Many first time home buyers assume that a mortgage is necessary to purchase a house. However, more than one-fifth of homebuyers in the U.S. used cash to purchase their homes.
Choosing to pay with cash might not be an easy decision to make.Often, the decision will come down to where you’re buying a home, your future goals and your financial health now and later.
“If I had $500,000, would I buy a house for that or invest it and let it grow to pay off that house at a later date?” explains John Gattulli, financial advisor and president of Capital Education Network of Albany, N.Y. “Lots of folks can pay cash for a house. In our area, you can buy some smaller homes for $150,000. But that’s still a significant amount of money.”
There are also areas in the U.S. where home costs can range from $20,000 to $20 million, and people are buying them with cash. Some houses are flippers, some are bought by foreign investors and some are bought by people who don’t want to deal with a mortgage.
But sometimes, it’s just hard to justify putting so much money into a house when interest rates for loans are hovering at 2.7 percent for 15-year fixed mortgage and 3.4 percent for a 30-year fixed loan, Gattulli says. Rates continue to be historically low, and it could make opting for a mortgage a more financially sound decision than buying with cash..
So what are some of the advantages and disadvantages of paying cash?
Advantages Of Buying With Cash
There are plenty of advantages to purchasing a home with cash. Of course, this option won’t be available to everybody. If you have the financial means to purchase a home with cash, consider some of the advantages before opting for a mortgage.
Less time and hassle to buy
Without a lender in the picture, you don’t have to go through the whole loan approval process. Also, you can avoid the necessity of a higher credit score – or any type of credit history.Pride and security
Knowing that you’ll have a home regardless of future financial issues can remove a lot of stress.. Plus, the bank can’t foreclose on you because your home is completely yours.
You own the house, so right away you have full equity. If you need money later on for remodeling, college or something else, banks won’t have a problem extending an equity loan.
“Every bank that sees you have the house paid off, would give you an equity line of credit. It’s not an issue,” Gattulli states.
No monthly payments
Aside from your property taxes and home insurance, your house is free and clear from monthly payments. You can now divert all that money you would have paid in loan payments to your retirement account or other investing ventures.
“For a select amount of people that are very savings-oriented, it’s a great option, as long as you maintain that discipline of putting money away,” Gattulli says.
Win bidding wars with cash
In many popular areas around the country, people are competing for the same house. A cash offer can be much more attractive to sellers because they don’t have to worry that your loan will get denied.
No paying interest, no mortgage insurance and fewer closing costs
Without a loan, you’ll be avoiding thousands of dollars in interest payments over the years. Also, your closing costs will be less because there are no mortgage origination fees or other fees charged by lenders.
Disadvantages Of Buying With Cash
While purchasing a home with cash is going to be an obvious choice for some home buyers, others will find that a mortgage is better. Even if you have the financial means to purchase a home with cash, it could still be a better option to use a mortgage.
Loss of some tax deductions
Mortgage interest payments usually provide a major tax deduction for many homeowners. In some cases, these tax deductions could add up. This may be something to consider.
Draining your cash for emergencies or big purchases
What if your roof has a leak, and you have to replace it soon? The unexpected can always happen in life, and you’ll need to be able to pay for emergencies.
“If you spent all your cash on buying the home, it’s hard to come up with $10,000 quickly,” Gattulli says. “Life happens. People get hurt.”
Loss in potential investments
The money you used to buy the house with cash could have been put into an investment and earned 8-10 percent interest while current mortgage rates are around 3.4 percent.
“If you used the $225,000 you were going to pay for a house and used it for an investment that paid 10 percent in interest, it would grow to $1.5 million 20 years,” he explains.
When To Pay Cash For A Home
Knowing whether you should pay cash or get a mortgage may not be as easy as it sounds. Each home buyer is going to have a unique situation, and figuring out which option might take serious thought.
“I believe the properties to buy outright would be the summer or vacation house. That makes more sense to own,” Gattulli says. “I believe in paying your house down, but not buying it with cash. It really all depends on your personality and discipline.”
One factor to take into consideration is current mortgage rates. Current rates are low, and lower rates could translate into a smarter option for home buying down the road.