High mortgage interest rates may have you exploring alternative ways of buying your home that don’t require a loan. And while the competition for a new home may not be what it was in 2021, for the right home you may still need to work to get a leg up on the competition.
If you have the means, an all-cash offer is a great way to fast-track a deal and avoid the additional costs that come with a mortgage. A seller is more likely to accept your offer, and the success of the deal isn’t reliant on a lender’s OK following an appraisal. You’ll also own the home outright after the transaction with no mortgage to pay each month.
Cash transactions make up a minority of home purchases: 78% of homebuyers financed their purchase between July 2021 and June 2022, according to the National Association of Realtors’ 2022 Profile of Home Buyers and Sellers.
Which option makes more sense based on your situation? Here’s what you should consider when contemplating buying a house with cash.
[READ: How to Decide Where to Live.]
Reasons to Buy a House With Cash
The ability to purchase a home with cash gives you a lot of freedom as a buyer, and sellers will often see a cash offer as more likely to close than those limited by mortgage loan approval.
Here are four reasons you should buy a home with cash:
1. Cash offers stand out.
2. Cash speeds up the closing process.
3. You can avoid taking on debt.
4. When you sell, you keep the profit with no mortgage to pay off.
1. Cash Offers Stand Out
Especially if you’re looking to buy an in-demand house getting a lot of interest, an all-cash offer can provide the needed leg up to get the seller to consider your offer more seriously than others. You may not even be the highest bidder, but the seller knows a cash offer will make the closing process easier.
“Cash offers are still an effective way to make an attractive offer,” wrote Marcy Keckler, senior vice president of financial advice strategy for Ameriprise Financial, in an email. Citing a 2021 Redfin report that found an all-cash offer quadruples the chances of winning a bidding war, she adds: “But it’s important to remain pragmatic and know your limits — both financially and risk-wise — when considering an all-cash offer.”
2. Cash Speeds Up the Closing Process
Part of the attractiveness of your all-cash offer is the elimination of the waiting period often imposed by mortgage lenders, filled with due diligence and underwriting to receive and approve the loan. With a cash offer, you have the freedom to choose which aspects of the due diligence process are most important, rather than those that are required by a lender. For example, you could choose to forgo an appraisal while still having the inspection done.
While your speedier homebuyer timeline can be a powerful tool in negotiations for a purchase, don’t get carried away by neglecting aspects of due diligence that could reveal serious problems with the property in question. “Please do not skip an inspection,” says Brian Walsh, a Grand Rapids, Michigan-based certified financial planner and senior manager of financial planning for financial services company SoFi.
3. You Can Avoid Taking On Debt
By paying cash, you won’t have to make monthly payments to a lender, and when the house increases in value, that directly boosts your personal wealth.
It’s also important to remember that by financing, you take on additional costs with loan origination fees and the interest paid over time, so the net cost of buying your home is less when paid for in cash.
“If your potential mortgage rate is much higher than what you could earn on investments, a cash purchase could potentially help you save more money than you would earn,” Keckler says. She recommends seeing a financial advisor for help weighing the costs and benefits of potential scenarios.
If you want to set yourself apart from other buyers but still have a mortgage, you could use the cash to your advantage in the offer and then finance after closing.
However, you wouldn’t want to make this part of your plan unless you can financially handle the possibility of a lender declining a mortgage, on the chance that the market value drops or other unexpected factors affect your credit.
If you financially need to get a mortgage after you purchase the house, you may be better off getting a mortgage from the start. “In general, I would lean away from buying a house with cash and instead buy a house with a mortgage,” Walsh says.
4. When You Sell, You Keep the Profit With No Mortgage to Pay Off
By skipping the mortgage now, you can rest assured that any increase in value on a property directly benefits you when it comes time to sell. With no mortgage to pay off, 100% of the profits from the sale go into your wallet, making it easy to purchase another home with cash or finance a larger purchase with plenty of cash on hand.
Reasons Not to Buy a House With Cash
Even if you have enough cash on hand to purchase a home without a loan, is it always a good idea?
Here are five reasons to buy a home with a mortgage:
1. For most people, it’s the only way to afford a home.
2. You can maintain liquidity.
3. You qualify for a favorable mortgage.
4. Your money may be better invested elsewhere.
5. You could capture a sizable tax break.
1. For Most People, It’s the Only Way to Afford a Home
While there are more cash buyers than there once were — NAR’s Profile of Home Buyers and Sellers reports that 78% of homebuyers financed their purchase, compared to 87% in 2021 — it’s still the only way for most people to buy a home.
Even with programs aimed at helping with a down payment, many homebuyers find coming up with the cash for a small share of the total home purchase price is a major obstacle, let alone covering the entire cost. NAR reports that 26% of first-time homebuyers said saving for a down payment was the most difficult step in the homebuying process. The typical down payment for first-time buyers was 6%, according to the NAR report.
2. You Can Maintain Liquidity
It’s not wise to purchase a home with cash if you have just enough to pay for it. It’s a good idea to maintain an emergency fund that will sustain you for at least a few months if you were to lose your income — covering things like car maintenance, unexpected medical costs and your regular grocery and utility costs for up to six months. You’ll also want to have some cash on hand for any number of unexpected house needs, from a new roof to a furnace that’s on its last legs.
“It’s always important to be prepared for unexpected expenses, such as replacing a furnace or fixing a surprise plumbing or electrical issue,” Keckler says. “Consider maintaining an emergency cash reserve for at least three to six months of living expenses to help in these types of situations. Your financial advisor can also help you determine a specific amount appropriate for your situation.”
3. You Qualify for a Favorable Mortgage
If you have enough cash to purchase a home outright, lenders will likely view you favorably for mortgage options. With a down payment of 20% or more, you don’t have to worry about mortgage insurance with a conventional loan, and you’re more likely to get a lower interest rate due to the fact that lenders see you as less likely to default on the loan.
Mortgage interest rates are much higher today than they were two years ago. Compared with October 1981, when mortgage rates hit an all-time high of 18.44%, according to Freddie Mac, rates between 6% and 7% are still in the low range, historically.
With a down payment of 20% or more, you eliminate the need for private mortgage insurance, which removes an additional monthly cost common among today’s homebuyers.
4. Your Money May Be Better Invested Elsewhere
If you have enough cash to pay for a home outright, you’re likely sitting on a pretty big pile of money. But the decision isn’t necessarily between buying a property outright or keeping money idling in the bank. Consider other forms of investment that may yield higher returns than the interest you’ll save by paying cash.
You could consider investing in stocks, mutual funds or a personal business you feel confident will bring greater returns. “There could be opportunities that you want to take advantage of, that you would benefit from having some extra liquidity around,” Walsh says.
Keckler is quick to point out, however, that no investment is a sure thing. As with a home purchase, there is risk when investing your money anywhere.
5. You Could Capture a Sizable Tax Break
All homeowners with a mortgage can receive a tax break on the interest paid to the lender.
This benefit applies to a small share of homeowners, however. Following federal tax reform passed at the end of 2017, the mortgage interest tax deduction has been limited to interest paid on the first $750,000 in mortgage debt.
In addition, new increases to the standard deduction in 2023 make it so fewer people need to file itemized tax returns, which is where the mortgage interest deduction would occur. If you’re taking the standard deduction, and the vast majority of homeowners are, you do not receive a separate mortgage interest deduction.
If your household will itemize tax returns and get the deduction, “It’s a side consideration — certainly something to keep in mind, but not something to make a decision one way or another,” Walsh says.
Frequently Asked Questions About Buying a House With Cash
Is it better to buy a house with cash? Whether you should pay with cash or finance your home purchase depends on your financial situation. Paying cash will make your offer more attractive to the buyer, and you will own the property outright. But if you don’t have the funds to pay for a house with cash, a mortgage can help you reach homeownership sooner.
Whether you decide to purchase your home with cash or take on a mortgage, go with what makes you feel most comfortable.
How long does it take to buy a house with cash? Instead of taking a month to close for loan underwriting and approval, buying a house with cash can take just a few days. But you shouldn’t skip aspects of the due diligence process that lenders often require. An appraisal can help ensure you aren’t overpaying for the property, and an inspection will tell you what issues may exist in the home.
What are the closing costs if you buy a house with cash? You won’t have a down payment, loan origination fees or points to cover at closing. While many closing costs become optional when there’s no lender to require them, paying for a title search and title insurance, inspection, survey and more can help reduce your chances of buyer’s remorse down the line.