Buying a house with cash: what to know before skipping the mortgage
Yes, you can buy a home without a mortgage — but should you?
It’s understandable why you might desire paying cash for a home — no monthly payments to deal with, no costly interest charges and the security of owning your own place. The scenario may be more common than you think, with an estimated one-third of all homebuyers in the U.S. now paying cash for their homes, according to recent Redfin data.
While purchasing a home in cash is an enviable position for some, there are circumstances where it might make more financial sense to opt for a mortgage.
- A cash purchase offers numerous benefits, such as saving money over time, a quicker path to closing and owning property outright.
- Taking on a mortgage has its advantages, too, such as tax deductions and keeping your cash liquid to cover unexpected expenses.
- Instead of putting your nest egg into one real estate transaction, diversification could be a better long-term strategy.
What is a cash buyer?
A cash buyer is someone who pays for a home or property with all cash, as opposed to taking on a mortgage to spread the payments out over a defined period of time. Paying cash for a home may appeal to someone with limited credit history or someone who wants to make the most competitive offer possible.
But being a cash buyer doesn’t mean paying for a home with physical dollar bills, either. It’s using funds to finalize the purchase, such as from savings or checking accounts, investments or proceeds from the sale of another property.
How to buy a house with cash
The process of buying a house with cash is similar to buying one with a mortgage, but without the substantial paperwork involved when working with a lender.
- First, the buyer makes an offer on the property. If it’s accepted, you provide an earnest money deposit and sign paperwork to go under contract.
- Once under contract, a cash buyer should go through all the proper due diligence steps, such as getting title insurance, a home inspection and surveys.
- When it’s time for closing, the buyer should bring a cashier’s check or arrange for an electronic funds transfer for the purchase.
Even when you buy a house with cash, you’re still responsible for closing costs and inspection fees.
While a cash buyer avoids the application, paperwork and usual appraisal required by a lender, there are other financial requirements involved. You need to show proof that you actually have the funds to complete the transaction, such as a recent bank statement.
And keep in mind even though you’re paying cash, there are still some fees, including closing costs and inspection fees, that you’re still responsible for.
“Don’t forget the homeowners insurance — without the lien of a mortgage, no one requires you to have it on closing day and the policy is kept current,” advised Rachel Lewis, a realtor-broker and CEO for Lewis & Kirk Realty based in Davidson, North Carolina. “You could end up in a bad situation without home insurance, so be sure it’s paid for out of closing proceeds and active on day one.”
Pros of buying a house with cash
For some buyers, paying cash for a home is a dream come true. There are multiple advantages worth considering.
No mortgage payments
The first and perhaps most obvious benefit is you won’t have a monthly mortgage obligation. Not only is this one less financial burden each month, but you also won’t have any interest and fees associated with a mortgage, which are often significant.
For example, a homeowner with a $300,000, 30-year conventional mortgage with a fixed 6.5% interest rate ends up paying about $382,000 just in interest over the life of the loan.
The house is yours
Paying cash means you own your property outright. Even if you lose your job or come under financial hardship, you may have peace of mind knowing you have a roof over your head.
Potentially more attractive to sellers
Paying cash for a home is typically a much easier transaction for both the buyer and seller. There’s less chance something could go wrong with the closing, a job loss or the mortgage underwriting process — which can make you more attractive to a seller.
“Cash buyers may have more negotiating power, as their offers can be more attractive due to the lack of financing contingencies,” said Lewis. “This means less risk for the sellers as appraisal and other terms of the financing can cause delays and hiccups. They can often close deals more quickly and have a competitive edge in fast-paced markets.”
Lower closing costs
There are numerous fees associated with closing, such as lender and application fees, loan origination fees and purchasing points. Without the use of a lender, the buyer avoids these types of fees and ends up with lower closing costs.
» MORE: How much are closing costs?
Cons of buying a house with cash
Even though you might have the ability to pay cash for a home, there are a few drawbacks worth noting.
Your money is in one asset
Unless you have other investments and savings, using cash to buy a home limits your portfolio diversification. It puts all your “eggs in one basket.” It’s possible your money could earn a greater return by spreading out the investment versus putting it all in one real estate transaction.
Miss out on mortgage tax deductions
You won’t have the option to deduct any of your mortgage interest on your personal income tax return. Borrowers can deduct mortgage interest on the first $750,000 ($375,000 if married filing separately), but you don’t have access to this deduction when you pay cash.
You limit your liquidity — how quickly you can convert your investment into cash — when most of your money is in your home. Bank accounts give you almost instant access to your funds, and brokerage accounts might take a day or two but are generally a quick process to convert. However, a home can take months to sell, leaving you with a longer time frame to access your own money.
» MORE: Tax deductions for homeowners
Should you buy a house with cash?
Purchasing a home is a major financial commitment, whether in cash or with a mortgage. But before you dedicate your cash to a single purchase, you should assess your personal financial situation.
“While cash offers provide advantages, buyers should approach real estate transactions with diligence, keeping in mind both the benefits and responsibilities that come with cash purchases,” advised Lewis.
Consider if you need the cash for other important obligations, such as an emergency fund, unexpected medical bills or expenses, and if a cash purchase leaves you depleted. You may not have the liquidity you need for life’s financial challenges if your home purchase uses all of your cash.
Another consideration is determining whether putting the cash into other investments yields a greater return. While no investment can guarantee returns, there may be other tax advantages and diversification options offering better returns in the long run versus a real estate transaction.
On the other hand, many homeowners find great relief in knowing their home is entirely theirs until they decide to sell or pass it on.
Do I need a real estate agent to buy a house with cash?
You are not obligated to use a real estate agent to purchase a home, whether it’s with cash or a loan. However, good real estate agents can help negotiate the best price for the home, plus offer insight and guidance during one of the biggest purchases of your life.
Is it cheaper to buy a house with cash?
It depends on the specific real estate transaction. There are two ways a buyer may save money by buying with cash. One is if it allows them to negotiate a lower price on the property and is more attractive for the seller. Two, the buyer avoids paying thousands of dollars in mortgage interest over the years.
Are there tax implications for buying a house with cash?
A borrower — whether they pay in cash or take out a mortgage — must still pay property taxes. You should consult your trusted tax advisor if you have specific questions on the tax implications of buying a property with cash.
- Redfin, “ One-Third of U.S. Homebuyers Are Paying in Cash, the Highest Share in Nearly a Decade .” Accessed June 8, 2023.
- Zillow, “ Amortization Calculator .” Accessed June 8, 2023.
- IRS, “ Publication 936 (2022), Home Mortgage Interest Deduction .” Accessed June 8, 2023.
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