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- Buying a house with cash vs. mortgage
- Should you buy a house with cash?
- How to buy a house with cash
When buying or investing in a home, you’ll be faced with the important decision of how to finance the purchase. Many homebuyers opt to take out a mortgage, but there is also the option of paying all cash that is worth some consideration. Keep reading to find out how to buy a house with cash, and why it presents itself as an attractive option for some buyers.
Buying With Cash vs. Using a Mortgage
There are a multitude of creative ways to finance a home purchase, but the two most straightforward options are either buying with cash or taking out a mortgage. If you’re buying a house with cash, that means that you have access to a lump sum that’ll allow you to buy a house outright from the seller.
Using a mortgage is the most popular option for homebuyers, as so few people have enough cash to buy a home in totality. (If you do, then lucky you!) A mortgage is the technical term for a home loan, where you put down an initial payment — called the down payment — and finance the rest of the purchase price through a bank. With a mortgage comes interest payments and closing fees. Mortgages allow homebuyers to purchase homes that are worth far more than the liquidity they currently have access to.
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Should I Buy a House With Cash?
If you’re in the market to buy a house, you may be wondering if buying a house in cash is more advantageous than using a mortgage. Personal and national debt is a hot topic in this day and age, and there’s endless talk about how the insurmountable amount of debt is crippling our economy. With ideas like these swimming around your head, you may not be able to help but wonder if you should just try to buy a house outright with cash and avoid going into debt. Well, the answer is not so clear cut here. As with most large financial decisions you make in life, there are both advantages and disadvantages you need to carefully consider. Here’s a breakdown of the pros and cons.
Pros
- No interest payments: When you pay all cash instead of taking out a mortgage, that means that you won’t have to pay an interest rate on top of your monthly payments. This can save you a lot of money in the long run.
- Avoid mortgage-related fees: Another major benefit when you avoid taking our a mortgage is that you won’t have to pay all the fees associated with it. This includes closing costs, origination fees or appraisal fees, to name a few.
- Attract sellers: Sellers are always worried about saying “yes” to an offer, but then the buyer backs out because they couldn’t get approved for financing. You can make yourself more attractive to sellers when making an all cash offer, since they will feel more confident that the deal won’t fall through.
- Negotiate a discount: Because cash offers can be so attractive to sellers, you also have the opportunity to negotiate a discount. Not taking out a mortgage means that you’ll be helping both sides save some money.
Cons
- Limits “how much house” you can afford: One of the major benefits of taking our a mortgage is that it significantly increases your buying power. By making a down payment and taking out a loan, it allows you to buy a house with a purchase price of far more than what you might have available in cash. By committing yourself to paying all cash, it means that you are limiting how much house you can afford.
- Ties up your cash: One thing to be mindful of is to not completely tie up your cash. By pouring all your liquidity into the purchasing process of the home, you may be putting yourself in financial danger in case you have an emergency, or if the house requires unexpected repairs and you can’t afford it.
- Cancels the ability to refinance later: Many homeowners have the peace of mind of knowing that they have the ability to refinance their home purchase in order to take out a home equity loan later down the line. (Read more about HELOCs, or home equity line of credit, if you’re unfamiliar.) By paying cash, you are choosing not to have this option available to you in the future.
- Give up other investing options: By pouring all your cash into a home purchase, that means that you’re potentially giving up your ability to invest your money in other vehicles, such as a retirement savings fund or stocks.
3 Steps to Buying a House With Cash
If you’ve decided that buying a house with cash is ultimately the right decision for you, then you’re probably wondering how exactly to do it. The following lays out the surprisingly simple steps on how to buy a house with cash:
1. Set A Budget
First things first, you’ll need to set a budget. You can look on real estate listing websites and research what kind of list prices are currently on the market in your area. When setting a budget, you’ll need to be realistic. Since your plan is to pay all cash outright, you’ll have to pick a target that strikes a balance between how much house you can afford, how much your income is, and how much time you’ll need in order to hit that target. You may even need to commit to buying a start home first, which you plan to sell in order to achieve your dream home later down the line.
2. Start Saving
The easiest way to start saving is to take a lofty financial goal and break it down into smaller, digestible targets. For example, calculate backwards from how many years you’d like to be able to buy the house in, and then how much money you’d need to save each month to reach that goal. You can even come up with a creative plan, such as starting out small while you pay off debt, and then increasing the savings scale as your cash flow improves and your income increases. You may even need to make certain sacrifices to meet that goal, such as significantly trimming down your spending or even by increasing your income in creative ways.
3. Make Offers!
Although buying a house in cash may be broken down into three easy steps, the steps certainly are not easy. Saving enough cash for a house can most certainly be the hardest part, especially as it can take years. If you’ve finally saved up your target amount – it’s time to congratulate yourself for your hard work, as it’s about to pay off! Next, hire yourself a real estate agent, and let them know that you plan to make all cash offers! Your agent will be able to use this as leverage to potentially get you an even better deal than you ever anticipated.
Summary
At the end of the day, there is no correct answer as to whether or not you should buy a house with cash, or take out a mortgage. You must decide which option will give you the biggest bang for your buck. For example, some buyers might strategically go with the all-cash route to make sure they can pounce on a deal in an extremely competitive market. A different type of buyer might go with a mortgage if they plan to live in the house for a long time and want to be able to purchase more house than they could have if they had paid all cash. If you do go with the cash option, however, be sure to set aside a nest egg in case of emergencies or unexpected expenses. You never want to tie up absolutely all of your cash.
What are some other benefits to paying all cash for a house? Let us know in the comments below.
