Not many people can do it, but the idea of handing over a suitcase stuffed with greenbacks for a brand new house is undoubtedly appealing—at least to some people. There are several things to think about if you’re considering paying cash for a new home. It can be done, but there are advantages and disadvantages, depending how you approach it.
Does buying a house with cash make sense?
There are definite benefits to buying a house with cash. For one thing, it might give you a leg up on the competition, with sellers more apt to accept an offer knowing it’s not contingent on a bank’s approval. What’s more, the closing would happen quickly, and you wouldn’t have to deal with the paperwork of a mortgage.
Plus, if you have the necessary money sitting around in a low-yield savings account, using it to purchase a house would seem to make much more sense than signing on for a 15-year mortgage. It might even gain you a so-called liquidity discount from sellers motivated to move quickly. It will also save you money on closing costs. With no mortgage, there are an array of line item costs you can avoid, from bank attorneys to escrow fees.
And finally, applying for a mortgage is no guarantee of getting one. Even if you have excellent credit, the bank’s appraiser could decide that the property you desire isn’t worth as much as the agreed-upon price. Such a finding would make securing a loan for that amount next to impossible. Paying cash solves that problem before it can derail your plans.
The downside to buying with cash
There are some things to mull over when using hard currency to buy a property. Cash purchases are only a small percentage of home purchases, and while that’s mostly because few people have enough money on hand to do it, there are practical reasons why such a strategy might not make sense.
For one thing, it isn’t wise to spend every bit of cash you have on a new home. It’s important to have savings to cover the inevitable maintenance and repairs that come with being a homeowner.
For another, having a high level of liquid assets could qualify you for an excellent mortgage rate, while still enabling you to keep your cash liquidity. What’s more, a hefty down payment—which can eliminate the need to secure your loan with private mortgage insurance—and low monthly payments can leave you with an affordable mortgage and plenty left over in your savings account.
Consider the tax implications as well. By paying upfront in cash, you’ll be missing a decent-sized tax break. The mortgage interest deduction can offer significant savings, depending on the size of the purchase. It allows homeowners to claim whatever mortgage interest they pay on mortgages worth as much as $1 million between two houses.
Here’s another consideration: Home values can go down. It may be tempting to “invest” your cash savings into a new home with the hope that there’s only upside potential in the home’s value. But while home prices have generally been on the rise in recent years, the housing crisis of a decade ago should be a reminder that that is far from a sure thing to continue.