Even though all-cash home purchases have been on the rise since 2021, relatively few people are in a position to buy a house with cash. But it does happen. People downsizing to a less-expensive area, or heirs who sell an inherited home and buy a place more to their liking with the proceeds, are two common examples of ordinary people buying a house with cash. Real estate investment firms and foreign buyers account for many cash sales too.
Buying a house with cash is more common in a good housing market. During a booming housing market, not only are more people buying their first home, but more people are changing homes. They can sell their current place at an elevated price, relocate, and buy their next house with cash. Data from the U.S. Census Bureau on the number of new single-family homes that sold for cash from 1988 to 2020 shows that cash sales are more likely to occur during a property boom and then retreat during a downturn.
But since mortgages are considered "good debt," should everyone who can afford to buy a house with cash do so? Are there reasons to finance instead?Get Free Quotes
Here we explain the advantages and disadvantages of buying a house with cash.
The Pros and Cons of Buying a House With Cash
Let's break down the pros and cons of buying a home with cash. That is, with money from savings, the proceeds of stock or real estate sales, family members, and even lottery winnings. Don't imagine stacks of dollar bills changing hands. What makes a person an all-cash buyer is that he or she doesn't need to borrow from a lending institution to buy the house.
Advantages of buying a house with cash:
Not taking on a mortgage frees you from one of life's biggest debts. Not only will you face no monthly payment, but you save an astonishing amount of money on interest. The accumulated interest on a 30-year mortgage can exceed the loan amount over time. For example, a $300,000 loan with a 5.30% annual interest rate ends up costing $599,729, basically double the amount borrowed. Mortgage loan estimates reveal this in the TIP box, which stands for Total Interest Paid.
The closing time will probably be faster when you buy a house with cash. This is a minor advantage because closings aren't very long anyway; the average closing takes 49 days per the latest (2022) data from ICE Mortgage Technologies. A cash purchase can shave several days off that. Harder to quantify than days saved will be possible time saved: You save some hassle during closing because you won't have to respond to a lender's need for various paperwork.
As a cash buyer, you won't necessarily be more attractive to the seller, but you will probably have more flexibility to increase your bid if the need arises. Assuming you aren't sinking all your cash into the home purchase (you shouldn't), you could instantly increase your bid as needed, whereas your competitors are limited to the mortgage amount for which they've been approved.
Since a cash offer leads to faster closing, you would shine in the eyes of a seller who is in a hurry.
“A short-term mortgage could be the ideal compromise.”
Finally, owning your home outright is a huge psychological perk. Nobody can take it away (assuming you keep it up to code and pay the property taxes). Mortgage holders think of the house as theirs from day one as well, but for cash buyers, the house truly is theirs right from the start.
Disadvantages of buying a house with cash:
Investing all or nearly all your money in the house would leave you with less money for other needs, such as retirement savings, stocks and bonds, and medical emergencies. If you should need money sooner rather than later, it could be hard to get it out of the home—much harder than, say, selling stocks or withdrawing money from a savings account. This disadvantage lessens over time if you have a steady income.
If you buy a house with cash, you won't qualify for one of America's most popular tax deductions. The mortgage interest deduction lets you lower you taxable income by the amount you paid in mortgage interest that year. Starting in 2018, you can deduct the interest you paid on the first $750,000 ($375,000 if married filing separately) of your mortgage debt for your primary home or a second home. If you bought your home before 2018, you can deduct the interest on the first $1 million.
Making regular mortgage payments boosts your credit score. You miss out on this way of improving your credit if you buy a house with cash.
A Short-Term Mortgage Could Be a Good Compromise
Let's say you have enough money to buy a house with cash but like the idea of making other investments too, or keeping a lot in savings for immediate expenses. You also like that mortgage interest is deductible on your tax form. But you hate the idea of paying too much interest or being in debt too long. A short-term mortgage could be an ideal compromise.
Taking on a mortgage for 10 or 15 years would come with one of the industry's lowest interest rates. Put 20% or more down on the home, and you will escape the need for private mortgage insurance and won't need as high a credit score as someone who is only putting 5% or 10% down. Because of the shorter term, the total interest you would pay won't be nearly as high as with a long-term mortgage. The higher payments on a short-term mortgage should be easy to handle, given that you had the means to pay entirely in cash.
"If you have enough cash then you should never borrow. But what is enough?" That's a question posed by Texas real estate broker Glenn Still. "You need enough to buy the house and still have enough for issues that come up later. At least six months' worth of income put into a savings account and some in a retirement account, depending on your age." Rather than buying a home with cash, he says "most people would be happy putting 20% or more down and then getting a 15-year loan."
A mortgage is considered good debt (compared to credit cards, personal loans, and so forth) for several reasons, namely that you need somewhere to live anyway, your payments build equity and improve your credit score, real estate is historically a good investment, and the interest is tax-deductible. Whether these points are more advantageous to you than skipping a mortgage entirely and buying a house with cash is, ultimately, an assessment you must make personally.
Are There Any Advantages to Selling a House for Cash?
The seller receives the proceeds of a sale in cash regardless of how the buyer funds the home purchase. The agents and brokers always receive their commissions in cash too, paid by the seller, and commissions are generally 4% to 7% regardless of now the house is bought. Therefore, an all-cash buyer isn't necessarily more attractive to a seller. Competing buyers who are preapproved for a mortgage can compete head-to-head with an all-cash buyer in most circumstances.
That said, one thing a cash buyer can do for a seller is respond more flexibly in a bidding war. Unlike the mortgage-backed buyers, the cash buyer doesn't have to get preapproved for a higher loan amount. "In a competitive market, where multiple offers are being presented, the cash buyer at least has the odds in his favor for the counteroffer," explains Hawaiian real estate broker Sue Young.
Buying a House With Cash vs. a Mortgage—What's the Same?
Some stages of homebuying are the same regardless of whether the buyer pays all in cash or finances the purchase with a mortgage. First, just like a mortgage holder, a cash buyer will need to provide financial documentation to prove that enough money is on hand. Because selling to an all-cash buyer is rare, the seller may want more documentation than a lender would want.
The share of home purchases using cold, hard cash shot up in the beginning of 2021 and has remained elevated through Oct. 2022, the last month for which data is available.—The Motley Fool
Second, even though you could skip the home appraisal when you buy a house with cash, you probably shouldn't. To ensure that you’re paying a reasonable price for the home, order an appraisal. Also get a home inspection to check for any safety problems.
Third, an all-cash buyer still needs to set up an escrow account unless the seller really trusts the buyer and vice versa, such as in family transactions. The buyer will make an earnest money deposit into the escrow account when signing the purchase and sale agreement, usually 1% to 2% of the home’s price. This deposit is called “earnest money” because it shows that the buyer is serious about buying the home—that’s good for the seller. The money will be held in escrow until the transaction is finalized. If, however, this deposit were simply handed over to the seller, the seller could disappear with it, robbing the buyer. An escrow account protects both parties.
Finally, an all-cash buyer will still have to pay for a real estate attorney, a title search, title insurance, and other administrative costs. On the plus side, when you buy a house with cash, you can skip lender-related closing costs, such as origination fees and underwriting expenses.
Key Takeaways: Buying a House With Cash
- Buying a house with cash saves you all the money you would have spent on interest.
- Closing should be faster, which is a benefit to both buyer and seller.
- Closing will definitely be cheaper, since you avoid the lender-related fees.
- Mortgages have benefits for your credit score and taxes, so for some people a 10- or 15-year mortgage could be better than tying up all their cash in a home purchase.
- Cash buyers should still get a home appraisal and inspection, an escrow account, and a real estate attorney.