Buying a house with cash is gaining popularity in the USA, where one in every three houses is purchased with cash. As 30-year fixed mortgage rates approached 7% in 2024, around 34.5% of house buyers purchased their homes with cash.
On average, a cash buyer pays 11% less. But, a mortgage offers some unique advantages too, such as lower down payment and tax deductions, which makes it a competitive option for many buyers. Let’s dive deeper into the world of cash purchases with this article.
Buying a House With Cash 💵
When you buy a house with cash, you put together a large chunk from your savings to pay for the house price. Which looks cheaper at first, but has some significant drawbacks too. Let’s understand both the pros and cons involved with a cash purchase one by one.
✔️Pros:
Save on Interest and Closing Costs:
A mortgage plan includes interest and a few additional closing costs like loan processing fees, and Private Mortgage Insurance (PMI). When you buy a house with cash, you save on both.
Easy Process:
In a mortgage, there are many stakeholders involved such as home Inspectors, home appraisers mortgage lenders, government tax agencies, etc. which makes it a complex process. On the other hand, an all-cash option reduces the number of stakeholders and makes it easy and swift.
Get Full Home Equity:
When you buy a house with cash you get 100% home equity on your house immediately. This means you can quickly rent or sell the property without any hassle.
Attracts More Sellers:
A cash offer typically takes 10-15 days to close, which attracts a lot of home sellers looking for a quick deal. But, a mortgage offer can take up to 30–60 days to fully close.
❌Cons:
You lose Your Liquidity:
Buying a house with cash means you pay it all from your pocket, which reduces the availability of funds. You should get the help of a financial consultant and get a strong financial plan ready before you buy a house with cash.
You Lose Opportunity to Invest:
In a cash purchase, most of your funds are invested in your house. By not diversifying, you are at risk of losing it all in case of a natural calamity. You also lose the opportunity to invest and earn higher returns than your mortgage repayment.
Buying a House with a Mortgage 🏦
In a mortgage purchase, rather than paying it all at once, you pay a small fraction of your house price in monthly installments. This gives you a lot of flexibility, but like the cash option, a mortgage has its drawbacks too. Let’s understand both the pros and cons of buying a house with a mortgage.
✔️Pros:
You get More Liquidity:
In the mortgage option, you just need a small down payment typically 18.6% of the value of the house. It means you have more funds with you to invest or use in case of an emergency.
You Get the Benefits of Tax Deductions:
Mortgage buyers get the exclusive benefit of tax deductions. You can deduct payments made against property taxes, interest payments, mortgage insurance premiums, and mortgage points from your taxable income.
It Shows Your Commitment:
A mortgage pre-approval shows that you are a serious buyer and the chances of your offer falling apart are rare. Sellers take your cash offer seriously and you have a better chance of closing.
❌Cons:
You Pay More on Closing Cost:
Mortgage involves more steps and costs like house inspection and appraisal which is typically $300-$450 for Inspection and $300-$600 for appraisal. These additional steps make a mortgage a high closing cost option.
You Have to Pay Monthly:
With a mortgage, you have a monthly compulsion for mortgage repayment. For most buyers, their biggest chunk of earnings goes into mortgage repayments.
Few Options if You Have a Low Credit Score:
There are only a few options available if your credit score is below the required threshold. Different lenders have different credit score requirements.
6 Factors to Consider Before Buying a House With Cash
There are several factors that can affect your decision to buy a house with cash. let’s understand these factors one by one for a better insight into the world of cash house purchases.
1. Personal Finances:
Before you purchase a home with cash, carefully plan and make a 50/30/20 budget for your family income and expenditure. A cash purchase may lead to a cash crunch and it can affect your ability to pay for other necessary expenses.
2. Your End-Goal with the Purchase:
If you are planning to buy a second home and you don’t plan to live there, an all-cash purchase can provide you the flexibility to either rent or sell quickly. But in a mortgage, you can’t sell your property unless the mortgage is fully paid off.
3. Tax Implications:
The mortgage buyers get the benefit of tax deductions. Typically, you can deduct payments of property tax and mortgage from your taxable income. But, all-cash homebuyers don’t get any such benefits.
4. Emergency Funds:
Before buying a house with cash seek professional help in financial planning. Prioritize and keep a reserve fund to deal with any future uncertainties like medical emergencies, Natural calamities, etc.
5. Closing Costs:
Closing costs can vary depending on the location, HOA fees, and various other factors. Compare the closing costs in both cases for your property and decide on what works for you.
6. Risk Bearing Capacity:
The median house price in the USA is $420,000 in 2024. Risk-bearing capacity is simply your ability to take risks without jeopardizing your stability. Analyze past and current trends of your risk-bearing capacity to make an informed and sound decision.
Cash or Mortgage: What Is Better for You?
Choosing the right option when buying a home is crucial. While buying a house with cash might look quicker and cheaper, a mortgage offers unique benefits that can make it just as competitive. To make an informed decision, conducting a detailed profit-and-loss analysis of both keeping your long-term financial goals in mind is essential.
At Houzeo.com, we simplify the home-buying process to help you evaluate the best option for your needs. Whether you’re exploring cash or mortgage options, Houzeo provides expert insights and assistance to guide you toward a decision that’s financially sound.
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Frequently Asked Questions
Can I pay cash for a property?
Yes, you can buy a house with cash, which is much simpler and beneficial than applying for mortgages. You can include the cash payment as proof of the transaction in your registered title deed.
Why you should never pay cash for a house?
Paying cash for a house ties up a large amount of your liquid assets, and limit your financial flexibility. Additionally, you miss out on tax benefits from mortgage interest deductions and the opportunity to invest that cash elsewhere for potentially higher returns.
Should you get a home loan even if you have the money to buy a house?
Experts indicate that even if you have the cash to buy a property, you should take out a home loan for tax exemptions and better liquidity.
