The Pros and Cons of Buying a Home With Cash
If you’re in the market for a new home, you’ve probably been looking at mortgage rates with a bit of trepidation. Sure, interest rates are low as the real estate market recovers from the downturn, but if you have credit problems that won’t help you very much. Even if you have perfect credit, you might be wondering about the feasibility of paying cash for your home. If you have the ability it is certainly enticing. But is there a downside to that strategy? Here are a few things to keep in mind if you’re considering buying a home with cash.
If you have the sort of liquidity that enables you to buy your home outright, there are certainly some positives to going that route. First off, your credit history won’t come into play at all. So if you’ve had previous financial troubles that still impacts your credit but have the cash on hand to buy, this will make it happen. Some people just don’t like using credit cards, and therefore don’t have much of a credit history. That makes cash a viable alternative as well.
Paying cash is also a clear way to save money on the purchase. Taking on a mortgage means paying interest on your home. If you pay for the house outright, you’ll avoid that interest. The same holds true when it comes to leverage situations. If the price of your home fluctuates due to changes in the market, you will only be on the hook for that amount of change. For example, if your house devalues by 5%, then you are only out that 5%. If you took a mortgage that required 20% down, you are actually losing 25% of the money you paid.
Oftentimes you’ll also be able to get yourself a better deal by paying cash. By not requiring a mortgage or bank approval, you remove a bunch of work and some significant fees and expenses from the purchasing process. That helps the seller as much as it does you. You can use that as leverage to negotiate a better closing price with the other party. On top of that, there’s a great feeling of satisfaction that comes in knowing you completely own your house. And without the need for a monthly mortgage payment, your salary will be untouched going forward.
However, paying for a house with cash is not a perfect strategy. A house is probably the largest investment you’ll make in your life, and paying for it with cash will leave you with a huge reduction in your liquid assets. If you hit financial problems down the line, you won’t be able to free up that cash when you need it. Just make sure you have enough liquid assets left over that you’ll be covered in case of an emergency.
The lack of leverage on your home will also cut the other way. Sure, paying with cash will mean you don’t lose as much money if the home devalues, but if the value of the home rises, your monetary gain by percentage will be much smaller than if you had just put money down on a mortgage. Finally, you won’t receive some of the great tax advantages that come with home ownership. Any interest you pay on a mortgage is tax deductible, which could make a serious difference in your yearly bill or refund. Surely not enough that you’ll have to use a free home listing if you need to sell in the future, but it’s definitely something to keep in mind.