Buying a house with cash vs a mortgage

If you’re thinking about making a cash offer on a house, you’re not alone. A significant number of homebuyers eschew borrowing: all-cash deals made up 27 percent of home purchases in March 2023 alone, National Association of Realtors (NAR) stats show. Nationwide, all-cash purchases accounted for nearly 40 percent of single-family home and condo sales in the first quarter of 2023, according to  ATTOM, a curator of land, property and real estate data — and 36 percent in 2022, the highest in a decade.

However, even if you have the means to pay for a home in full, it doesn’t necessarily mean you should do so. Let’s consider the pros and cons of buying a house in cash vs getting a mortgage.

Cash offer vs getting a mortgage

An all-cash offer occurs when a buyer purchases a home without taking out a mortgage or other loan. Instead, the buyer taps their savings, investments, or funds from the sale of another property, or another source — such as gifts from relatives or friends. The point is, they are paying for the property outright with their own money, as opposed to financing the purchase in a way that uses the home as collateral.

All-cash offers are similar to offers that involve loans in some key ways. You’ll still be required to provide financial documentation, since the seller will want to see proof you have the funds you plan to use to buy the home — in fact, you may need to provide even more, or more detailed, statements than a lender might ask for.

You’d probably want to arrange an appraisal to ensure that you’re paying an appropriate price for the home as well as a home inspection to check for any safety issues.

In addition, you’ll still have to set up an escrow account. You’ll make an earnest money deposit when you sign the purchase and sale agreement, usually 1 to 2 percent of the home’s purchase price, which will be held in escrow until the transaction is finalized.

Come the closing, you’ll still have to pay for a real estate attorney, a title search and title insurance and other administrative expenses. But you’ll get to skip lender-related closing costs, such as origination fees.

When you should consider getting a mortgage

• To use your money elsewhere
• To reduce your tax bill
• To build your credit

To use your money elsewhere

Before you think about writing a check for the entire cost of a new home, think about what else you might do with that cash. Do you need to cover college expenses for your kids? Are you behind on your retirement savings?

Take a long look at your finances to understand how much in liquid assets you’ll have remaining if you pay with all cash. If that smaller amount seems like a potential source of major stress, getting a mortgage is a better option. You can make a sizable down payment and keep the majority of those funds free for other uses.

To reduce your tax bill

If you normally itemize deductions on your tax return, getting a mortgage can reduce what you owe, since mortgage interest payments are tax-deductible. This can be very important for high earners who typically itemize and want to maximize their deductions.

To build your credit

Having debt isn’t necessarily a bad thing. Having a mortgage gives you the chance to make those regular payments that make you look great in the eyes of the major credit reporting agencies. In the long run, managing your mortgage debt on a regular basis can help improve your credit score.

When you should consider paying cash for a house

• To beat out other buyers
• To speed up the process
• To save on closing costs
• To lower your long-term costs

To beat out other buyers

A shortage of housing inventory has fueled an insanely competitive market. In fact, NAR data shows that there are four offers for every one property sold. An all-cash offer stands out from the crowd. Put yourself in the seller’s shoes: If you’re comparing three bids that all hinge on the ability to get full approval from a lender with one offer that requires nothing, but is ready to go — which would appeal to you more?

To speed up the process

Paying with cash can also simplify the home-purchase process. There’s no loan application, preapproval or approval, so you’ll save yourself the potential headaches and stress of shopping for and dealing with a lender. You can likely save some time, too, since that lender won’t need to gather and comb through all your paperwork, deciding on whether to approve you. All told, side-stepping the mortgage can speed up your closing by as much as a month.

To save on closing costs

If you have the funds, paying all-cash for a home definitely saves you money, since you won’t have to pay any of the costs associated with taking out a mortgage. The origination fee and other closing costs can add up to 2 to 5 percent of the purchase price. So, if you’re purchasing a $300,000 home, eliminating closing costs might help you lower your bill by somewhere between $6,000 and $18,000.

To lower your long-term costs

In addition to saving on your upfront fees, paying in all-cash means you won’t be paying interest, which can add up to a huge chunk of change. For example, let’s say you’re comparing a $425,000 cash offer with a $340,000 30-year mortgage (a loan on the same home after 20 percent down) with a 6.5 percent interest rate. Over the course of that loan, Bankrate’s mortgage calculator shows you would pay nearly $433,674 in interest, for a total cost of $773,674. If you can swing the cash offer in that scenario, it might be beneficial, depending on how you would otherwise invest the sum.

Cash offer vs. mortgage homebuying considerations

As you ponder buying a house with cash, ask yourself these questions to help guide your thinking:

What’s the state of the housing market?

If you really want to secure that home, keep in mind that another buyer might feel the same way. If that’s the case, an all-cash offer can be a difference-maker. A recent Zillow survey revealed that 41 percent of real estate agents say that making a cash offer is the best strategy to win a bidding war. Remember that real estate is a hyper-local industry, though. If you’re buying in a very hot housing market like Austin or Denver, all-cash can be the ideal route. If you’re buying in an area where sales have been more sluggish, you may be just as successful at winning by getting preapproved for a mortgage.

How much more will you pay with a mortgage?

Say you’d like to purchase a $400,000 home, putting down a 20 percent payment of $80,000 for a 30-year mortgage for the remaining $320,000, with a fixed interest rate of 5 percent. Closing costs typically amount to 2 percent to 5 percent of the loan principal, so in this case, $8,000 to $20,000.

By the end of the loan term, you’ll pay $298,000 in interest. Adding your total interest to your closing costs, you would end up paying an additional $306,000 to $318,000 over a 30-year period. Your total cost would be almost double that of the loan itself.

This cost might be offset to some degree if you’re a taxpayer who itemizes deductions on your return. You might get some tax savings each year if you’re able to deduct your mortgage interest payments. If you’re married, you can deduct the interest on up to $750,000 of qualifying home loans. If you’re married and filing separately, that limit is halved to $375,000. Bankrate’s mortgage interest tax deduction calculator can offer a sense of the tax savings.

How much money will you have left if you pay in cash?

If you pay cash for a home, you might feel good knowing you won’t have a big bill each month, but make sure you don’t stretch your finances too thin to accomplish that. You’ll still need to have an emergency fund in place, and you’ll need to have enough money to cover home maintenance and repairs. You’ll also want to make sure your cash purchase doesn’t impact saving for retirement or other long-term plans.

Bottom line

The decision between buying a house with cash vs a mortgage hinges on your overall financial picture, not just the home itself.

Buying in cash to save on mortgage interest might not be the best choice if you have other promising options for investing the money or if you have other major expenses on the horizon. Getting a mortgage can provide a lot of financial flexibility by keeping more of your money liquid to tap for emergencies.  And while mortgage rates have been increasing lately, you can still take steps to lock in low rates. For example, if you make a large down payment and get a 15-year mortgage, you will still be able to secure a competitive deal.

However, for retirees or those who desire to be debt-free, a cash purchase can provide certainty and security that is difficult to put a price on. Paying in cash gives you the peace of mind that you own your home — your most important asset — free and clear.