The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
- Paying for a house in cash can speed up the buying process, lower your long-term costs and give you instant 100% home equity.
- Getting a mortgage allows you to save that cash for other financial goals, offers tax deductions and can enhance your credit score.
- Before you buy a home in cash, consider various factors, including the state of the local real estate market and the long-term cost of a mortgage.
If you’re thinking about making a cash offer on a house, you’re not alone. A large number of homebuyers avoid borrowing: all-cash deals made up 27 percent of home purchases in August 2023 alone, National Association of Realtors (NAR) stats show. Nationwide, all-cash purchases accounted for nearly 37 percent of single-family home and condo sales in the third quarter of 2023, according to ATTOM, a curator of land, property and real estate data.
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 with their own money instead of taking out a mortgage (and using the home as collateral) to finance the purchase. Instead, the buyer taps their savings, investments, funds from the sale of another property or another source — such as gifts from relatives or friends.
All-cash offers are similar to offers financed with loans in some key ways. With an all-cash offer, you’ll still need 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.
Even when buying a house in cash, it’s a good idea 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.
- Requires a sizable amount of liquid assets to cover purchase price and other costs
- More streamlined lending process
- No closing costs or monthly principal and interest payments
- Monthly mortgage payments and closing costs
- Deductible mortgage interest payments help you save at tax time
- Could boost credit health with timely loan payments
Advantages of using cash to pay for a home
- Beat out other buyers
- Speed up the homebuying process
- Save on closing costs
- Lower your long-term costs
Beat out other buyers
A shortage of housing inventory has fueled an insanely competitive market. In fact, there are five offers on average for every one property sold, according to NAR data from 2022. 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?
Speed up the homebuying 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.
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 $15,000.
Lower your long-term costs
Along with saving on upfront fees, paying in all-cash means you won’t pay any interest, which adds up to huge savings. 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.
Advantages of getting a mortgage to finance a home
- Use your money elsewhere
- Reduce your tax bill
- Build your credit
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 buy a house in cash vs. get a mortgage. If the amount of cash needed to purchase a house seems like a potential source of major stress, getting a mortgage is a better option. You can make a sizable down payment and keep most of those funds free for other uses.
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.
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.
Other cash offer vs. mortgage homebuying considerations
As you ponder buying a house with cash or a mortgage, 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 make a big difference. Forty-one percent of real estate agents say that making a cash offer is the best strategy to win a bidding war, according to a Zillow survey from 2021. 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. You put down a 20 percent payment of $80,000 and finance the remaining $320,000 with a 30-year mortgage at a fixed interest rate of 7 percent. Closing costs typically amount to 2 percent to 5 percent of the loan principal, so in this case, $6,400 to $16,000.
By the end of the loan term, you’ll pay about $447,000 in interest. Adding your total interest to your closing costs, you would end up paying an additional $453,400 to $463,000 over a 30-year period. Your total cost for the loan over 30 years would be about $767,000 — almost double that of the original loan amount.
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.
Cash offers vs. mortgages: How to decide what’s right for you?
Ultimately, deciding between a cash offer and a mortgage depends on your financial situation, the current market and your personal preferences. If you have the means to pay cash without negatively impacting your financial health, it could be an ideal option. A cash offer could also make financial sense if you’re looking to buy an investment property in need of substantial repairs but can’t get approved for financing.
That said, if you want to use the funds for other financial goals or invest them elsewhere, a mortgage could be a better fit. Taking out a home loan also means you can capitalize on tax benefits and build your credit over time as you make monthly payments.
Frequently asked questions
Not necessarily. There are home loan options for borrowers with a low credit score, but you might receive less generous terms, such as a higher interest rate. Look into government-backed mortgage products, like FHA loans, that only require a 580 credit score and 3.5 percent down payment. Or you could qualify for an FHA loan with a score as low as 500 if you make a down payment of 10 percent.
Cash offers can help simplify the home purchase process as you’ll get more bargaining power and likely close faster. Sellers may also be more inclined to accept cash offers since they indicate you have the funds on hand to make the purchase, and the deal is less likely to fall through.
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 to pay. 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 position yourself for the best deal available on a home loan.
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.