If you are fortunate enough to be able to buy a home with cash, you are in a good position. You don’t have to worry about finding a mortgage company that will approve you or worry that a seller won’t like your choice of financing. There’s nothing better than cold-hard cash!
While there are many benefits of buying a home outright, there are some downsides too. Keep reading to learn both sides of the equation so you can determine what the right choice is for you.
The Benefits of Paying Cash
There are several benefits of paying cash for a home, such as:
No matter how short of a mortgage term you choose, you’ll pay interest and it will likely add up in the thousands. If you take a 30-year term, you’ll pay the most in interest. Shorter terms cost you less, but again, it’s still money you will not see in return even if you sell your home for a profit.
When you pay cash for a home, you don’t pay any interest. There’s no loan fees or anything else. The only fees you might have to worry about are title fees and certain government-related fees involved with buying a home. The total cost will be minimal than if you were to secure a mortgage for the home you buy.
Plenty of Equity
When you don’t borrow money to buy a home, you have 100% equity in it. This could be your emergency fund should something happen. While you invest most or all of your money into the home, you will likely have the option to take a home equity loan if you need the money in a pinch. Of course, this is only possible if you keep your credit score up and have stable income.
Less Haggling With the Seller
Sellers love buyers who pay cash. If sellers don’t have to worry about financing falling through or picky lenders, they are more apt to choose the cash deal than the deal from someone borrowing the money. Sellers may even take a lower sales price just knowing that there won’t be any issues leading up to the closing unless you have an inspection or appraisal contingency in the contract (which you should) and things don’t pan out the way they should.
The Downsides of Paying Cash
With the good usually comes the bad. It’s important to look at both sides of the equation when dealing with buying a home without a mortgage. The downsides include:
No Interest Write Off
If there’s one benefit of having a mortgage, it’s the interest write off. While you probably don’t look forward to paying thousands of dollars in interest, you can write it off as you pay it. For example, if in one year you pay $5,000 in interest, you can write it off on your taxes if you itemize your deductions. This leaves you with a lower tax liability, decreasing the stress that paying interest causes. When you pay cash there is no interest that you pay and therefore no tax deduction.
No Liquid Emergency Fund
Tying all of your money up in one asset can be a big mistake. What happens if you need money suddenly? Your home isn’t very liquid unless you have a buyer on hand immediately that will pay cash, which is very unlikely. This leaves you with the risk of financial destruction just because you tied all of your money up in one investment. Diversification is often ideal, keeping some of your money in liquid accounts to help you if you get into a jam.
The Market Risk
As we saw with the housing crisis, home values can drop in a flash. Before you know it, your investment could be washed away, leaving you with nothing. Well, you will have a home, but you are then stuck with that home until values rise again. Of course, this would be the case with a mortgage too, but the damage isn’t as devastating as you didn’t sink all of your money into the investment at one time.
Buying a home with cash can be a very good way to get the home you want. Sellers will prefer your bid and you won’t have to deal with the stress of getting a mortgage. Of course, there are the downsides and lack of protection that you will experience. Before you decide what to do, weigh both sides of the equation to see what will work best.