About one-fifth of home buyers pay cash instead of getting mortgages these days. But is buying a house with cash the smart thing to do?
The answer depends on motivations and goals. If you want to buy a house with cash to avoid paying mortgage interest, you should consider how much that money could grow if you invested it instead. If your goal is to beat other bidders for a home, buying with cash will attract the seller’s attention. You’ll still need to make a competitive offer, though.
Before you commit to buying a house with cash:
Identify how you hope to gain by making a cash purchase.
Don't assume that cash is better.
Consider how you might benefit by getting a mortgage instead.
Congratulate yourself for having a big bank balance!
How to buy a house with cash
Buying a house with cash is mostly the same as buying with a mortgage, with the giant exception of not having to apply for a loan and all the paperwork it involves.
After your offer is accepted, you'll make an earnest money deposit, make sure a title search is done, conduct a final walk-through and go to a closing, where you'll sign documents to transfer the property. You might conduct a home inspection and even hire an appraiser.
Even though you won't have to supply information to a lender, you'll be expected to supply information from a financial institution.
"One thing a cash buyer will need to do is provide evidence of the available funding within days of an agreement, if not prior to signing a contract," says Tomas Satas, a real estate agent, real estate investor and CEO of Windy City HomeBuyer, in Chicago. Also known as a proof of funds, this evidence could take the form of a bank statement or a letter from a financial institution.
Satas adds that you shouldn't skip due diligence just because you can. "Cash buyers mustn't skip important details like inspections, surveys, termite letters and title insurance," he says. "A good attorney that doesn't let these things fall through the cracks is vital."
It may feel satisfying to buy a house with cash, but it's not necessarily the optimal choice for everyone who can afford to do it.
» MORE: All the steps to buying a house
Reasons to buy a house with cash
You don't want to pay interest
A mortgage is expensive. On a $300,000 mortgage with an interest rate of 3.25%, you'd pay about $170,000 interest over 30 years. When you pay cash for a home, you avoid paying all that interest — not to mention going into six-figure debt.
Buying a home with cash doesn’t eliminate recurring expenses. You'll still pay property taxes and, if you're wise, homeowners insurance. But, you can take the money you would have spent on monthly mortgage payments and save it for retirement or emergencies (or spend it).
You're competing against other buyers
Sellers know that lots of things can go wrong while a lender is processing a mortgage application. Buyers mess up their credit, lose their jobs and don't submit paperwork on time. Lenders misplace paperwork and make mistakes.
These problems are commonplace, and they can result in delays or outright loan disapprovals. Sellers are aware that these problems affect mortgage borrowers but not cash buyers.
Home sellers appreciate the certainty that cash buyers will be able to close on their purchases and on time, says Hiro Kurokawa, founder of WeOfferQuick.com, a company that buys houses in Dallas for cash. "Some sellers will appreciate this enough that they go with a cash buyer over a traditional buyer with a higher offer price," he said in an email.
Another advantage of paying cash: You can close sooner. Cash buyers often can take ownership in two weeks or less, whereas it often takes four to six weeks to close on a mortgage. When a seller is in a hurry, a cash buyer might have a competitive edge.
You don't want to be at the mercy of an appraisal
Cash buyers have the ability to skip or ignore an appraisal. Mortgages, on the other hand, require appraisals. If a home appraises for less than the price, the lender may expect the borrower to come up with cash equal to the difference between the appraised value and the price — in essence, a bigger down payment. If the borrower doesn't have enough cash on hand, the deal will fall through unless the seller reduces the price.
"As prices are rising quickly, and what people are willing to pay outpaces appraisals, a cash buyer is often the only person able to pay what the market demands," says Janie Coffey, a real estate broker and investor in St. Augustine, Florida.
You find it hard or impossible to get a mortgage
Sometimes it's difficult to qualify for a mortgage because of issues with the property, and sometimes it's difficult because of issues with the buyer.
Mortgage lenders "typically won't finance a house that is in disrepair," Kurokawa says — so you might pay cash for a home that needs work before it's habitable. However, various renovation loan programs allow you to buy a fixer-upper and include renovation costs in the loan.
Some buyers may be stymied by a "thin credit file," which means they don't have enough information in credit reports to generate a credit score, which is necessary to get a mortgage. A thin credit file may befall immigrants, citizens who moved back to the United States after living abroad for many years, people who avoid using credit, newly single people and those who have been incarcerated.
You can bulk up a thin credit file, but it takes time. Meanwhile, if you're in a hurry and have the money, you can buy a home with cash.
Don't assume cash is better
Most sellers are looking for the best price and terms, says Tricia Lee, an associate real estate broker in Brooklyn. Mortgage borrowers can win bidding wars by offering more. Don't expect a cash discount.
"Buyers shouldn’t think that cash will automatically land you a better price, because often it does not," Lee said by email.
But sometimes a cash offer can be the winning bid, even at a lesser price, she added. This might be the case if the seller is buying another home and a delay would endanger that deal. "It’s the agent’s job to decipher if that’s the case for each particular seller," Lee said.
Reasons to get a mortgage instead of buying with cash
You'll come out ahead by investing the money
In many cases, getting a mortgage is the rational course. There might be more productive ways to use the money, even if you have enough cash to pay for a house outright.
"What would you do with the money otherwise?" is what Nick Holeman, head of financial planning for online financial adviser Betterment, asks cash buyers.
When you spend cash on a house, you're not investing it for retirement or your children's college expenses. By investing the money in a tax-favored, diversified portfolio, "you likely could outperform the rate on the mortgage," Holeman says.
For example, if the mortgage interest rate is 3.5%, and you could get an investment return higher than 3.5% in a tax-favored, diversified portfolio, you come out ahead by investing the money.
"Don't sacrifice your other financial goals to make an all-cash purchase," Holeman says. "If you are adamant about making an all-cash purchase and you can't do so without dipping into your retirement accounts and your emergency fund and your kids' college fund, well, you're buying too big a house."
You'll need the cash for other things
You are likely to have unexpected expenses and reductions in income over the years. Roofs leak, water heaters break, employees get laid off, people fall seriously ill. Cash is handy when these things happen.
"You'll probably exhaust your cash for emergencies, repair and important purchases if you spend all your cash on buying the home," Tal Shelef, a real estate agent and co-founder of CondoWizard, in Toronto, said by email. "Since unexpected things always happen, when deciding to pay cash, make sure to spare some for emergencies."