Buying a House with Cash – Should you do it?

When the market is incredibly competitive prospective buyers will employ whatever tactics are needed to close the bid on a new home. Some buyers have the option of utilizing the winning tactic of a cash offer. Buyers that can put in all-cash offers are four times more likely to win a bidding war as it is more attractive to sellers. Some buyers will even leverage their retirement or securities funds to pay cash for a home. Other buyers have taken out home equity line of credits or short-term friends and family loans to secure an all-cash offer. Just because you have the cash does that make it a wise decision to purchase a home with cash?

This is not a decision that should be taken lightly. Paying cash for a home as opposed to financing is a choice that should be carefully weighed with the help of an accountant or financial advisor. What factors need to be taken into consideration when determining I f paying cash is the right route to take?

Delayed Financing

If your motive for paying cash now is to win the bidding war now and get a mortgage later, you could be setting yourself up for a compromise. This form of delayed financing can set you up to have financing later at a higher interest rate. On the pro side sometimes, you will benefit by having a lower rate later and then can invest the cash. It’s a gamble, so you need to carefully weigh the factors involved.

Avoiding the amortization schedule

Amortization is the amount of principal and interest that you will pay over the term of the loan. Depending on your interest rate you could be paying more than you expected in interest. If you pay cash, you will be saving money on the overall cost of your home. Buying a home all-cash you end up spending less to purchase the same asset.

Emergencies and Expenses

Yes, there is a peace of mind in knowing that you own your home outright and won’t have a mortgage payment, but what about the unexpected? Home ownership comes with unexpected repairs and costs that can prove daunting if all your cash is tied up in your house. If you are thinking of buying in cash, be sure to have enough reserved to pay for normal and emergency expenses. A home equity loan taken out in an emergency can decrease your credit score and your income stream.

Taxes

When you have a mortgage, you receive a mortgage interest break on your taxes. Talk to your financial advisor about your options. That tax break can really help you later in life when you’re able to save more toward your 401k early on.

Missing out on making more money

If you pay all cash for your house, you may enjoy the feeling of a paid-for home, but at what cost? If your cash is tied up in your house, then you can’t use that cash to make money. You should still run the numbers and ensure that your returns would out-earn the interest you would pay the back, but there’s a reason millionaires and billionaires choose mortgages over cash. Opportunity costs need to be considered. Less money to invest means you could miss out on a return that is much larger than the interest saved.

These are just a handful of pros and cons to consider when considering buying a house with cash. Before you make any decision speak with your financial advisors and your agent and make sure that your motives and your goals are in sync.