What are the advantages of paying cash for a house vs. taking out a mortgage?

February 20, 2014
I'm in New York. Additionally, if I should take out a mortgage, should I be trying to minimize my cash down, or are there benefits to putting a higher cash down payment?

Advisor answers

Jarrett Topel

Jarrett Topel

MSFP, CFP®

The main benefit of an all cash offer, is that you are more likely to have your offer accepted by the seller (and you may be able to offer less than someone who is using a bank funded offer). Sellers prefer all cash offers, as then they do not have to worry about the bank pulling the loan at the last minute, or any of the other minutia (aka drama) that often occurs with bank funded purchases.

The question of if it is better to pay cash, or take a loan, comes down to opportunity cost. If you have an opportunity...

This question is very similar to one I hear from clients regarding whether or not it makes sense to pay-off a mortgage early, and the answer is, "it depends". Certainly, there is an economic view which looks at the alternative uses of the cash available to pay-off the loan or purchase the property and the correct answer would be to select the option which provides the biggest net return to the investor - in other words, could you make more after-tax by investing the money?

However, as with all financial decisions, in...

I concur with Jarrett's advice, and I would add this additional perspective:

Using someone else's money to buy an asset (like a house) is sometimes referred to as "leverage". A lever amplifies an input force to provide a greater output force. In the same way, a small amount of home equity (the down payment) can appreciate dramatically, even if the home appreciation is modest. For example, a $1 million home is purchased with a 10% down payment, or $100,000. Th...

Guy Baker

Guy Baker

CLU, ChFC, AEP, CFP®

Buying a house is about cash flow, flexibility and value.

Paying cash for your house is great - if you have a lot of money. But tying up cash in a house when you could invest possibly and get a better return makes no sense to me. Plus, there are tax benefits to have a mortgage - that creates arbitrage. This is where you leverage your money to have both the house and investments. If you only can buy the house, you forego the investments.

If you buy a house and it appreciates - you will get that appreciation regardless of whether you pay ...

John Buerger

John Buerger

MSFS, CFP®

Paying cash will make your offer more tempting to the seller since they don't have the risk of your lender changing the deal at the last minute (which can happen). That means you might be able to either (a) pay a lower price than a mortgage-dependent buyer or (b) have a better chance of having your offer accepted at the same price as everyone else.

I don't know how much cash you have lying around so the other variables are even harder to quantify. Putting all that money into a house in which you live is the equivalent of burying that m...