If you want to buy a house, you’ll most likely need a mortgage. Yet you constantly hear how bad it is to carry debt. So naturally, you may conclude that buying a house with cash—or at least making the largest down payment possible to avoid a massive home loan—is a smart financial decision. Sure, you have plenty of reasons to buy a home outright, but there are also several drawbacks you may not have considered. Here’s what to know before buying a house with cash.
How Common are All-Cash Bids?
An all-cash offer means the buyer wants to purchase the house without a mortgage or other financing. Nationwide, cash sales accounted for about 28 percent of single-family home and condo sales in 2018. This is down from the peak of 38 percent in 2011 and up from the pre-recession average of 19 percent between 2000 and 2007.
While most homebuyers secure financing, buying a home with cash is perfectly acceptable if you have the money in your bank account. Here are some common reasons why all-cash sales take place:
- A private investor or investment company wants to buy a house to rent out.
- The buyer just sold their previous home and has the capital to pull from.
- The buyer wants to compete with others in a hot real estate market.
- The property is distressed or condemned and is therefore listed as cash-only.
How Does an All-Cash Purchase Differ from Getting a Mortgage?
Buying a house is a little different without a mortgage lender in the picture. Here’s what to expect:
- There’s no mortgage application, documentation, or underwriting, but buyers must typically still sort out title insurance and sign closing documents.
- With no pre-approval from a mortgage lender, buyers must provide proof of funds in another way. This often involves getting a letter from the bank showing that sufficient funds are available.
- Fewer contingencies apply with cash sales. Buyers don’t need a financing contingency, and there also may be no need for a sale contingency. Still, some buyers may want an inspection contingency.
- Buyers don’t have to worry about lender-mandated appraisals when they pay in cash, though they can choose to get one if they want.
- Even without a mortgage, buyers still need a title and escrow company to handle the transaction. However, there’s typically more leeway when choosing these parties with no lender to satisfy.
Pros of Buying a Home in All Cash
Assuming you have the necessary funds, here are the top reasons to make a cash offer on a house:
- Appeal to the seller: Being a cash buyer helps you stand out in a competitive market. It gives the seller more confidence because they don’t have to worry about your finances falling through at the last minute.
- Pay no monthly mortgage bills, interest, or fees: Not having a monthly housing payment is a pretty great benefit. You’ll end up paying less on the house when no interest or fees are involved. And as a cash buyer, you may even qualify for a discount, allowing you to obtain the property for a lower price.
- Simplify, speed up, and lower the cost of closing: Without a lender in the mix, the paperwork at closing is significantly reduced. The entire process can also wrap up in a week or two, compared to the average of 43 days to close with a mortgage. Closing costs are also lower when you have no lender fees to pay.
- Own your home outright: This sense of freedom is hard to describe. An all-cash purchase means you will always have a place to live, and there’s no risk of foreclosure over missed loan payments.
- Have the option to do a cash-out refinance: Buying with cash and then tapping into your home equity with a cash-out refinance offers the best of both worlds. You enjoy an easier buying process in a hot market, but you still have the option to take out a low-interest mortgage later if needed.
- No need to worry about underwriting: If you have poor credit or an inconsistent income, you may not qualify for a mortgage, even with a healthy savings account. Paying in cash lets you avoid this uncertainty.
Cons of Buying a Home in All Cash
While buying a house outright offers some attractive benefits, consider why a mortgage might make more sense, even if you can pay in cash:
- High opportunity cost: Saving for years to buy a house in all cash may prevent you from investing in other ways. Plus, once you buy, your money is tied up. Is your goal to save money? If so, realize that you will probably end up with a higher net worth after 30 years if you invest your money instead of buying with cash to avoid getting a mortgage.
- No tax deductions: Most mortgage interest payments are tax-deductible for homeowners who itemize their deductions, reducing their taxable income. If you forgo a mortgage, this option won’t be available to you.
- Foreclosure is still possible: Just because you don’t have a mortgage doesn’t mean you have zero housing liabilities. You still owe property taxes, homeowner’s insurance, utilities, and, in some cases, HOA fees. If you fail to pay property, state, or federal taxes, you could lose your home through a tax lien.
Apply for a Mortgage Today
If you decide that financing a home purchase benefits you more than buying a house in all cash, reach out to Financial Concepts Mortgage. As Oklahoma’s premier mortgage lender, we offer competitive rates on numerous home loan options and keep the application process fast and simple. We’re proud to be a locally owned mortgage bank, not a mortgage broker, allowing us to provide in-house loan origination, processing, underwriting, and closing. To discover what makes us the best choice for home loans in Oklahoma City, please contact us at (405) 722-5626.