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Buying a house with cash vs. a mortgage

A neighborhood in the suburbs
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A neighborhood in the suburbs
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If you’re thinking about making a cash offer on a house, you’re not alone. According to the National Association of Realtors, all-cash deals made up 28 percent of home purchases in March of 2022. However, even if you have enough cash to cover the cost of a property, it doesn’t necessarily mean you should spend all of it. 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

  • To beat out other buyers
  • To speed up the process
  • To skip the 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 nearly five 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 offers that all hinge on the ability to get full approval from a lender with one offer that requires no underwriting, that no-lender-required offer can look very appealing.

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. You can likely save some time, too, since that lender won’t need to comb through all your finances.

To skip the 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 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 cash. For example, let’s say you’re comparing a $300,000 cash offer with a $240,000 30-year mortgage (a loan on the same home after 20 percent down) with a 5 percent interest rate. Over the course of that loan, Bankrate’s mortgage calculator shows you would pay nearly $224,000 in interest. If you can swing the cash offer in that scenario, it might be beneficial, depending on how you would otherwise invest the sum.

When you should consider getting a mortgage

  • To use your money elsewhere
  • To reduce your tax bill
  • To build 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 liquid cash 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.

And while it might not seem like a great time to invest in the stock market – some economic experts feel like we’re in for a bear market – you’ll also be buying fairly low right now with the potential to hold on for a solid long-term return.

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.

Cash or mortgage homebuying considerations

As you ponder buying a house with all 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.

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.

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 bills arriving for your mortgage, 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 big-picture expenses.

Bottom line

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 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 very 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, 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.

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
Reviewed by
Senior mortgage loan originator, American Fidelity Mortgage