Paying cash for a house seems like a dream scenario. No mortgage, no problems! But is that the best decision for your overall financial benefit?
We talked to top real estate agents from major markets across the country in order to determine the pros and cons of paying cash for a home and help you develop a strategy to make a cash purchase a viable possibility.
In a world where house flippers and iBuyers are becoming increasingly prevalent, buyers need to know what makes cash bids competitive in order to make an educated decision about the best course of action for their personal situation. There’s a certain level of nuance regarding cash real estate purchases that must be understood before jumping in to what could be a cutthroat buying environment.
The pros of buying a house with cash
Your offer is very attractive to sellers
Maureen Connolly, a real estate agent in New York with 17 years experience, maintains that “cash is king.” Sellers recognize that those who are applying for a mortgage are more apt to run into roadblocks and time delays due to the more stringent requirements of today’s underwriting landscape. Once cash buyers present their proof of funds, sellers have more peace of mind that the sale will indeed go through.
Brad Korb, a five-star real estate agent in the greater Los Angeles area, says he sees between 25% and 30% of buyers bringing cash offers to the table simply because they’re aware that in a multiple-bid scenario, cash is an enticing contract element.
You can waive some contingencies
Obtaining a mortgage will almost always require a buyer to obtain an appraisal. Banks need to know the appraised value of the property before loaning money for the purchase.
However, if you’re confident that you’re getting a fair price for the property, you could waive the appraisal as a cash buyer. Forgoing an appraisal represents a potential savings of around $300 to $400 — the average cost of a home appraisal.
You have more control over the closing timeline
Cash buyers don’t have to wait for the loan approval process (which can take between 30 and 45 days), so they’re able to negotiate more freely with sellers regarding the closing date. Connolly says that in her experience, cash closings can shave off a good 15 days or more from that timeline.
This can be a great benefit for those who find themselves in a job relocation, a lease termination, or other situations that would require them to move in a timely matter. Remember that some time will need to be built in for inspection, but after that, a cash home purchase can close in as little as seven days (depending upon location), during which time the title company will be doing their due diligence.
You might be able to pay less
As previously mentioned, paying cash for a house makes your offer attractive to sellers. You can use that as leverage to propel you into a better purchase price.
Sellers — especially highly motivated sellers — may actually choose to take a cash offer with a lower price rather than an offer with a financing contingency but a higher price. Korb says that this is especially common when sellers are confident in their appraisal (and therefore listing) price.
For example, in the condominium market, the appraisal price can only go so high, due to other comparable units in the same building; in this case, a full cash offer would be more desirable than a higher (above list price) offer with financing because the appraisal would likely come back at the initial listing price anyway. In other words, the lower cash offer would win.
You’ll save money over time
A mortgage loan means interest, and interest means your total cost of purchasing a home rises over time. For example, on a $120,000 home at 4% interest, you end up paying close to $69,000 in interest alone over the 30-year term of the loan. Paying cash saves your future self a significant amount of money.
The cons of buying a house with cash
You’re tying up a ton of money in a single investment
Good financial planning advice will always include the need for diversification. Putting all your eggs in one basket, so to speak, does not allow for much diversification, if any.
Connolly mentions that sometimes buyers determine that a low-interest home loan allows them the financial freedom to invest their cash in other places.
In addition, tying up your money in a single home purchase reduces your level of investment liquidity. Meaning, if a sudden unexpected expense arises (a health emergency, for instance) you may not have the ability to access the money you need. Your investment is still there, but it takes a significant amount of time to pull the money out of a home purchase (typically 14 to 28 days to acquire a home equity loan).
You may have to put off your purchase while you save up cash
Most of us don’t have upwards of $100,000 just lying around for a home purchase, which means it will take time to come up with the cash needed to buy property.
If the housing market in your area is currently slow, this could mean you miss out on an opportunity to capitalize on lower prices. By the time you save up your cash, the market could have changed, and you won’t get the same value.
You may not be able to finance repairs and renovations
Rarely is a home completely move-in ready. While you can request that sellers fix major things that pop up in inspections, the sellers may or may not agree. That means you’ll need to have a cushion of cash available to fix or update things around the home. This can range from a couple hundred dollars for a fresh coat of paint to upwards of $20,000 for a new roof.
Be sure you have the additional cash ready for any repairs and renovations that may be required. Of course, a home equity loan could be an option to cover major expenses after your cash home purchase — but that negates your goal of having no payments.
You may experience a lower return on investment
Take this super-simplified example: You buy a $100,000 home that rises in value by $20,000 over a few years. If you paid cash, you experience a 20% return on your $100,000 investment.
But if you got a mortgage, you experienced a 100% return on your investment ($20,000 gained on your initial $20,000 down payment).
This doesn’t take into account other factors like interest paid over time, but that’s the return-on-investment principle that bears considering.
You lose the tax write-off
For those who itemize their tax deductions, taking the mortgage interest deduction can represent a significant tax savings, one that would be lost, of course, when buying a home with cash. However, it’s important to remember that itemized deductions must exceed the standard deduction for this to make any difference, so that may or may not be a relevant point for your situation.
OK, I want to buy a house with cash. How do I do it?
Decide on your location and budget
Location is key, especially when considering a home purchase. What are the needs for you and/or your family? School zone? Proximity to work? Access to major transit?
Working with a top real estate agent in your area is the key to finding the neighborhood that’s right for you. After narrowing down your range, it becomes easier to see what kind of budget you can set. Your agent will help you take a look at the pricing for your desired neighborhood so you know how much cash will be required.
Another option may be to pay cash for a home that’s outside of your desired area and use it as an income property. The rental income from a cash purchase of an investment property could be used to offset the mortgage on your dream home.
For example, if you really want to live in a neighborhood where the average purchase price sits around $350,000, but you only have $200,000 in cash, take a look at neighborhoods in the $130,000 range. One option is to save $70,000 (as a 20% down payment for your dream home) and use the rest of your cash to purchase an investment home in a nearby neighborhood. Depending upon the housing market, you can likely get $1,300 per month in rent, which is almost the exact amount that you’d need for your dream home’s mortgage payments — $1,304.68.
Now, remember credit scores, interest rates, PMI, and other factors come into play with these numbers, along with two sets of taxes and insurance payments. But the point is, buying an investment home for cash is a viable option that’s worth entertaining.
Figure out the size of home you want
Since home prices are calculated in part by square footage, a smaller home often means a lower investment. Once you’ve determined the area where you’d like to buy, take a look at the average price per square foot for homes that have recently sold. An expert agent can help you with this. Using that number, you and your agent can calculate the size of home that will be best for your budget.
Don’t forget to leave room for closing costs when doing these size calculations. Yes, closing costs are lower for cash buyers, but they’re not nonexistent. Closing costs vary from state to state, but as a general rule of thumb, you could end up paying for closing costs around 3% of purchase price as a cash buyer.
For example, if homes in your preferred neighborhood are selling for $90 per square foot, and you’ve got a $120,000 cash budget, you know you’ll want to look at homes around 1,300 square feet. That way, your home should cost around $117,000, leaving around $3,000 for closing costs — a figure that puts you right in that 3% range.
Cut corners everywhere you can
Even on tighter budgets, there are places you can try to cut back in order to save up cash to buy a home:
- Limit going out to eat.
- Cut the cord on cable/satellite.
- Clip coupons for groceries — especially pantry items and paper goods.
- Consider prepaid cellular services.
- Pay off any loans to avoid interest expenses.
- Limit extracurriculars, entertainment, and travel.
- Meet with an insurance professional to reevaluate your coverage needs.
- Don’t hire out services (cleaning, lawn, pest) that you can perform yourself.
Consider financing a portion
If saving the entire sum of a home purchase is not feasible, do the best you can. Jumping into the real estate market with a larger down payment sets you up for financial success as well, and it puts you on a course that leads to the same payments-free place you want to be.
For instance, if you’re purchasing a $120,000 home at the typical 20% down payment, your monthly payment would be $458.32 (not including taxes and insurance; assuming a 4% rate at 30 years). In the same scenario, if you could scrape together a 50% down payment, your monthly payment drops to $286.45. With that difference of $171.87, you could invest in your principal, meaning you still eventually get to that payment-free lifestyle you crave in a timely manner.
Take a look at our HomeLight Mortgage Calculator to figure out the terms and rates that are best for your situation. Using this tool can help you see on a personal level how a large down payment can work in your favor.
Is the mortgage-free lifestyle the right choice for you? If so, be sure to play it smart, weigh the pros and cons, and create a manageable plan for your cash home purchase.
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