Buying a House with Cash – Is It Smart?

Halo Group Real Estate Advisors Blog

In a hot housing market, buyers are going all out to bid on, and secure new homes — and cash offers are one of the most successful strategies. According to figures from the National Association of Realtors, all-cash proposals accounted for roughly 25% of home offers in February 2022. These offers were more than four times as likely to win a bidding war in 2021. While many may have enough money to consider buying a house with cash, the case for whether it is a wise decision has to be considered. Let’s explore the pros and cons of each.

Pros of Buying a House with Cash

If you have the means to do so, there can be a multitude of benefits involved with paying for a house with cash. In this section we will discuss what those pros are, and why they are important to note.

I. Interest Savings

Two powerful words can motivate you to buy a house with cash if you have the means to do so: amortization schedule. The amount of money you’ll pay back to the lender, including interest, over the loan term. For example, on a $240,000 mortgage at a 3.5 percent fixed interest rate with 360 monthly payments, you will pay $147,974 in interest on a standard payment schedule. The total will be $387,974, with you paying 61.7 percent of your loan amount in interest.

II. Attractiveness to Sellers

Directly writing a check to the seller makes you the most popular buyer. In today’s market, submitting an all-cash bid will give you an advantage over many other buyers who need to finance their purchase with a mortgage. A seller is more likely to accept your offer because it’s a sure thing. They don’t have any complications like needing an appraisal when a cash offer is made. This low risk and instant gratification is why sellers jump at the opportunity.

III. Saving Time & Money During Closing

Not only does using cash cut down on time during the closing process, but it also streamlines the entire purchasing process. Without a lender or underwriter to deal with, and no appraisal necessary, you can close on your home in as little as ten days compared to the typical 30 days when financing the purchase with a mortgage.

Cons of Buying a House with Cash

In some scenarios, an all-cash offer may not provide the advantage you think it would. In a regular market, cash buyers can negotiate discounts that mortgaging buyers cannot receive. Sellers would give these discounts because cash offers aren’t as risky and time-consuming.

However, when a market suffers a supply shortage, the cash discount can become a premium. The cash buyer will have to compete against mortgaged buyers on price with less flexibility. In other words, when mortgage buyers bid up, and sellers decide they’re willing to do whatever it takes to close on the property, this may produce an undesirable effect. Sellers, sensing the competition, have no desire to do a discounted deal when tomorrow’s prices exceed today’s.

I. Opportunity Cost

Discussing the benefits of paying cash compared to getting a mortgage should consider opportunity costs. Some people with enough money still decide to finance their homes, and many wealthy people choose mortgages for financial reasons.

Taking out a mortgage may give you years of interest payments, but it also provides liquidity for your assets. By tying up all your savings in a home, you reduce the amount of money available to invest and miss out on returns that could far exceed what you’ve saved on interest.

Take into account this information: On average, the stock market has historically returned around 10 percent yearly, far more significant than mortgage interest rates today. You may generate money with your money instead of putting it in your house.

II. Preparing for Emergencies

Although it can provide peace of mind, owning your home outright may not be the most financially savvy decision because you don’t want all your money committed to one venture. Instead, keep some cash on hand to cover both day-to-day spending and unexpected costs. Also, remember that if you plan on taking out a home equity loan in the future, doing so could lower your credit score if mishandled. There’s also always the potential of losing your source of income and needing to take out loans to cover expenses, which defeats the purpose of paying cash to avoid interest payments on debt.

III. Miss a Chance to Improve Your Credit Score

Nothing affects your credit score more than your payment history.

Mortgages typically require 15 to 30 years of payments, which is plenty of time to polish your score by making on-time payments. It can also eventually contribute to the age of your credit or how long you’ve had credit, which may help.

The kinds of credit you use — credit cards, auto loans, mortgage — also affect your score, but not nearly as much as paying on time. In credit-speak, your credit cards are revolving (reusable) credit, and your mortgage is an installment loan. The more credit diversity, the better; a mortgage added to the mix does not hurt.

What's The Right Decision?

When making a significant financial decision, such as purchasing a home, it’s critical to thoroughly consider the advantages and drawbacks. Before you submit an offer, speak to your financial advisor or realtor to ensure your short- and long-term objectives are in sync.

If market knowledge and professional experience are what you seek, consider us at Halo Group for your real estate buying and investing needs.