Advantages of Buying a House With Cash
The decision of whether to buy a house with cash or take out a mortgage may be one that most people never have to face. For the most part, American society is comfortable with the idea of going in debt to buy a house for two reasons. First, the value of a house is expected to rise over time, and second, if debt was not available for buying a house, many families would never be in a financial position to own.
If you are blessed with cash available to purchase a home without the help of a lending institution, should you do it? There are certainly many advantages of buying a house with cash, but some disadvantages as well.
Banking Deal: Earn 1.55% APY on an FDIC-insured money market account at CIT Bank. See details here. CIT Bank. Member FDIC.Cash advantage #1: no hassle. The process of qualifying for a mortgage is a hassle, even if you show you have significant assets and income available. You need to have established credit for a lender to be able to evaluate its risk in you, but with cash, you are no risk. You save time with paperwork and, in theory, the purchase process will be faster. For a seller, a buyer who presents cash may have an advantage over those who are tied to a mortgage lender’s involvement.
Cash advantage #2: less expensive. You might be able to negotiate a better purchase price when you have cash to show, but there are many other areas you can save money. Closing costs might be less, and without a mortgage you don’t have to worry about paying points. Over time, the bulk of the savings comes from interest. On a $250,000 mortgage at 7% over 30 years, you could pay almost $350,000 in interest. Pay $250,000 up front and save your money.
Cash advantage #3: no payments in retirement. With thirty-year mortgages being the norm, families who wait before buying a house may find they’re still have a balance to pay their lender by the time they retire. During retirement, income could be significantly reduced, making those mortgage payments more difficult to pay. Those with a mortgage should do what they can to eliminate payments before retirement, but if you pay cash, you never have to worry about changes in your future income affecting your ability to hold onto your home.
Cash advantage #4: you’re not a slave. I don’t fully subscribe to the idea that debt is slavery, but when you owe money to someone else, you certainly lose some of your freedom. For example, a Philadelphia homeowner was notified by his lender, Wells Fargo, who may no longer even own the mortgage due to securitization, to increase his insurance policy to covered the full replacement value of his home rather than the house’s market value. The charges would have added $500 to his monthly bill. Although the owner might be able to fix the situation, without a mortgage, Wells Fargo wouldn’t have been harassing him.
Mortgage advantage #1: bigger financial reward. It comes with risk, but if you’re planning to stay in house for several decades, and you do stay, your financial gains could be greater if you finance the purchase. If after ten years the value of the house increases by $200,000, all that increase belongs to you even if you don’t own the home outright. You could even cash out that increase if you need the money for some reason. The other size of this is that if the value of the house decreases, you are on the hook for that loss, and in many circumstances, you could end up underwater, owing the lender more than your house is worth.
Mortgage advantage #2: afford a bigger or better house. Even if you have the ability to buy a house with cash, you may still want to choose a mortgage. If you expect to have more cash on the way, you can use your current assets to help you afford a much bigger home, if that is something that is important to you. With $400,000 cash available today, for example, you could either buy a home without a mortgage or use a portion or all of that cash for a down payment and closing costs. As long as you expect more income in the future to pay for the mortgage payments, you can use today’s cash to your advantage.
Mortgage advantage #3: get tax breaks. Yes, it’s true that at least as of today, there is a tax deduction for mortgage interest. This isn’t as great a benefit as most people believe, however. You get back only a portion of each dollar in interest you pay, and the benefit is limited by income. Even with a middle-class salary, you might be prevented from taking this deduction. Of course, if you pay cash for a house, you pay zero interest, which is much better than paying interest and getting a portion of it back from the government.
Mortgage advantage #4: diversification of assets. Just having the cash to spend isn’t the only consideration. If the house you want costs $450,000 and you have $460,000 in cash ready to go, you will be left with only $10,000 for all of your other savings needs, including an emergency fund. Using all of your cash to buy the biggest house your money can by is putting all your eggs in one basket. If you have enough cash so the home purchase only requires a portion of your assets, you may still consider your financial condition safe, but once you shift all your liquid savings into an illiquid asset like a house, you may have trouble getting cash when you need it.
Would you jump at the chance to pay for your dream home with cash, or would you consider taking out a mortgage even if you have cash available?
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Article comments
Buying cash brings the huge safety of NOT having any payments to make! This is a huge plus, especially once retired! Congrats on the new move, I wish we were mortgage-free!!!
I am just looking for a little peace of mind here. Over the years I have been putting cash away for retirement. Well it is almost here. I have a little over 100k in a safety deposit box . I want to spend 30k for a car and have already puy 9k down on it. How can I handle the balance without throwing up flags……don’t need that . The money is all legal. Bur as we all know the gov want all they canget. Can you please advise me. Or even send me in the right direction.
Thanks for any help,
Teresa
I think it really depends on age. Who wants monthly payments on a house at age 62 if you can pay cash and still have a decent amount to live on. Enjoy life debt free during this time.
I paid cash for my house using taxable IRA money.
I knew the taxes on my IRA distribution were going to be quite high. I was told I could lower them by stretching my distributions & tax payments over several years since not all money is taxed at the same rate.
Higher amounts are taxed at a higher percentage rate as per the marginal tax rate table the IRS issues each year.
However, the rates are subject to change yearly so there is an element of the unknown.
Also, distributions on pre-tax IRAs are counted as income so you must factor your yearly taxable income in to determine the amount of taxes you’ll owe.
I took an IRA distribution to pay off the house in full. The next year but before taxes were due in April I took a 2nd distribution to pay off the taxes on the 1st distribution.
Next year I will do the same to pay off the taxes on my last distribution & so on.
If you are buying a home for cash, it’s alway better to use tax-free money if you can.
If not you must figure income taxes into the purchase price to determine how much house you can really afford.
I’m told it’s bad to use retirement money to buy a house but in my case I think it was a good idea as my views have changed. My husband worked & saved all his life towards his retirement & passed away just short realizing that dream. I no longer place as much emphasis on the future.
That said, I am saving a whole lot of money by not paying rent anymore on a place that isn’t mine (my rent payments were going towards paying off my landlord’s 2nd home -not the greatest feeling)
I now have a sense of security. No longer can my landlord say: get out, I’ve sold the house.
This is my place, paid in full & that’s a really good feeling.
Actually, my yearly insurance & property tax payment is about what I was paying PER MONTH at the rental. Unbelievable!
I wish I could pay cash for the house that we just bought. We got lucky and the price was really cheap(about 15,000 due to the sudden death of the owner and his kids just wanted to get rid of it) but we did the 30 year mortgage on it anyway because of the amount of work it would require to get it up to our standards(with modern amenities like a new box for the circuit as opposed to the fuse box and switches on the walls instead of pull strings on ALL the lights). We figure if we put about another $10,000 we’ll have the house in the shape we want it and then if we decide we want to move, we’ll rent it out. 🙂 But, I have seen people buy a home with cash. My brother’s in laws had saved from the first day they came to states and 15 years later, they were able to negotiate the price of a house down from $200,000 to 89,000 because of the weak market and the fact that they had that in cold hard cash right there right now. And that included much of the furniture.
Well, you could always go back to renting, where you will always have a monthly cost. On top of that you will get no return on it, ever! Now, I’m totally against renting, rather do that than buy a house with a mortgage. However, rent costs continue to climb and could be a con. If you don’t like living in your house anymore, rent it out and find yourself a rental to live in that could be paid for from the rental of your house. If you own your house outright, which is the best position to be in, you have that freedom. You also need to think about retirement and having to rent during retirement cost more monthly than if you have a home completely paid for.
I used a mortgage, but I still have a problem with diversification of assets. I bought the cheapest reasonable house I could find (half the median price in my town), and it’s still a fight to keep it down to less than 1/2 of my net worth (I’d prefer it to be more like 1/3).
Even after it’s paid off, though, I’ll still be a slave. I’ll owe property taxes every year. I’ll still want to pay insurance, just in case. I have to mow the grass and/or pull weeds continuously all summer.
And I’m more stuck than with a rental–even when you like a place and don’t change your mind, the place itself can change drastically. Since I moved in 15 years ago, the very nearby airport was moved outside of town (yea!), the nearest entrance ramps to the freeway were dug up (boo! hiss!), the stores at the local shopping center have changed (yea!), the closest grocery store has closed down (boo!), and additional laws have been passed about what you’re allowed to do with your own property (boo!). I also miss someone else being in charge of repairs, thought it’s nice that when I finally get around to it, I make sure it’s done right.
Buying a house with a mortgage is a leveraged investment. If you put 5% down you are leveraged 20:1. If house values go up 5% you “doubled your investment”. If they go down 5% you “lost everything”. The reason it is important to bring up is because the housing bubble created huge gains for home owners who bought at pre-bubble prices. Since it was only about 10 years ago there are many people in that category. However the flip side is occurring now that the bubble is deflating. People who purchased in the last 4 or 5 years has seen their equity disappear.
The point is that purchasing a home with a mortgage is a leveraged purchase and the more leverage the more risk there is. In the bubble era everyone knew that house prices “only went up”. Now that it is becoming more evident that housing is on it’s way down, purchasing a house with leverage becomes a terrible investment.
I can’t see any scenario where purchasing a 1st house today is a good investment (it may be the right choice for your family but that doesn’t make it a good investment) Who would want to leverage an investment 20:1 in a depreciating market on an asset with high carrying costs (taxes and maintenance, HOA fees etc) and high transaction costs (Realtor, closing costs etc)? I understand the alternative is to pay money for rent but if you factor in the cost of housing depreciation (roughly 3%/yr in my area), it doesn’t makes financial sense to buy as opposed to renting.
Listen carefully, there are NO advantages to having a mortgage period. Al advanatges listed are not advantages. Buying a bigger, better house? Go right ahead and put yourself at that risk, thanks. You get a bigger financial award with cash for advantage 1. Diversification? How about buying a cheaper home with cash, and let’s not forget that there will be o mortgage payment each month. Tax break, really think this is an advantage? How aout doing some real math on the interest your paying every month which is greater than the tax benefit. Get real!
Oh, thank you for your clarity. I received an inheritance from a loved one, and thought about how I would invest it. People have so many varying ideas of how to “grow” money, I felt absolutely perplexed as I listened to several experts’ advice. I decided, finally, to buy my first home with cash. It’s small, but I’m thilled. Still…as I read this blog I started having second thoughts about my decision. Thanks for reminding me that my choice makes sense, at least to you and me! 🙂
In my never to be humble opinion, it makes more sense to buy a house with cash if you have it. Interest rates may be low, but I estimate (based on one prior mortgage) that we saved over $5,000 just in “fees” to originate the loan. Yes, there are/were opportunity costs, but the money I don’t pay monthly to my lender are worth it to me, and I feel safer investing it in the stock market monthly with dollar cost averaging. You still deduct property taxes from your income tax return, by the way. As for the tax savings of property taxes, I’d rather keep my $1,000 a month in interest instead of paying it and maybe getting $200 or even $300 of it back in income tax “savings”.
I prefer to use a mortgage to buy a house. You get tax benefits for the property tax and mortgage interest, as well as a chance leverage OPM’s (Other People’s Money) for an investment.
I’d love to buy a house with cash but I will have to take a 30 year mortgage and plan to pay the house off earlier. Good article, flexo.
While I did not pay for my house with house I paid it off early. I had so many people argue with me that we needed the tax break, the money in the bank and several other arguements. I just wanted the house paid off and have it be mine. That way I owned it. In a related item, I am looking around for a used car since mine in old and on it’s last leg. I am planning on paying cash and everyone tells me that I need the 0% financing and to keep the money in the bank. Maybe, that is smart but I just want to be debt free. After all you never know what ould happen with your job or your health.
IF you can qualify for a mortgage, it makes much more sense than renting or buying a home with cash.
1. As a renter, you landlord is getting tax deductions for the interest and taxes that you’re paying for him/her.
2. As noted in the original article, one can purchase a larger home if using the cash for downpayment and getting a mortgage. NOT SPECIFICALLY NOTED is the APPRECIATION in the value of a more expensive home is going to be greater. Last I knew, the median home price is around $175,000 and the average appreciation rate is over 4% – even in these troubled real estate times. (Note that I’m using the word “average” which takes into account the double-digit appreciation of some markets in some years.) Simple math will show you that 4% on a $100,000 home isn’t going to be as much as 4% on a $400,000 home.
3. Risk/reward – though the author looks at this mortgage reward in terms of being able to buy a bigger house, left out is a look at the potential gains of OTHER investments. The historical average total return for the S & P 500 SINCE INCEPTION is around 11%. The after-tax cost of a mortgage today is around 4%. So while your $100,000 cash in your home is saving you $4,000 in interest, you’re LOSING $8,000 in after-tax (assuming 30% in taxes) earnings in the stock market. And of course, if one is using a professional money manager, some folks have seen returns above 50% in these troubled times.
In my book, a mortgage is a better use of one’s money.
With interest rates so low, I don’t think I would currently buy a house with cash if I could. I think I would put the cash in some low risk investments, something like tip bonds maybe…
At least at first that’s what I would do. Most likely, I would break down and pay it off in a year or two…
It’s a healthy attitude to not view this as an all or nothing decision. One can buy with a mortgage and choose to pay down as quickly/slowly as possible.
Love the site and the insights you are offering on this blog. I’m also a blogger from NJ and appreciate your efforts!
It sounds great but I don’t think it’s plausible for me. I would of course make sure I have at least 20% down and not buy more house than I need. I think either way works as long as you’re making a financially responsible decision.
Whether or not I would pay for a house with cash would depend on a lot of other financial factors, but I do think it’s good that the pendulum has swung back to where people are talking about it again. I think it would be good if homeowners would stop worshiping at the altar of the tax deduction and just see it as one of many pros/cons, as you’ve presented it here.
Noob here. Here’s my 2 cents.
Currently have a mortgage, looking to sell and relocate to lower cost of living area. I would anticipate buying the next home with cash, or a very large down payment. Having no mortgage could mean freedom to semi-retire and do part-time work or work and build up a nice investment without risk of losing ones home.
I would love to buy with cash! Despite any “benefits” to having a mortgage, owning a home free and clear would be the best benefit of all. Unfortunately it is not as much of a reality as taking a mortgage out and paying it off as fast as possible.
Cash is king.
Debtors are slaves to the lender.
Buy with cash.
You can do it.
“Everyone” is broke, don’t listen to the masses.
Live way under your means, save like crazy, be patient and buy that house with cash.
Well said wise!
Wise, you said it the best! Good thinkin’
Me and my wife are qualified for a mortgage but we decided to live with our family and saving money to pay cash for house. It will probably take us 3 years to get there but it’s definitely better than to be on a 30 years mortgage. We will save money on interest and property tax for the 3 years and not to worry about getting laid off.
You are right, Wise Finish. We want to live like no others, so we will live like no others.
Having recently retired, I can confirm advantage #3. We paid as much as possible in cash when buying our home, paid off the mortgage early, and have had peace of mind ever since.
I’d buy my house in cash if i have the chance.. but i also won’t be buying too much house or too much stuff..
I think this is a good point. One advantage to owning your home outright is that you have a paid-for place to live, which could be important in the event of a job loss or other unfortunate circumstance. The key, however, is not to buy too much house, so that you have money to save, invest, etc. and you don’t have the high opportunity costs that were mentioned above.
I think it would be pretty hard for someone to buy a house with cash unless they were ubber rich where I live. I definitely can’t do it. I think buying a home makes sense when you can own a home if your mortgage payment would be the same (or cheaper) then what you are paying for in rent.
I think it’s rare that people suddenly have that kind of money. A more realistic question is whether to keep saving while renting until you have enough to pay cash or whether to buy as soon as you have a good down payment, or something else in between. At the time I bought my house, house prices were going up much faster than I could save, and after I bought it, it kept going up most years, so I’m glad I had a mortgage. I’m actually going to pay it off much more quickly than I could have saved up to pay cash.
I was in a bad car accident a couple years ago and have completely killed my credit. I’m planning on using the money from my settlement to purchase a house and using the money I’m spending on rent currently to get myself out of debt.
In today’s housing market, u will be surprised how far a little can go, if only you are willingly to let some luxuries/excesses go. I am not close to being ubber rich but i own my home free and clear.
if i had the cash, and was in the market for a house, i would certainly take the cash option. while there are advantages to a mortgage as well as some disadvantages to cash, to simply have the home and not have to worry about payments for a decade or two would be a great feeling.
since we are talking about a dream scenario, if i had that much cash on-hand, i would “probably” be in a spot where my credit would be fine, my ef would be funded and many of my other concerns would already be taken care of. in that scenario, to be free of that large debt would be the way to go.
I would love to buy a house with cash. I’ve been hearing about more lately, as my mom is looking for a house. She’s been hearing of people with cash offers. I just don’t think I could save that much money in time!
I bought an investment house to flip several years ago with cash. I saved a fair amount in junk fees and other closing costs, and the closing time was cut in half. For a flipper, those advantages are huge, because time is money.
Razmaspaz makes a great point about opportunity costs. In my current home, I had enough cash to put 66% down. Being newly divorced and single parent at the time I bought it, I chose to put all the cash in my home rather than just put enough for 20% down and put the rest in an emergency fund. I was too focused on keeping my monthly payment down to be thinking clearly. But after the 66%, the remaining balance wasn’t enough to fund a traditional first mortgage, so I let them talk me into a HOME EQUITY loan for the balance. Not only did it raise my rate a full percentage point, but it has kept me from being able to refinance my loan at a lower rate, because in this state you can only refinance a home equity loan with another home equity loan, and those rates are always higher than conventional mortgage rates.
I shudder to think what opportunities I have missed out on because of that one lapse in judgment. It’s cost me untold thousands of dollars. But maybe someone reading this will learn and not make the same mistake.
Mortgage loans have their pros and cons; one of the cons being the fact that mortgages are usually very emotional decisions that can keep the borrower from realizing a better bang for his or her buck somewhere else.
I refinanced into a Home Equity Line of Credit because it had a _lower_ interest rate, dropping us from 6.25% to 3.25%. And since HELOCs tend to have no closing costs, that’s even better.
Of course the disadvantage is that most HELOC interest rates are variable. So though it is currently 3.25%, it will go up. But if you are in a position to completely pay off the loan in less than 5 years, this can be a great option. We refinanced 2 years ago, and now have it completely paid off.
The problem with a HELOC is that you are paying interest ONLY – that keeps the payment low, and if you are selling/re-financing within a few (5-10) years, it’s a great alternative to taking an initial mortage with the additional costs.
However, if you are in the house for a long period of time and/or the variable interest rates rise, then the HELOC can be a disaster!
Plus, typically, the HELOC will only give you 70% of the home’s value!
Definitely cash because I completely agree with #4 (slave to debt to be avoided if possible).
Another bonus of a mortgage over cash purchase which I am feeling right now. I bought my first home with cash because we just had a little one and did not want to worry about mortgage payments. Because i do not have a mortgage my credit score is lower. The diversity of credit obtained and the healthy payments scheduled would show a large positive mark for my credit score but mine is blank when it comes to homes and it will hurt me if i try to upgrade and get a mortgage second time around.
Reasonable if you think you’ll move in the future and won’t have enough cash to buy outright. Doesn’t seem like a big deal for those who are settling down and can build their credit history elsewhere (student loans, credit cards, car loans, etc.)
You left out a huge advantage of a mortgage. Well not really left out, but failed to elaborate into it. Opportunity cost. When you dump your money into your house, you can’t put it somewhere else. Maybe its go to college, maybe its invest in the stock market. Putting this fictional $400,000 in the house is in most cases bad money management. You are taking a loan on that money for lets say 6%. After tax breaks its maybe 4-5%. Over a 30 year time horizon that barely beats inflation. The stock market over the next 30 years, even conservatively should return 6-8%. That’s 8k/year you are leaving on the table. Frankly, in a dire circumstance, 8k will sustain a family for an entire year. Sure you could choose to take a mortgage on the home you own outright, but you give up the returns between when you purchased, and when you fell on hard times.
Lots of times debt is not the right answer, especially for those tempted by its unlimited buying power, but it is still the way the rich get richer. Leveraged debt is the laziest (and one of the best) way to put your money to work for you.
Great point! Thanks for adding it!
such a very basic economic concept that many people simply do not think of when they are making financial decisions, but such a very important thought.
I preffer buy out cash. once you buy you dont have to worry about huge monthly payments. that means all those monthly payments are your future savings. mortgages keep you a headache, nobody lives strong forever, not everyone have the same investing knoledge. all the banks and stock marjet is always thinking to take your money. i rather buy a house, same money again, then invest in a business or keep as retirement. less headaches, better quality of life, you can go on vacations and enjoy life better than people who live pay check to pay check. about building credit score – there are so many ways to do it, mortgaging is not the only option. lease a car, creadit card, business loan. i know corporate world loves people to stuck with monthly bills ass much as possible. then people work and work just to pay bills. once they go unhealthy you would loose all. less bills- peace of mind. good luck!
I totally agree, I had 47,000 in bank and bought a forclosure and made it nicely livable with that money,new appliances etc.To not having a mortgage or having rent payments actually makes me feel so free simply because you cannot end up on the street due to illness Etc.Just pay the taxes and enjoy.
Hey,
How did you buy the foreclosure and how much practical skills did you have to make the place livable? I am interested in buying a foreclosed home provided I can get a great deal, but am worried about the process of ensuring I actually get it. Also have little knowledge or experience fixing up a place so am worried about getting in over my head should the place need substantial repairs. Thank you!
I also just bought a 2bed,11/2 bath foreclosure for $36k in an OK neighborhood. All you need to do is get a reliable realtor and the whole process will go smoothly. I think my decision to pay cash for my house is the best decision i ever made cos while i was renting, my bill was about $1500 but now that i own my home, my bill have been cut to less than half of that amount. The amount i safe now goes straight into my savings account and that gives me the financial freedom to plan for my future.
I’d love to be able to pay for a home in cash, but I agree with mortgage advantage #4, diversification of assets. Having an emergency fund is very important to me, and I’d take out a small mortgage if that were the only way to keep some cash on hand in case I needed it.
Agreed, however if you did indeed have 460,000 and were truly smart, you would never consider buying a 450,000 house, but rather a more modest 325,000 range for the added security cushion.
I’d go lower than that. I realize this depends on location, but I would go for the cheapest house I could find that “appears” unlivable in a decent neighborhood. Decent meaning I feel safe in this area and don’t have to go out of my way to get things I need for everyday living because I live in society. I would fix up that house to my specifications because I bought that house for a fraction of my budget. People want too much. Every kid has to have their own room. They have to have a kitchen with granite counter tops, but they don’t cook. The bedrooms have to be huge for what? Our grandparents had dressers, dressing tables, chest of drawers, and the bed itself in bedrooms that people complain are too small today. We’re using less furniture, so why do we need more space? People have less children, but need bigger rooms? I grew up in a five room total house. There were two bedrooms, and 1 bathroom. Six people shared it. Sometimes we did have an additional house guest or 2. (I was a 90’s kid in case you’re wondering.) We don’t have to be that extreme, but we have to change our values. If I had $450,000 to spend on a home, I would go $200,000 or less depending on the location. In many parts of the country you can find a nice house $200,000. In other parts the house may be dated, but still livable or just completely inhabitable. I feel like with a budget if $450,000 at that price point I could update it and/or make it livable for my family’s needs. If you don’t have time, then you have enough money left over anyway to pay someone to do it. We have to take the sticks out of our butts, and start living smart again.
I am currently renting even though I know that the interest rates on mortgages will not be this low again for a very long time. The catch is that it just doesn’t make sense to buy a house at this point. I am young enough that my career may take me to other places in a short while.
Don’t want another house unless I can buy with cash. Renting isn’t a bad deal right now either. Real Estate taxes for a house where I am are almost as much as renting a small apartment.
Where do you reside CeeCee that you have to pay that much in Taxes?