Whether you're liquidating assets for an investment property or are diligently saving to purchase your dream abode, buying a home in all cash can significantly increase your purchasing power. It's a strategic move that strengthens your position as a buyer and improves your flexibility in the real estate market. However, it can put you in a financially vulnerable spot.
Is buying a house in cash the right move for you? This post will explore the unique advantages and considerations of becoming an all-cash homebuyer.
The pros and cons of buying a house in cash
Your purchasing power will increase
Saving on interest is one of the most common reasons to buy a home in cash. Throughout a 30-year mortgage, you could pay tens of thousands or even hundreds of thousands of dollars in total interest.
Additionally, your purchasing power increases — with no financing contingencies, you can explore a broader selection of homes.
You’ll be in a strong negotiation position with sellers
When purchasing a home, you must convince the seller that you’re the best candidate — even if you’re making a similar offer to others. What is the best way to do that? Pay in cash. When competing with several other buyers, paying in all cash can help you stand out. Sellers also appreciate how quickly the transaction can close.
There’s an opportunity to close faster
Forgoing financing can help the transaction move and close faster. When taking out a mortgage, the lender and underwriter must verify all documents, the value and condition of the home, and ensure you can afford the loan. Alternatively, paying in cash negates all those needs, leading to a faster turnaround time.
It diversifies your portfolio
Real estate is one investment that tends to outpace inflation over time. Unlike stocks and bonds, it's considered less risky and can provide short- and long-term wealth gain.
One caveat to note is that during specific economic markets, real estate can produce less ROI than other investment types in the short term. For example, when rates are low, what you'd save on interest would earn you more in a different investment vehicle.
It can make you financially vulnerable
The biggest risk of paying cash for a house is that it can make your finances volatile. Tying up your liquid assets in a property can reduce financial flexibility and make it more challenging to cover unexpected expenses.
Additionally, tying up your cash means missing out on high-earning investment opportunities that could yield higher returns elsewhere. If you're not timing out the market, you could lose significant cash flow compared to other investments — especially if selling the property quickly is part of the plan.
You’ll miss a credit-building opportunity
When you take out any kind of loan, including a mortgage, your payments will be reported to the major credit bureaus. If you make your payments on time, then you'll build a positive payment history which can improve your credit score. However, buying a home in cash means you won't receive credit for all those payments.
If you have other loans or credit cards, you can still use those to show an on-time payment history on your credit report.
You’ll have additional expenses to cover
In addition to the cost of the home, you'll need enough cash to cover an array of expenditures. During the home buying process, buyers can expect to pay related expenses, like closing costs, appraisal fees, inspection costs, title searches, and more.
Once you own the property, you'll also need cash for maintenance, renovations, and other unexpected expenses.
Before buying a home in cash, make sure you have a solid emergency fund as well as a savings account that can cover substantial home repairs.
You’ll forego tax deductions on interest
When you pay interest on a mortgage, you can deduct that amount during tax season. However, you can’t do that if you don’t have a mortgage.
How to buy a house with cash
Prepare your documents
The seller and their agent will generally need proof that you have the cash in hand before they will accept your offer. This may require a bank statement. The funds need to be liquid, not in an investment account, to count as cash.
If you received money from a relative, you may need to ask them to write a letter showing that the funds are a gift, not a loan.
Negotiate your offer
Once you pick a house, it's time to submit your offer. You can look around the neighborhood to see what price makes sense or ask your real estate agent for their advice.
In a hot market, you can offer an escalation clause which means your price will go up if there’s a competing offer.
Your real estate agent should send you closing details well in advance. Make sure to bring your ID and any other documents you might need. Set aside at least an hour for this appointment.
Special considerations for buying a house in cash
Want to buy a home in cash? Here are some things to be aware of before you close on a house:
Don’t skip the appraisal or inspection
When you take out a mortgage, the lender will issue an appraisal to verify the home's value. The appraiser will determine how much the home is worth, often based on similar homes that have been recently sold in the neighborhood. If you don't need a mortgage, then you can skip the appraisal.
However, you should still order the appraisal because it will give you a sense of the home’s current value for your own net worth calculations. Plus, if the appraisal comes back much lower than the selling price, you may try to negotiate a better deal with the seller.
Anytime you buy a house, you should order an inspection, which is like a vehicle history report for a home. A reputable inspector can find anything wrong with the home, which you can use as a bargaining chip. The inspection also gives you an idea of any deferred maintenance and how to prioritize tackling the repairs.
There are various home inspections available to homeowners. While some are recommended for every purchase, others cover more unique situations. For example, a crawl space inspection could be warranted if a home has high indoor humidity. The different types are:
- Roof inspection
- Chimney inspection
- Electrical inspection
- Crawl space inspection
- Lead-based paint inspection
- HVAC inspection
- Septic system inspection
- Pest inspection
- Radon inspection
- Soil inspection
- Asbestos inspection
- Mold inspection
- Plumbing inspection
- Foundation inspection
- Pool and spa inspection
Secure title insurance
When you hire a title company, they will investigate to make sure that the seller is legally allowed to sell you the property. While you can forgo title insurance, doing so means taking a risk that there’s another legal owner to the home who could challenge you.
Account for additional expenses
Even if you buy a home in cash, you are still responsible for paying closing costs. Make sure to determine how much you’ll have to spend and how you’ll have to pay for those fees. You may have to bring a cashier’s check or wire the funds before closing.
Alternatives to ways to pay for a home
Want to buy a house without paying cash or taking out a traditional mortgage? Here are some other options:
Just like the name suggests, a rent-to-own agreement means renting a home before eventually buying it. The costs of a rent-to-own arrangement may be more expensive than a traditional mortgage, so make sure to do the math before you agree.
If you can’t afford to buy a home in cash or don’t want to take out a traditional mortgage, you can try to co-buy a house. This process generally refers to buying a home with someone other than your spouse, like a friend, domestic partner, or relative. Make sure to have the correct legal documents put in place to ensure that your ownership rights are set in stone.
Sometimes, a seller is willing to act as the lender for their own property. You will have to sign a contract with them and discuss the financing details ahead of time. Sellers may not require a minimum down payment, but this depends on their particular circumstances.
If you already have an existing property, you can take out a home equity loan or line of credit and use those funds to buy a new home. However, the interest rate on home equity loans or lines of credit may be higher than a traditional mortgage.
Alternatively, you can take advantage of a Home Equity Investment (HEI) to unlock your home’s wealth. HEIs give you access to funds without restricting your monthly cash flow. Using home equity to buy property can help you avoid being in a financially vulnerable position.
It’s a common occurrence. You find your dream home, put in an offer, and have it accepted. But there’s a catch: you have to sell your current house to afford your new one.
That’s where a bridge loan comes in. A bridge loan covers your expenses while you sell your old home. Bridge loans can have high interest rates, so it’s best not to use them unless you’re certain the home will sell quickly.
Before buying a home in cash, consider what else you might need the funds for. If you have another major financial goal, you may need the funds for that instead.
Also, make sure you have a fully stocked emergency fund that can handle any potential major home repairs or remodeling projects. Remember, a mortgage usually has a lower interest rate than any other credit product, so you’re better off taking out a home loan if you will need to borrow money later on.