Buying a house with cash vs. mortgage

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Many homebuyers use a mortgage to buy a house, but there are those fortunate enough to be in a position to pay all-cash — and in today’s booming housing market, cash buyers have much more leverage. Is buying a house with cash the best financial decision, though? If you’re weighing the pros and cons of buying a house in cash vs. getting a mortgage, here are key points to consider.

When you should consider paying cash for a house

A one-time cash offer could pay off in a few big ways. Here are some reasons to consider making one:

To beat out other buyers

In today’s market, sellers are favoring cash offers, since they’ll be able to close the sale more quickly and without the risk of the deal falling apart if a mortgage approval doesn’t come through as expected.

To speed up the process

Paying with cash can also simplify the home purchase process. There’s no loan application, underwriting or approval, so you’ll save yourself the potential headaches and stress of dealing with a lender, and might not have to wait as long to close.

To skip the upfront fees

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 a mortgage. The origination fee, appraisal fee and other closing costs can add up to several thousand dollars.

To lower your long-term costs

With no loan, you also won’t be shelling out money every month in interest costs, which pile up over the typical 30-year mortgage.

“You don’t have a mortgage payment, and paying cash gives you the effective opportunity cost of the mortgage,” says Leon LaBrecque, chief growth officer and certified financial planner at Sequoia Financial Group in Troy, Michigan. “Not having a 2.875 percent mortgage is like making 2.875 percent.”

When you should consider getting a mortgage

The question isn’t simply “Can you buy a house with cash?” though. It’s important to ask yourself whether you should spend all that money upfront. Here are some of the benefits of borrowing a mortgage instead of using your own funds for a home purchase:

To earn more than you save

One compelling reason to consider getting a mortgage is historically low interest rates. Currently, the benchmark 30-year fixed-rate mortgage is 3.080%, according to Bankrate’s survey of national lenders. Locking in a low, fixed rate on a 30-year mortgage helps you free up cash for other purposes, such as an emergency fund, investments or funding your retirement accounts.

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 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.

“Mortgage debt is good debt, since it is for an appreciating asset — not a depreciating asset like a car or boat,” says Allan Moskowitz, a certified financial planner with Transformative Wealth Management in El Cerrito, California.

Considerations to make when deciding to buy a house with cash or mortgage

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

1. 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 report from real estate brokerage Redfin found that making an all-cash offer improves the chances of winning a bidding war by 290 percent.

2. How much more will you pay with a mortgage?

Say you’d like to purchase a $360,000 home, putting down a 20 percent payment of $72,000 for a 30-year mortgage for the remaining $288,000, with a fixed interest rate of 3 percent. Closing costs typically amount to 2 percent to 4 percent of the loan principal, so in this case, that works out to between $5,760 and $11,520.

Using Bankrate’s mortgage calculator, by the end of the loan term, you can estimate you’ll pay a total of about $149,167 in interest. Adding your total interest to your closing costs, you’d end up paying an additional $154,927 to $160,687 over a 30-year period.

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. If you’re weighing whether to buy a house with cash or take out a mortgage, you can use Bankrate’s mortgage interest tax deduction calculator to understand how a mortgage will impact what you owe.

3. How much money will you have left if you pay cash?

If you pay cash for a home, you might feel good knowing you won’t have bills arriving for your mortgage, but make sure you don’t stretch your finances too thin in order 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 big-picture expenses.

Bottom line

In the end, the competition between buying a house with cash vs. 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 otherwise would be able to invest the money, in the stock market or elsewhere, for a higher return. If can you lock in a mortgage at today’s low rates, you can leverage the lender’s money for your home purchase.

Getting a mortgage can provide a lot of financial flexibility by keeping more of your money liquid to tap for emergencies — but, for retirees or those who desire to be debt-free, buying in cash can provide certainty and security that is difficult to put a price on. Regardless of your age or financial situation, paying in cash gives you the peace of mind that you are debt-free on your most important asset: your home.

If you decide to buy your home with a mortgage, you can easily compare mortgage lenders and offers on Bankrate. Whether you’re seeking a 15-year or 30-year mortgage, you can compare rates from lenders in your area, as well as estimated closing costs, so that you’ll know the true cost of financing your home.

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Written by
Jeanne Lee
Contributing writer
Jeanne Lee writes about mortgages, personal finance and enjoys finding ways for people to hack their finances.
Edited by
Mortgage editor