- Buying a home in cash can be a great step toward financial freedom, but it isn't automatically better than a mortgage.
- Paying in cash can save you thousands on interest, closing costs, and monthly payments.
- On the other hand, paying in cash could be risky if you don't have much left in savings after buying the home.
If you have the money to buy your dream home, you might assume paying in cash is the way to go. This could be true, but the choice between paying in cash and getting a mortgage isn't black and white.
The answer to the "cash versus mortgage" debate depends on your circumstances. There are several factors to consider, including how much you'd have left in savings, how you'd spend the extra money if you took out a mortgage, and what your priorities are.
Pros and cons of buying a house in cash
Pros
There are plenty of benefits to buying a home in cash. Here are just a few you'll enjoy by avoiding a mortgage.
No mortgage interest and fewer fees
For one, you won't pay interest. Over a 15-year, 20-year, or 30-year term, the average mortgage interest rate can cost you tens of thousands of dollars. You'll still pay some closing costs, but you won't have any mortgage-related fees, so your overall costs will be lower.
Immediate equity in the home and lower payments
Another perk: You'll enjoy immediate equity in the home and will have lower monthly payments. You'll still have to make regular payments on things like property taxes, homeowners insurance, and maybe homeowner's association fees. But you'll free up hundreds or thousands of dollars per month on mortgage payments, so you can spend that money in other ways.
A stronger buyer position and potential discounts
Finally, it could make your offer stand out — which might be important if you're buying in a competitive market. Sellers often prefer to sell to someone who is paying in cash, because the closing process usually goes more quickly (there's no tedious loan approval to deal with), and there's less risk that something will go wrong. They may even accept a lower offer due to these conveniences.
Cons
Even if you have it, cash isn't always the way to go. These are the drawbacks that come with buying a home in cash.
Liquidity concerns and tying up funds
First, buying a home in all cash ties up a lot of money. This could drain your savings and emergency fund, possibly making it hard to handle an unexpected expense. It could also pose problems if you lose your job or something happens with your income later on.
Opportunity costs of investing the money elsewhere
There's also the opportunity cost. The cash you put toward your home might earn you returns as your home appreciates over time. But there's a chance putting that money in other investments, like the stock market, for instance, could earn you more.
Lack of mortgage interest tax deduction
Last but not least, you're missing out on the mortgage interest deduction by skipping a mortgage. Mortgaged homeowners get to write off the interest they pay on their loans each year, as well as any points paid at closing.
Pros and cons of using a mortgage to buy a house
Pros
Though a mortgage means taking on debt — not to mention years of interest costs — there are actually some perks that can come with these loans.
Leverage and potential investment returns
When you take out a mortgage, you aren't tying up a lot of money in one investment, meaning you could put your funds elsewhere to work even harder for you.
If mortgage interest rates are low when you buy, for example, then you could stand to make more by investing some of the money in the stock market than by avoiding interest payments.
Maintaining liquidity and financial flexibility
You also aren't spending a lot of cash at once. Yes, buying in cash can potentially save you a significant amount of money in the long run. But if you spend the bulk of your liquid cash on the home, then you could face trouble if there's an emergency or if you need to make home repairs after moving in. You should always have money set aside for an emergency after buying a home.
Possible tax deductions
You'll enjoy tax perks with a mortgage, too, as mortgage interest payments are tax-deductible — as long as you itemize your returns. The deductions aren't quite as substantial since the 2017 Tax Cuts and Jobs Act limited how much you can write off, but it's still worth considering. You may be able to write off interest on up to $750,000 in mortgage debt.
Cons
Of course, mortgages come with drawbacks, too, and they can cost you over time. Here are the ones you should consider before taking out a mortgage loan.
Interest costs over the life of the loan
The biggest disadvantage of using a mortgage is the long-term interest you'll pay. On a 30-year, $350,000 loan at a 6.5% rate, your total interest costs would come to over $440,000 by the end of the loan term.
Qualification and closing process
You will also have to go through the loan approval process, which relies heavily on your credit score, credit history, and debts. Depending on how your financial picture looks, this could be challenging.
Loans take longer to close, too. With a mortgage, it can take between 30 to 60 days to complete the homebuying process.
Potential for foreclosure
Finally, when a mortgage lender has a stake in your property, there's always the chance of foreclosure. If you fall on hard times and fail to make your payments at some point, they could seize your home.
Paying cash for a house vs. getting a mortgage: Factors to consider
The right move depends on a lot of factors, including your financial situation, current market conditions, and your personal long-term goals.
Current financial situation
If you have the cash and would still have funds left over for emergencies and home repairs, then buying a home outright may be a smart move.
If it'd require you to drain your savings, though, or stretch your budget, a mortgage may be a better option.
Real estate market conditions
Local housing market conditions matter, too. In a competitive market, buying in cash could give you the upper hand, as it allows you to close quickly. Sellers may even accept a lower price point as a result.
However, if it's a buyer's market and there's not much competition, an all-cash offer might not be necessary.
Personal and financial long-term goals
Your personal and financial goals also must factor in. If your goal is to grow your wealth as much as possible, using a mortgage loan could free up cash to put toward higher-ROI investments while you're in the home. It can also qualify you for a valuable tax deduction.
On the other hand, if having low monthly housing costs for the long haul is more of a priority, cash is likely a better option — as long as it won't deplete your savings.
Buying a house with cash vs. a mortgage FAQs
Can I buy a house with cash?
Yes, you can buy a house with all cash, rather than getting a loan. When you do this, you'll own the home outright and won't have a monthly mortgage payment.
How much cash do I need to buy a house?
How much cash you'll need to buy a house depends on the home price and your other costs. Even if you're getting a mortgage, you'll still need some cash to complete the transaction.
Can taking out a mortgage be financially beneficial?
Taking out a mortgage can be financially beneficial because it frees up your cash savings for other higher-ROI assets. You'll also safeguard your savings in case of emergency and may qualify for certain tax deductions.
How does buying a home in cash affect my financial flexibility?
While paying cash can help you avoid interest costs, it also reduces your financial flexibility, tying up a significant amount of money that you could use for other investments. It may also impact your ability to handle financial emergencies later on.
Should my decision change based on market conditions?
Market conditions can influence the decision. In a competitive market, offering all cash may help you stand out among other buyers or even negotiate a better price.
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Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.
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