Pay Now or Pay Later? Breaking Down Cash vs Mortgage Pros and Cons

It’s one thing to carry credit card debt on a big-screen TV that might otherwise be out of your budget. But carrying debt on real estate by way of a mortgage loan is an entirely different scenario. How should you think about paying vis-a-vis cash vs mortgage?

There are many advantages — including financial liquidity, tax advantages, and credit-building potential — to purchasing a home with a mortgage.

On the flipside, there are also advantages to making your purchase with cash if it’s a financially viable option for you. (Spoiler: For many buyers, it’s simply not.)

With cash, you’ll pay no interest on a mortgage loan — and your all-cash offer is likely to look strong against competition in a hot real estate market.

To help you determine whether buying with cash or a mortgage is right for you — and explore a way to get the advantages from both strategies — dig into our expert-backed list of pros and cons.

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The pros of buying with a mortgage

If you get a mortgage, you’ll receive tax benefits as you pay off the mortgage: Your tax savings will come as a deduction equal to your mortgage interest for that year.

The mortgage interest deduction applies on the first $1 million of mortgage debt during that tax year for homes purchased prior to December 15, 2017; homeowners who bought houses after that date can deduct interest on the first $750,000 of the mortgage (but not the principal or insurance payments).

Getting a mortgage also allows you to keep more of your liquidity intact: If you had $500,000 in the bank, and use it on an all-cash home purchase, you now have $0 in the bank. However, if you take out a mortgage on $400,000, you’d have approximately that amount left to use for other things, including investments or future maintenance or repairs.

“If you have more cash available, you’re going to be able to withstand many storms, if anything bad does happen to the economy or anything else, because you’re going to have those liquid cash reserves in your bank account,” explains agent Jordan Clarke of Clarke Real Estate Group, who completes 13% more sales than the average Carlsbad agent.

Mortgage interest rates are very low compared to other types of loans — so taking out a mortgage is hardly comparable to carrying a balance on a typical credit card with a high APR, for instance.

And having a mortgage is a way of diversifying and building your credit that can help build your credit score. (Making a big purchase such as a home can actually cause a small ding to your credit at first, but if you make your payments on time, they’ll help build up your credit over time.)

The cons of buying with a mortgage

If you do purchase a home with a mortgage loan, you’ll be paying interest on that loan.

You’ll also pay origination fees and other financing-specific expenses during and at closing.

If you’re home shopping in a hot real estate market, you might face multiple-offer situations, in which you’ll need to come in with a highly competitive offer to seal the deal. If you’re coming in with a mortgage loan, your offer won’t look quite as strong as an all-cash offer does.

Numbers representing a cash payment.
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The pros of buying with cash

If you purchase your home in cash, you will save overall in raw numbers: You won’t ever pay interests or fees associated with having a loan.

You can also make a strong offer if you’re prepared to come in with all cash, especially important in a competitive housing market. Sellers are more confident the deal will close without financing hangups.

When you pay cash, you aren’t required to get an appraisal on the home’s value. That said, it’s still a good idea to do so as it will help you understand the property’s real value and make a sound purchase decision instead of paying more for a home than it’s really worth.

You also don’t technically need to get a home inspected that you purchase with cash, as you do with most loans. Though here, too, a home inspection is always a good idea to save you from unpleasant — and potentially expensive — surprises.

If you’re purchasing a home in cash, you’ll also avoid the need for a sales contingency (meaning your house has to sell before the deal will go through) in the offer.

And all of this streamlining means you can close faster on your new home, with fewer potential places for bottlenecking at closing.

The cons of buying with cash

If you’re buying a home with cash, you’re tying up a lot of money in one purchase. If you have an emergency or unexpected bills later, or need to make repairs on the home, will you have enough liquidity left to do so? You could wind up house-rich and cash-poor, which is not a desirable place to be.

If you buy in cash, you’re also forgoing the ability to claim those mortgage interest deductions, which could otherwise provide tax relief.

“The drawback of paying cash is you’re not leveraging your money,” Clarke explains. “Right now, mortgages are a very cheap form of OPM: other people’s money.

“If you’re able to use other people’s money at a cheaper cost, then you’re able to put your money to work. And that’s always something that you should do.”

In Clarke’s professional opinion, “Right now you shouldn’t be paying cash even if you have the ability, because you’d be able to put your money to better use in many other investments.”

A room in a house paid for with cash.
Source: (Collov / Unsplash)

Is there a way to have it all?

HomeLight Cash Offer is a unique way to get the advantages of both strategies.

Here’s how the fee-based service works: HomeLight goes over your financial details and pre-approves you for your loan amount. You then find your house, and HomeLight makes an all-cash offer, buying that home for you.

Next, you secure your mortgage to purchase the home from HomeLight, under the same terms. (HomeLight Home Loans is one option for your mortgage, but you can get your loan from anywhere.)

When the loan closes, the house is yours.

Through this approach, you avoid tying up a huge amount of your wealth and liquidity in your home purchase. You can also take advantage of low interest rates on loans and claim mortgage interest if you itemize your deductions. And you can make a stronger offer, just like with cash.

“The vast majority of people don’t have the option to pay cash for the property or have those available proceeds,” Clarke says. “So, the best way to do that is through the HomeLight Cash Offer program.

“HomeLight and HomeLight Home Loans will get you fully preapproved for your loan before you even write your offer. Then they’ll buy the house on your behalf in cash, eliminating the need for financing and appraisal contingencies.”

And that matters especially in a hot seller’s market. “A short inspection contingency is going to put you leaps and bounds in front of everyone when it seems like every single listing, no matter what it is, is going into multiple offers,” Clarke says.

In other words, HomeLight Cash Offer presents all of the pros of buying a home with a mortgage and cash. So you and your offer can have it all!

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