If you have the ability to purchase a home with cash only, then you’re part of a slim percent of the American population - congrats! Before you head to the bank to withdraw those fat stacks of greenbacks, make sure you consider both the pros and the cons (yes, there are some cons) of skipping the mortgage.
Skipping the interest. Buying a home is often a good investment, but buying one flat out may be an even better one. This is because you save on mortgage interest that is usually paid over the life of the home loan – interest that could amount to anywhere between several thousand dollars to hundreds of thousands of dollars.
Avoiding the fees. With an all-cash deal, you skip those loan origination fees, an appraisal, some closing costs and other charges imposed by the lender.
Seller appeal. Sellers love cash buyers, and will favor them in comparison to an offer with a loan attached. So, buying with cash gives you leverage in the negotiation process.
A quicker close. Since you have no loan, once the seller accepts your cash offer, you can close much quicker - yet another reasons sellers favor cash buyers.
House poor? Make sure you can actually afford to put down cash on your new home. Sure, you may have the cash in the bank, but is it all the cash you have? If so, you could end up in the tricky situation known as “house poor” - your house is your only asset, and you have no free cash to spend.
Bye bye, tax breaks. If your new home is going to be your primary residence, you will not be able to take advantage of the tax breaks available to homeowners with conventional loans. By paying cash, you basically forfeit those tax breaks. However, if you’re going to save more on interest than you ever would on taxes, buying with cash may still be smartest. Talk to your financial advisor before making a decision.
To determine whether a no-mortgage purchase is right for you, compare it to other investments, weighing the risk, return, and liquidity. We also recommend talking to both your accountant and a lender to crunch the numbers and make sure that you are using your money in the smartest way, and for the highest return.