If you buy a house with cash, you can avoid paying interest and feel comforted by the idea that the house is actually yours. Additionally, cash sales don’t require credit checks and are often faster transactions. However, there are disadvantages — including a potential loss of money in the long-run. For the full pros and cons of buying a house with cash, as well as information about how the process works, see below.
Advantages of Buying a House with Cash
If you have the money, buying a house with cash is simple — assess your funds and make an offer. About 20% of homes in the U.S. are paid for in cash. Below, we have the list of advantages to paying for real estate with cash.
- Cash sales can be processed quickly. Lenders can slow down the closing process by requiring extensive appraisals and simply by taking some time to approve the buyer’s funding. In cash transactions, the funds require no approval or additional appraisals, as the buyer already has the money on hand. Cash sales can close in as fast as two weeks, while financed houses close in 30 to 60 days.
- Cash sales don’t incur high interest charges or fees. Mortgages come with a wider range of fees than cash sales. These include loan origination fees, appraisals, and more — and that’s not to mention the interest you’ll pay over the lifetime of the loan. Without a mortgage, you instantly save by avoiding many of these charges.
- Credit checks aren’t required for cash sales. You’ll have to provide proof of funds and sign plenty of paperwork to close an all-cash sale, but since you aren’t using any sort of financing, a credit check isn’t required. (Note: Alternately, not all mortgages require credit checks. See our article on banks and mortgage companies that do manual underwriting for more information.)
- You’ll feel less stressed. Owning your new house outright from the start can save you a lot of stress. You won’t have to worry about missed mortgage payments. Without a mortgage payment, you’ll also have extra money in your pocket each month, which can be saved for emergencies or put toward home improvement projects.
- You may be able to get a better deal. Cash offers are attractive to sellers because of their shorter time frames and the fact that the deal isn’t reliant on a lender. Some sellers will accept a lower offer if the house will be paid for in cash. As noted above, you’ll also save on certain closing costs, like loan origination fees.
- You won’t be leveraged. Leverage can lead to bigger gains when property values increase but can also be very risky if home values decrease.
Disadvantages of Buying a House with Cash
While cash sales have many advantages over mortgages, there are a few things to be cautious of as well. See the list of disadvantages of paying for a house with cash below.
- Getting a mortgage later may leave you with a higher rate. If you buy a house in cash and later decide to get a mortgage on that house, the mortgage may be labeled as a refinance, or the market may shift in such a way that you end up with a higher rate. (Delayed financing is also an option and can help you avoid refinancing fees, but is coordinated around the same time as the sale.)
- Other investments may be more lucrative. If you’re looking to pay cash for a house as an investment, investing in the stock market may be wiser. The stock market has gained an average of 12% annually since inception. The appreciation of your real estate investment will vary based on the house itself and its location.
- You will have less liquidity. The value of a “liquid” asset can be easily converted to cash — but a house is not a liquid asset. Liquid assets can save you from a financial crisis in an emergency. Liquidity is an important factor to consider if you own few assets. It may be smarter to keep your cash or invest it in liquid assets (like stocks, bonds, and mutual funds) than to keep your money tied up in real estate.
- You won’t benefit from tax deductions. In the U.S., you can claim a deduction for mortgage interest as long as your mortgage meets certain requirements set by the IRS. If you opt to purchase a house with cash, you will not benefit from any of these tax deductions. For some people, this is reason enough to get a mortgage, even if they can afford to pay cash.
How to Pay for a House with Cash
When paying for a house with cash, you can’t just slide a stack of bills across the table in exchange for the keys. You’ll still need to formally submit an offer and go through the closing process. After weighing the advantages and disadvantages, if you choose to buy a house with cash, we have a few tips to make the process go smoothly:
- Analyze your income before beginning your house search. You’ll want to consider what your budget will look like after buying a home. How much money do you earn each month? What will your monthly costs associated with the home total? Do you have any other major purchases on the horizon? How much savings will you have left after buying the house?
- Know exactly how much house you can afford. Based on a thorough analysis of your own finances, as described above, make careful estimates and investigate the real estate market in your area to determine what you can afford within your budget.
- Keep the full scope of expenses in mind. The house’s list price isn’t the only amount to consider. While you’ll avoid mortgage fees by paying in cash, there are still taxes, insurance, utilities, and, in some cases, homeowners association fees you’ll need to cover. Without financing, the amount of cash you have on hand will need to cover all of these expenses.
With your budget set and a clear idea of the type of house you want in mind, all that’s left is to find a house, submit an offer, and close. You can search online or work with a buyer’s agent to find a house you like. When you’re ready to make an offer, highlight the fact that you’ll be paying with cash and looking to close quickly.
You’ll need to attach proof that you have the funds to pay for the house to your offer, such as a bank statement. A realtor can help you draft your offer and perform a title search, to be sure the house has a clear title.
Homeowners insurance is generally only a requirement before closing if you’re working with a lender. However, it’s a good idea to explore your home insurance options at this point even if you are paying in cash. Homeowners insurance not only protects your home but protects your personal belongings and protects you from liability should someone be injured on your property.
Once your offer is accepted, there will be a closing meeting between you, your agent, the seller, and the seller’s agent. At the closing, you’ll sign a legal contract confirming the sale. Rather than bringing the full purchase price in cash, you’ll need to pay using a check or have the money wired into an escrow account to be transferred to the seller.
Is buying a house with cash right for you? If you decide that you do want to invest in real estate, buying a house with cash has several advantages including a quick closing process, fewer fees, and no credit checks. But, you should be aware that it may be less lucrative than other investments, that you will have less liquidity, and that you won’t be able to benefit from tax deductions. At the end of the day, it’s about what you’d like to do with your cash.
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