It's becoming less and less common to purchase a home with cash, especially with the current trend of rising home prices that outpace income growth. The median home sale price has now surpassed $428,000, making it a challenging feat even for the most diligent savers to accumulate enough cash to purchase their home outright.

The National Association of REALTORS® 2022 Profile of Home Buyers and Sellers reports that 87% of recent home buyers use a loan to finance their purchase.

Purchasing a house with a cash offer may be a wise financial decision if you have sufficient funds in your bank account. However, before jumping into the real estate market as a cash buyer, there are a few factors to consider. Here are some things to keep in mind.

 

Is it possible to purchase a house using cash?

 

When we say we are buying a house with cash, it doesn't mean we are doing it literally.

A cash buyer is an individual paying for the entire cost of a home purchase using their funds without taking out a loan. These funds may originate from personal savings, investments, or the sale of another property.

 

Why would someone consider buying a home without a loan?

 

Buying a house with cash benefits both parties with faster closing, no interest, and lower costs.

 

Pros of Paying Cash for a House

 

• Home sellers are often more interested in cash home buyers.

 

If you're competing with other buyers, being a cash buyer can give you an advantage over those who plan to finance their purchase. Sellers often prefer cash buyers because they eliminate the risk of the buyer's financing falling through at the last minute, which can sometimes happen with mortgages if the buyer cannot get approval.

 

• Cash-only transactions may result in faster sales and more willingness to negotiate with cash buyers than mortgage borrowers.

 

You will not have to make any payments towards your mortgage, including interest or other fees.

 

• Skipping monthly housing payments in cash avoids the mortgage process and fees.

 

Skipping interest payments can save a lot on a 30-year, $300k loan with 3.5% interest. After paying back the $300,000 principal over 30 years, you will have spent an additional $184,968 on interest. If you pay in cash, that’s money you get to keep.

 

Avoiding a monthly mortgage payment can provide significant benefits if you're using cash to buy a second home or investment property. This means you won't have to worry about an additional monthly mortgage payment, which can result in a larger profit margin on rental income.

 

• You will have reduced closing costs.

 

When you take out a mortgage, your lender will charge you for various services that will increase the amount you owe at closing. These services may include lender fees, application fees, loan origination fees, or discount points. Additionally, you may have other mandatory costs related to the loan or home purchase, such as a lender's title insurance policy.

 

When paying in cash, you avoid lender-related closing costs, resulting in lower overall closing costs.

 

• You will achieve a faster closing process.

 

The closing process when purchasing a home with a mortgage can take over a month from start to finish. However, if you're buying with cash, it's possible to close on a home in as little as one to two weeks.

 

When you're not taking out a mortgage to buy a home, you can avoid the wait for lender approval, underwriting, and loan processing, significantly reducing the time it takes to close on a home.

 

•  You will have a simpler and easier closing process.

 

Assuming there are no unexpected problems, paying with cash will make closing easier for you. This is because you will only have to keep track of some of the documentation borrowers usually need to send to their mortgage lenders.

 

• Your home belongs to you.

 

When you fully own your home, you don't have to worry about losing it if you make other payments, such as property taxes.

 

One of the biggest benefits of buying a home with cash is the peace of mind that comes with always having a roof over your head. Suppose you later decide you need access to the equity in your home. In that case, you can transition into a home loan through delayed financing.

 

Cons of Paying Cash for a House

 

• Your finances are currently invested in your property.

 

When you purchase a house with cash, you're investing a significant amount of your funds into a relatively illiquid asset, making it difficult to access your money quickly. When you need money quickly, it's easier to withdraw from a savings account than to sell your home and use the proceeds.

 

If you have enough funds to buy a house without taking a mortgage, consider your goals and whether that money could be utilized more efficiently elsewhere. For instance, you may see better returns by investing that money or boosting your retirement savings.

 

Alternatively, it might make more sense to obtain a mortgage to purchase the property and then use some of your savings to renovate or improve your new home.

 

Although owning your home outright can bring a great sense of security, it should not compromise your overall financial stability and make your house poor. If you use all your savings to buy a house, you may find yourself in a situation where you need emergency funds for unexpected expenses and money to make essential repairs to your new home.

 

It is crucial to consider the long-term financial implications of purchasing a house and ensure that you have enough savings to maintain your financial security.

 

• Cash buyers are not eligible to claim mortgage tax deductions.

 

If you have a mortgage, you can take advantage of the mortgage interest deduction by deducting the interest paid on the first $750,000 if you itemize your deductions. If you choose not to take out a mortgage, it's clear that you won't have the option to do so.

 

• There may be extra costs to consider.

 

Just because you don’t have a mortgage doesn't mean you're completely free of regular housing-related payments. There are various expenses associated with owning a property, including property taxes, homeowners insurance, utilities, and, if applicable, homeowners association dues. Additionally, it is important to budget for regular maintenance and repairs.

 

Purchasing a house with cash could be a viable option, but it may not always be the most appropriate decision. Opting for financing instead allows you to choose from a variety of mortgages and select the one that suits your needs best. This way, you can find a loan that is ideal for your situation.

 

The Bottom Line

 

If you plan to purchase a home with cash, it's wise to seek advice from a financial advisor or tax professional. They can evaluate your unique situation and provide guidance on how this decision may impact your finances.

If you plan to purchase a home with cash, it's wise to seek advice from a financial advisor or tax professional. They can evaluate your unique situation and provide guidance on how this decision may impact your finances.