Buying a House with Cash

Buying a house with cash is an option for more people than ever these days. If you are one of the lucky people in this position, it's important that you carefully weigh the advantages and disadvantages of paying cash for your home instead of taking a mortgage.

Advantages to Purchasing Your Home with Cash

The advantages to buying a house with cash seem pretty obvious, but there are some that you may not have considered. Paying cash puts you in a prime negotiating position for purchasing a home since most other buyers will have to obtain financing. The vast majority of home sellers would rather know that it is a done deal than worry that their buyer's financing is going to fall through at the last minute. This means that you may be able to negotiate a better price on the home.

Another bonus to buying a house with cash is that you will be able to close quickly. You can usually close within a couple of days as long as the title is clear and the seller agrees to it.

Additionally, you can get great deals on fixers. Buyers attempting to get financing for a fixer may have a difficult time since the bank requires an appraisal, and this often doesn't match up well with the amount of money the buyer is trying to borrow. As a cash buyer you don't have to worry about a bank appraisal, which means you can buy what you want.

The best benefits of all? No mortgage payment each month!!

Disadvantages to Buying a House with Cash

Who would have thought there could be diadvantages to paying cash for your home??! Perhaps a better way to think of these than disadvantages would be as ways you might be able to better invest your money.

The first reason you might consider taking out a mortgage rather than paying cash outright for your home is that you can deduct mortgage interest on your taxes at the end of the year. This can be a significant deduction that you could miss out on by buying the home outright.

The rest of the disadvantages of paying cash from your home revolve around the idea that you may get a higher return by investing your cash elsewher than what you would pay in interest on a mortgage.

If you keep your cash and decide to go with a mortgage instead, you can invest your money in more liquid assets such as money market, stocks, bonds CDs, etc. Houses are not considered liquid assets because they can often stay on the market for months before they sell. More liquid investments will allow you to have access to your money more quickly if you need it.

Another rather fascinating thing to consider is that you may get a much higher return on your investment by just paying a 20% downpayment on the home and mortgaging the rest instead of buying the home outright. Compare these scenarios:

Scenario #1

You buy a $200,000 home with cash. Over the first year the value of the home increases by 5%. Your $200,000 investment is now worth $210,000 which shows an increase of 5% on your investment.

Scenario #2

You buy a $200,000 home with 20% down and mortgage the rest. Your 20% downpayment comes out to $40,000. Over the first year the value of the home increases by 5%. This is an increase of $10,000, the same as in the first scenario. The difference however, is that it only took $40,000 out of your pocket to make that $10,000 increase, vs. the $200,000 out of pocket in the first scenario. That represents a 25% increase on your investment ($10,000/$40,000) instead of just the 5% increase in scenario #1 ($10,000/$200,000). Of course, you will have to factor in the interest that you are paying on your mortgage which will decrease that percentage slightly, but you still come out with a much better return on your investment doing scenario #2. In the meantime, you can take the $160,000 that you didn't spend on buying the house outright and invest that in stocks, bonds, money markets, etc.

Here's hoping however you decide to proceed you enjoy your new home!