Q: Is it a good idea to pay cash for a house? –Tricia, Tennessee
A: The wisdom of buying a home with cash vs. with mortgage financing depends a lot on the home and the financials of its buyer. For one thing, it certainly creates a massive sense of security and stability to own your home outright, with no mortgage.
In fact, that is the ultimate goal of many homeowners: to pay their mortgage off and live without the burden of a monthly rent or mortgage payment. So on a fundamental, almost visceral level, that is one major advantage to buying a home with cash.
But from a more nuanced, financial perspective, there are a number of considerations a smart buyer should take into account when making this decision.
First off, cash homebuyers get the best deals. They are able to negotiate lower prices, in many cases, and better terms than buyers who are relying on a home loan to buy their home.
Cash empowers buyers (and their homes’ sellers) to avoid much of the rigmarole and seemingly inconvenient or difficult guidelines imposed by mortgage lenders, like property condition requirements and appraisal guidelines.
As a result, sellers favor cash offers and are also willing to extend a discount price to cash buyers.
Similarly, cash buyers are able to access properties that mortgage-financed buyers cannot; many times, these are bargain properties. Foreclosure trustee-sale auctions on the county courthouse steps virtually always require cash.
Similarly, bank-owned properties that are major fixers will sometimes accept only cash offers, because of the challenges in getting a mortgage lender to extend financing to a property in dire condition.
Additionally, some mortgage lenders and programs will not lend money on homes that cost less than $30,000 — if you are trying to buy a dirt-cheap condo, say, in a foreclosure hot-spot, for $20,000 or a Detroit home for $5,000 at the tax sale, paying cash may be your only option.
If you pay cash and later decide you would like the added liquidity (i.e., cash in your pocket) of having a mortgage, you can always apply for a home equity line of credit or take out a mortgage on the home, so long as the home’s value at the time you seek the mortgage is sufficient to secure the loan.
It’s important to note that many of the bank-imposed requirements that seem like a hassle also offer some protections that cash buyers must go out of their way to obtain.
For example, a mortgage lender would require clear title and title insurance; many cash buyers don’t know they should be concerned about these issues, and more than a few have bought "homes" at a foreclosure auction where they were actually buying only a lien in second position to a first lender.
If you buy a home with cash, make sure to obtain a title search and clear title, get title insurance, ensure hazard insurance is placed on the home from day one of your ownership, and consider having the home appraised to make sure you are not drastically overpaying for it.
In fact, if you’re buying a home with cash at any sort of auction, my advice is to do so only with the advice and assistance of a local real estate attorney.
On the other hand, mortgage interest is currently very low — many would advise you to take a loan out now, while rates are so good. Additionally, mortgage interest is tax deductible — this is the primary tax advantage of homeownership. With no mortgage, you miss out on this weighty deduction.
Additionally, there are opportunity costs associated with sinking your cash into your home.
By doing so, you lose out on the returns you could be earning on whatever investment you would put the money into if you had not used it to pay for your home.
With interest rates so low (currently under 5 percent for a 30-year fixed loan, and below 4 percent on a 15-year-fixed mortgage), it wouldn’t be terribly hard to find an investment for your cash that earns returns higher than your mortgage rate.
Depending on your level of risk aversion, you might rather have the security of a home that is paid for, compared with the extra dough you might make if you take a mortgage and invest the cash. Or vice versa — but that’s up to you.
So, if you’re talking about buying a very cheap house or you are in a situation where you’ve had a windfall and/or have some reason to be concerned about your future income, or if you are near retirement, buying a home with cash can be a smart move.
If you are more concerned with which is most strategic, from a financial perspective, it might be advantageous to put a large down payment on your home, get a mortgage at the lowest rates ever and then invest the rest of your cash for returns greater than your mortgage interest rate, which would allow you the advantages of liquidity and the tax deduction for the mortgage interest you pay.