Buying A House With Cash: Pros, Cons And How To Make A Cash Offer
Even if having a mortgage is considered “good debt,” buying a house with cash has a certain appeal. Perhaps you have a low credit score or don’t want to hassle with the process of getting a mortgage. Or maybe you just feel like avoiding a monthly payment for the next 15 to 30 years is the best financial decision for you as a home buyer – especially if you can afford it.
In this handy guide, we’ll address the pros and cons of making a cash offer, as well as how to buy a house in cash should you decide that’s your best path to a new home.
Can You Buy A House With Cash?
Paying cash for a house just means buying a home without a mortgage. Cash buyers, as a result, don’t need to account for mortgage interest or mortgage-related closing costs when they purchase a new property. Buying a house with cash can save you money in the long run, but it can also exempt you from the advantages of a mortgage.
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Pros And Cons Of Paying Cash For A House
Buying a house with cash can be a strategic move. But as is the case with any substantial decision, you’ll want to consider all the advantages and disadvantages before you make a cash offer on your next home.
Advantages To Buying A House With Cash
- You’ll avoid paying mortgage interest. When you buy a house with cash, you don’t have to pay interest to your mortgage lender, which can save you hundreds of thousands of dollars. For example, let’s say you take out a 30-year fixed-rate mortgage loan for $350,000 with an interest rate of 4.0%. If it takes you the entire life of the loan to pay back your principal, you’ll end up spending an additional $251,543.27 in interest.
- Your closing costs will be reduced. If you buy your home with cash, you can avoid paying an application fee, lender fee, mortgage loan origination fee and other lender-related costs, which could save you thousands at closing.
- You’ll speed up the closing process. If you finance your home purchase through a mortgage lender, it may take your lender a month or longer to approve, underwrite and process your loan. However, you can close on your home purchase in 1 – 2 weeks if you buy with cash.
- You’ll own your home outright. When you pay cash for your house, your home belongs to you without a lender having a lien on the property. You won’t have to worry about missing monthly mortgage payments and defaulting on your loan. As long as you budget for and pay homeowner expenses – such as property taxes – on time, you can avoid the anxiety of going into foreclosure.
- You’ll be a more competitive buyer. Buyers and lenders alike can miss deadlines and make mistakes that can delay the mortgage process or cause the purchase to fall through completely. A quicker, less risky property transaction can be a very attractive perk to sellers – especially in a seller’s market. A cash offer is a sure thing and can give you a leg up on buyers who are financing their purchase.
Disadvantages To Paying Cash For A House
- The purchase can tie up your available money. Not having to budget for and make a monthly mortgage payment is certainly a perk of paying cash for a house. But if you have to use most of your available cash, pull from savings or dip into your emergency fund, you may not have enough money on hand – or enough cash liquidity – for unexpected expenses, emergency repairs or sudden changes in your income.
- Your money may be better used elsewhere. Putting all your money into one asset (your home) may not be the best investment. Instead of buying a house with cash, you could make a significant down payment, get a mortgage to finance the rest of the purchase price, and divert the remaining cash to other investments, like a retirement account or a diverse stock portfolio.
- You’ll miss out on mortgage-related tax deductions. It’s important to consider the tax implications of not having a mortgage payment. If you pay for your home in cash, you won’t be entitled to mortgage interest tax deductions. To qualify, you have to itemize your deductions. Speak with a tax advisor if you have eligibility concerns.
- You can’t quickly tap into your home equity. If you need to complete a renovation or fund your child’s college education, you’ll have to sell your home, use delayed financing or otherwise take cash out so that you can transition to a home loan and access your home equity.
- You’ll still have to pay annual housing costs. Even if you pay cash for your home, you’ll still have to make annual real estate-related payments towards property taxes, homeowners insurance, repairs and homeowners association (HOA) fees.
How To Buy A House With Cash
If you’ve decided buying a house in cash is right for you, do the following to prepare yourself to place an offer.
Consolidate Your Cash
Prior to bidding on the home, consolidate your money into a centralized place. If your money is spread across several investments or accounts, you’ll need to liquidate it into a single account before closing. Just know that liquidating cash from certain accounts, like a 529 or 401(k), could come with fees and/or tax ramifications.
Get A Proof Of Funds Letter
When you’re buying a house with cash, you won’t have a preapproval letter from your lender to show sellers what loan amount you qualify for. However, you can request proof of funds from the bank, credit union or other institution that holds your money.
Similar to a preapproval letter, a proof of funds letter will verify the amount of cash you’re good for, and it’ll communicate to sellers that you’re a credible buyer.
Negotiate The Final Price
A cash offer is a big deal. Some sellers may take a lower cash offer over a higher, mortgaged offer because the cash offer is much less likely to fall through. Use this fact to negotiate the best counteroffer.
Work with an experienced real estate agent to submit a cash offer appropriate for the housing market. Even if it’s lower than the seller wants, chances are the offer will get their attention, and you can negotiate from there.
If you need to find a real estate agent, our friends at Rocket HomesSM can match you with a Verified Partner Agent who understands the area and your goals.1,2
Prepare For Your Purchase
Prepare for your purchase by securing the amount you’re paying in the form of cashier’s checks or by performing a wire transfer at the closing. To get a cashier’s check, you’ll need to go to your local bank branch or get one online. Each issuer has requirements you’ll need to meet, but it's a relatively easy process.
Many banks will perform wire transfers online, but verify with them first. For the amount you’ll need to buy a home, you’ll probably be required to visit the bank branch. You’ll also need the recipient’s banking information, including bank name, routing number and their account number. And you’ll likely have to pay a small wire transfer fee.
Other Important Steps When Buying a Home With Cash
While part of the appeal of buying a home in cash is forgoing a lot of the closing costs, some parts of the mortgage process should be considered. You’ll have to pay for the services, but they could save you a lot of money and headache down the road. These services include:
- Researching title ownership: Whether hiring a title company or doing it yourself, you should make sure the home’s title is free and clear of any liens and encumbrances.
- Conducting a home inspection: While a home appraisal won’t be required, a home inspection is necessary to assure that the property does not have any major issues. A qualified home inspector will spot flaws in the home. You’ll be able to use this as negotiation leverage or to determine if you need to walk away.
- Obtaining a land survey: Getting a land survey done will clearly define the boundaries of the property you’re buying, as well as identify any easements.
The Bottom Line: Is Buying A House With Cash The Right Choice For You?
Depending on your situation, buying a home in cash may or may not be the best option. You need to be sure you have enough funds in reserve for emergencies, potential repairs or even updating your furniture.
On the other hand, for those with the money to do so, buying a home in cash has many benefits. It makes your offer appealing in a competitive market, you can save on some closing costs, plus you’ll avoid having to pay interest on a mortgage. But your money may be better invested elsewhere, and you’ll miss out on mortgage-related tax deductions.
On the fence about whether you should buy a home in cash? Talk to a Home Loan Expert for further advice. You can also give us a call at (833) 230-4553.
1 Rocket Mortgage, LLC and Rocket Homes Real Estate LLC are separate operating subsidiaries of Rocket Companies, Inc. (NYSE: RKT). Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation and applicable legal and regulatory requirements.
2 Rocket Homes® is a registered trademark licensed to Rocket Homes Real Estate LLC. The Rocket HomesSM Logo is a service mark licensed to Rocket Homes Real Estate LLC. Rocket Homes Real Estate LLC fully supports the principles of the Fair Housing Act. For Rocket Homes Real Estate LLC license numbers, visit RocketHomes.com/license-numbers. California DRE #01804478. Hawaii License # RB-23371. TREC: Information about brokerage services, Consumer protection notice.