About 28% of home buyers pay cash instead of getting mortgages these days, according to the National Association of Realtors. But is buying a house with cash the smart thing to do?
The answer depends on your 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 what 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 one with a mortgage, with the giant exception of not having to apply for a loan and all the paperwork it involves.
Though you won't have to supply information to a lender, you'll typically be expected to supply evidence of the available funding from a financial institution prior to submitting an offer. Also known as a proof of funds, this evidence could take the form of a bank statement or a letter from a financial institution.
DATA: What's the Homebuying Climate this month?
NerdWallet's Homebuying Climate Index puts a familiar weather label on how favorable conditions are for home buyers.
For July, our analysis puts the Climate Index at 54.2 out of 100, keeping the index in Partly Cloudy territory for the 48th straight month as most variables hold relatively steady.
Read more about the factors affecting this month's index to gauge how they might affect your homebuying plans.
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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 hire an appraiser.
Though you won't have to supply information to a lender, you'll be expected to supply evidence of the available funding from a financial institution prior to submitting an offer.
🤓Nerdy Tip
As a cash buyer, make sure you still do your due diligence. Don’t skip important details like inspections, surveys and title insurance. And consider hiring a good attorney that doesn't let these things fall through the cracks.» 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 6%, you'd pay almost $348,000 in 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, however. You'll still owe property taxes and, if you're wise, pay for 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 sometimes mess up their credit, lose their jobs and don't submit paperwork on time. Lenders misplace paperwork and make mistakes.
Some sellers may favor cash buyers to avoid these problems and delays.
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 you to come up with cash equal to the difference between the appraised value and the price — in essence, a bigger down payment. If you don’t have enough cash on hand, the deal will fall through unless the seller reduces the price.
You find it hard or impossible to get a mortgage
Sometimes it's difficult to qualify for a mortgage. For example, some buyers may be stymied by a thin credit file, meaning 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 U.S. 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.
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.
For instance, 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 could outperform the rate on the mortgage, especially if your mortgage rate is low.
You'll need the cash for other things
Unexpected expenses and reductions in income are bound to happen over the years. Roofs leak, water heaters break, employees get laid off, people fall seriously ill. Cash is handy when these things happen.
Get a mortgage if paying cash will leave you without a healthy emergency fund.
Don't assume cash is better
Most sellers are looking for the best price and terms. Mortgage borrowers can win bidding wars by offering more. Don't think that cash will automatically get you a better price. Find out what the seller wants besides money — this may include a fast closing, few contingencies, or not wanting to pay for repairs — and tailor your offer accordingly.
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