage payment is a huge plus. Paying in cash allows you to avoid the mortgage process and its costs and fees, such as interest rates and mortgage insurance.
Skipping out on interest can save you a lot of money over time. For example, assume you take out a $300,000 30-year loan with a 3.5 percent interest rate to purchase a home.
When the 30 years are finished, and you've repaid the $300,000 principal, you'll have spent an extra $184,968 on interest. If you pay with cash, you can retain the money in your wallet.
Avoiding a monthly mortgage payment is especially advantageous if you're using cash to purchase a second home or investment property; this means no extra mortgage payment to worry about each month and a higher profit margin on rental income.
2. You Don't Want To Be At The Mercy Of An Appraisal
Cash buyers can choose to forego or disregard an appraisal. Appraisals are required for mortgages, on the other hand.
Suppose a home appraises for less than the asking price. In that case, the lender may require the borrower to provide cash equivalent to the difference between the appraised value and the asking price — essentially, a larger down payment. If the borrower lacks sufficient funds, the transaction will fail unless the seller lowers the price.
3. You Can Close Faster
Mortgage purchasers must often plan closing dates a month or two in advance since a lender must authorize their loan. Lenders have time-consuming underwriting processes that can last several days. If the buyer cannot obtain a mortgage from a lender, the transaction may fail.
Cash purchasers can select a closing date that is acceptable to the seller, and they can even choose to move into a house within a week or two of placing an offer if it is empty.
4. Beat Out Competing Buyers
Because of how quickly a purchase can close, sellers favor all-cash buyers. While a buyer applying for a mortgage must adhere to the lender's timeline, which includes scheduling an appraisal and going through the underwriting process, buying with cash usually only necessitates due diligence on the buyer's part, after which the seller and buyer can choose a mutually agreeable closing date without having to adhere to a third-party lender's timeline.
In a competitive market with many potential buyers, the quickness and convenience of a cash offer makes you more appealing than typical homebuyers. Rather than waiting for the buyer to get accepted for the loan, which isn't always assured — even with a preapproval — sellers know that they'll have cash in hand quickly if they accept your offer.
5. Your Home Is Yours
When you own your home outright, 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, such as your property taxes).
One of the largest and most significant advantages of buying a home with cash is the piece of mind that comes with knowing you'll always have a roof over your head. If you decide you need urgent access to the equity in your house, you can always convert it into a home loan through delayed financing.
6. Lower Closing Costs
When you apply for a mortgage, your lender will charge you for certain services, which will add to the amount you owe at closing. Lender fees, application costs, loan origination fees, and discount points are examples.
Other charges associated with the loan or house purchase that the lender needs, such as a lender's title insurance policy, may also apply. When you pay in cash, you save lender-related closing fees, resulting in cheaper closing costs.
Disadvantages of Buying a House With Cash
Can you buy a house with cash? Yes. Should you? That is dependent on the situation. While there are various advantages to paying cash for a home, there are a few occasions when you may wish to seek financing. However, here are a few disadvantages of paying in cash that may affect you in the long run.
1. You Can Lose Your Liquidity
When you buy a home, you become "house rich but cash poor," as the saying goes in real estate. This is because consumers frequently use their money to fund escrow deposits and closing fees.
Suppose you devote a substantial portion of your money to buying a house. In that case, you may not be able to afford basic expenses (such as furnishing it) or other life expenses (like medical bills, car repairs, and vacations). Therefore, try to ensure that you will still have a substantial emergency reserve if you buy a house in cash.
2. Cash Buyers Miss Out On Mortgage Tax Deductions
Mortgage debt has the additional benefit of being tax-deductible. Married couples who purchase a home can typically deduct mortgage interest on their taxes up to $750,000, or $375,000 if married, filing separately. Although this write-off isn't as attractive as in prior years following the tax change in 2018, it still benefits a portion of homeowners with outstanding mortgages.
3. Inflation Reduces Real Housing Payment Over Time
When you take up a fixed-interest loan, you agree to pay the same principal and interest payment for the whole term of the loan. So, for example, if you take out a 30-year loan today, your payment will be the same in 25 years.
In nominal dollars, your payments remain unchanged, but not in inflation-adjusted dollars.
According to the U.S. Bureau of Labor Statistics, today's dollar is worth 41.3 percent less than 25 years ago. For example, a loan with a $1,000 monthly payment made 25 years ago would be worth $1,736.48 today.
In other words, if you had locked in your payment amount 25 years ago, your monthly payment would have effectively fallen from $1,736.48 to $1,000. As a result, in 25 years, your monthly payment will most likely reflect less money in terms of relative purchasing power. When you take out a fixed-interest mortgage, inflation works in your favor.
4. You May Have To Pull From Multiple Funds
Unless you have enough money in your checking account, you may need to dip into your savings, emergency reserves, and even retirement accounts to get enough cash. However, using your retirement accounts might cost you money in taxes and fees and limit your future income.
5. Skipping An Appraisal Can Come With Risks
In theory, skipping the appraisal may seem like a great option. This is because your purchase contract will not be contingent on an appraiser's opinion of your home's value, which sellers appreciate.
But what about from the standpoint of the buyer? True, the appraisal is intended to safeguard your lender from making a risky investment and overpaying for the house. However, as a buyer, the appraisal protects you as well. You don't want to overpay for your new home, do you?
Consider whether to waive the appraisal contingency and don't do so without first consulting a top real estate professional with time-tested market knowledge who can ensure you don't overpay for the home.
6. Not Building Equity While You're Saving
Saving money for a home is not a quick or straightforward task. Saving up 100% for a home could take much longer. And, while you're busy saving, home prices typically rise by 3.8 percent per year (but prices in America's hottest areas can increase by up to 10 percent per year).
Home prices are gradually rising year after year, but you're also missing out on the benefits of creating equity in a home — and hence wealth — by sitting on the sidelines.
This is one of the most common reasons buyers choose mortgage financing. It allows you to "get in the game" and begin creating equity right away, rather than waiting until you have saved a large sum of money.
How to Buy a House With Cash
If you've concluded that buying a house in cash is the best option for you, do the following to get ready to make an offer.
Consolidate the Cash
Consolidate your funds into a single location before bidding on the house. If your funds are distributed across multiple investments or accounts, you must consolidate them into a single account before closure. Remember that cashing out of some accounts, such as a 529 or 401(k), may result in penalties or tax consequences.
Obtain Proof of Funds from the Bank
A simple copy of your bank statement is frequently sufficient to demonstrate that you have enough money to pay in cash. However, you may receive an official document from your bank confirming that you are in excellent financial standing and have enough money to make a cash offer.
Make an Offer
When you've located the perfect home, it's time to make an offer. Offering cash for a home purchase will make you more competitive in a seller's market.
Consider putting contract contingencies in your cash offer to protect yourself in the deal. A contingency indicates that you are willing to buy the home if specific details are met. For example, though you won't require a mortgage financing contingency, you should consider an inspection and appraisal contingency.
Researching Title Ownership
Title research is a vital component of the home buying process because you want to ensure there are no undiscovered liens or claims on the property before you assume possession. Your settlement agent should address this. It would help if you also considered obtaining title insurance, which protects your ownership rights to the property if your title research misses something.
Get a Home Inspection
Be sure to schedule an inspection to ensure no hidden issues with your new house.
It is customary for cash purchasers to include an inspection contingency in their offer "for informational reasons only." It implies that if something is revealed, you can walk away, but you will not request repairs.
In other words, by including an inspection contingency for informational purposes only, you're informing the seller that, regardless of what the inspection reveals, you won't ask them to make repairs — albeit you reserve the right to walk away if the inspection reveals a significant problem. Otherwise, you are happy to buy the house as-is.
Obtain a Land Survey
Consider getting a land survey if you are buying a vast plot of land or a piece of property that does not have a clearly defined lot. The survey will identify the exact location of the property boundaries, whether the house is in a floodplain and any easements.
Negotiate The Final Price
A cash offer is a big deal. In fact, some sellers may prefer a lower cash offer over a more incredible mortgaged offer since the cash offer is less likely to fall through. Use this insight to your advantage while negotiating the best counter-offer.
Collaborate with an experienced local real estate agent to make a market-appropriate cash offer. Even if it's lower than they desire, it'll grab the seller's attention, and you can negotiate.
How to Make Buying With Cash Safer
Like any real estate transaction, buying a home with cash comes with its share of risks. To mitigate these risks, you must consider the following tips when looking to buy a home with cash.
* Be aware of property searches. A mortgage lender will conduct several searches on a property, including a Local Planning and Zoning Department Search (looking for plans, restrictions, or highway information that may affect the property), a Water Search (looking to see if the property is connected to the main water supply and assessing the proximity of sewers), and a Title Search (to show if there are any lien on the property). Your real estate and title company will most likely examine these but double-check with them to ensure you understand the results.
* Check to see when the last time the property was sold. If the present owner has only been there for six months or less, it's worth investigating why they're leaving so quickly. For example, there might be severe issues with the neighborhood, such as a high crime rate.
* Check for new build warranties if it's a new build. As with any insurance policy, reading the fine print carefully to determine what isn't covered is essential. For example, the warranty frequently does not cover natural wear and use, weather damage, and difficulties with any changes made by previous owners. Other hazards, like dampness and condensation, may be covered only if specific requirements are met.
* Obtain a survey. A mortgage value survey would be required if you were applying for a loan. Of course, as a cash buyer, you won't need this, but as with any sale, it's highly advised that you get a survey done on the property.
Opting not to do a survey may appear to be a cost-cutting measure, but it may be costly. For example, fixing structural issues like subsidence might cost thousands of dollars, but identifying them before contracts are exchanged may allow you to reduce the property's purchase price to compensate. Of course, you could also opt not to move forward with the deal.
Remember that if you have a mortgage or not, you will be solely responsible for any problems that arise after the transaction if you buy a house without having it thoroughly inspected.
Should You Buy a House with Cash or a Mortgage?
Finally, buying a property with cash vs. mortgage is influenced by your whole financial situation, not simply the home itself.
Buying in cash with the intention of saving on mortgage interest may not be the most fantastic option if you could otherwise invest the money for a higher return in the stock market or elsewhere. And if you can lock in a mortgage at a low interest rate, taking advantage of a mortgage to finance your home purchase may be a superb choice compared to buying a home with cash.
A mortgage can provide a lot of financial flexibility by leaving more of your money liquid to draw for emergencies — but for retirees or those who want to live debt-free, buying in cash can provide assurance and security that is tough to quantify. Regardless of your age or financial circumstances, paying in cash ensures that you are debt-free on your most valuable asset: your home.
Frequently Asked Questions (FAQs)
Below are several frequently asked questions by homebuyers looking to buy their next Texas home in cash.
If I pay cash for a house, should I get an appraisal?
The majority of lenders need an appraisal on any house purchase they finance. This is done to ensure that they will collect the whole amount they lent when the house is eventually sold. However, even if this does not apply to cash buyers, there are specific valid reasons why they may require an assessment.
If a home appraises for significantly less than the agreed-upon price, there may be some room to negotiate the price down. Furthermore, even cash buyers want to ensure that when it comes time to sell the home, they receive their money back and earn a profit.
Do I need to have homeowners insurance if I pay cash for a home?
While it is not a legal need to have insurance on your house, any mortgage lender will insist on it to protect its interests. You’re not required to obtain homeowners insurance when you pay cash for your home, but it's still a bad idea to go without it. Even if you are not compelled to carry it, you should keep it on hand to protect your investment.
Do cash buyers have an advantage?
Sure thing! Even in a seller's market, you have far more bargaining power than someone who needs a mortgage. In a buyer's market, you may be able to get a great price.
There is no one-size-fits-all answer to whether you should pay in cash or finance your property with a mortgage. For example, a 25-year-financial old's circumstances are very different from those of a 70-year-old.
The younger you are, the more logical it is to finance a property with a fixed-rate mortgage. However, if you're retired or nearing retirement, the security of less debt and fewer monthly expenses becomes more attractive to you.
Finally, the best method to decide whether or not to buy a house with cash is to choose the option that provides the best value for your money and the highest ROI. It may be a good idea to seek the advice of financial consultants on what is best for your specific financial circumstances and to assist you in determining which option is best for you.