If you have the money to buy a house outright (no mortgage!), you’ve probably read a lot of advice that says your very best move is to pay cash for a house and never look back — but is that actually true?
The answer depends on what else you might do with that money, should you decide to put it toward something other than buying a house. Let’s explore the pros and cons of paying cash for a house, so that you can decide whether that’s the best financial move for you.
Paying cash for a house: The pros
1. You’ll close faster
If things go smoothly during a typical home sale, it takes about four weeks for a house to close. But when you buy a house in cash, you aren’t working with a lender, so the timeline speeds up — sometimes closing can happen in as little as one week. The ability to close the home quickly may appeal to a seller, and if there are multiple offers on the home, your cash offer may be the most attractive.
2. You can offer to waive the appraisal contingency…
“The reason cash offers are held in higher regard is because they alleviate some of the contingencies in a traditional purchase agreement,” says Erick Monzo, a top-selling real estate agent in Detroit. Buyers who are purchasing a home with a mortgage loan must have the home appraised so the lender is assured they aren’t loaning more than the house is worth. “If someone offers cash, as an agent representing a listing, I know that person is not going to have to get the home appraised,” says Monzo.
3. …And eliminate mortgage contingencies as a whole
Even for buyers that are preapproved, a mortgage can still fall through. “Let’s say you have a preapproval, you put an offer in on the house, it gets accepted, and you do your appraisal and it goes through,” says Monzo. “Two weeks later, the bank or the mortgage company says they need your updated financial statements, so you give it to them and, oh my God, you bought a new car” — that can potentially lead to your loan being declined, Monzo explains. When you pay in cash, you eliminate that possibility and sellers find that very appealing.
4. You may get a discount on the price
Because buyers with cash can forego jumping through many of the hoops that buyers financing their home must jump through, it’s possible to get a discount on the price of the home you’d like to purchase when offering cash. As an example, if a seller receives a full-price offer that will be financed and an offer $7,000 under asking price in cash, the seller may still opt to go for the cash offer because of the speed and ease of dealing with a cash offer.
That doesn’t always work, though, warns Monzo. “It depends on the market you have,” he says. “If it’s a buyer’s market then, yes, you may get a discount on price.”
5. You will save money over time on mortgage interest and mortgage insurance
When you buy in cash, you’ll save on mortgage interest, which can add up to a small fortune over time. A homebuyer purchasing a $200,000 house on a 30-year fixed-rate mortgage with a 4% interest rate will pay a whopping $143,739.01 in interest over the lifetime of the loan. A homebuyer purchasing a $200,000 house in cash will not pay a dime in interest to a mortgage lender.
Additionally, a homebuyer that puts less than 20% down will have to pay private mortgage insurance (PMI), which ranges from 0.5% to 1% of the loan amount annually. When you pay in cash, private mortgage insurance is not required.
6. If you don’t have a mortgage, you can build wealth quickly
For many people, the mortgage is the largest bill they pay every month. If you buy your house in cash you essentially eliminate a huge monthly payment from your budget, freeing you up to invest that money and build wealth quickly.
7. You actually own your house
Let’s face it: if you’ve got a mortgage, you don’t actually own your house — the bank does. When you buy a house in cash, you can feel secure knowing that no one can take that house away from you, and big, unexpected problems like a job loss won’t leave you without a roof over your head.
Paying cash for a house: The cons
1. You could be tying up all your money into one thing
If you spend your life savings buying a house in cash, you’ll tie up all your money in one large investment. The money you use to buy your house isn’t liquid (meaning you don’t have direct access to the cash, and you’d have to sell your home to get your hands on it), so if you need your money for any other reason, it won’t be readily available.
2. You may make more over time by putting money in more lucrative investments
According to the National Association of Realtors, housing prices were appreciating 3.6% nationally as of April 2019. At the same time, mutual funds appreciate approximately 8% to 10% a year. If you were to take some of the cash you paid for your home and invest it instead, you may make more money in the long run.
3. You may have a longer path to homeownership
If you want to pay for a home in cash but you don’t have all the cash saved, it could mean a very long path to homeownership.
Let’s say you’ve got your sights set on purchasing a $200,000 home and can save $10,000 a year. It will take you just four years to save a 20% down payment of $40,000, but it will take you twenty years to save $200,000 to buy the house outright (the price of the house will also continue to increase, so you may feel as though you’re chasing a moving target.)
Keep in mind, too, that during the time you’re saving up to buy your house in cash, you’ll be “wasting” your money by paying rent.
4. Putting the money elsewhere might make more sense
Before you decide to buy a house in cash, you should take a holistic look at your life. What other dreams do you harbor? What kind of goals (financial and otherwise) do you have?
You may find that there is something else in your life that makes more sense to use the money toward, like socking money away in a child’s college fund or starting your own small business.
5. You get extra title protection with a mortgage
Part of the homebuying process involves reviewing the title for any other claims, liens, or issues that could prevent you from taking full ownership. The title research takes place whether you pay in cash or get a mortgage, and it’s always smart to get title insurance on your investment, which will protect you in the event that the title research missed any claims.
When you get a mortgage to buy your house, there’s another entity interested in making sure the title is clear and that you stay in the house and keep paying your mortgage: the mortgage lender. Your lender will secure title insurance, too — which means that if there is a claim filed at some point, you’ll have an additional layer of protection that a cash buyer wouldn’t have.
So, when is it a good idea to pay cash for a house?
When you won’t financially burden yourself by forking over all that cash
It’s scary to spend your entire nest egg in one place. If you can pay cash for a house and still have money left over for emergencies, home repairs, and other unexpected things that come your way, paying in cash is probably a great financial move.
On the other hand, if paying cash for a house completely wipes you out, you might want to reconsider.
When you don’t have other areas where you’d rather be investing your money, personally or financially
If you’ve been waiting for years to start your own bakery or take a six-month trip to Europe, you may find that your money will be better spent funding your dreams than fully paying for your home. If you and your family decide that paying cash for your house is the dream you’ve been harboring — go for it.
And when is it a good idea to keep renting or to get a mortgage loan?
When you could use that money on a more financially lucrative purpose
If you crunch the numbers and find that your money will be better spent investing in your 401(k), becoming a partner in your practice, or any other scenario in which investing your money would be more financially lucrative, that’s a good sign that you shouldn’t pay cash for your house.
Or when paying cash for a house will take too long
If it will take you a decade or longer to save enough money to pay cash for a home, you may want to consider financing so that you can become a homeowner sooner.
Remember, even if you take out a 30-year mortgage it doesn’t mean you are obligated to spend the entire 30 years paying it off. It’s a good move to continue saving your cash and making additional or larger-than-necessary payments each month.
Of course, paying cash for a house isn’t a permanent decision
“I have a ton of clients that buy in cash and refinance later,” says Monzo. “Your cash offer has more strength, so if you have the ability to pay in cash, pay in cash. And then later, if you want to invest the money elsewhere, you can always refinance.”