Homebuyers: Should You Pay Cash?

Posted by Greg Spears on Monday, February 8th, 2021 at 3:17pm

Home sales data from the National Association of Realtors showed that almost 25 percent of purchases in 2019 were all-cash deals. Even rock-bottom interest rates in 2020 didn't affect that category of transactions much, and while most people finance their home purchase with a mortgage, about 1 of every 4 homebuyers pays cash these days.

There are plenty of markets in the United States with home prices that make paying cash out of reach for most people. But if you come across an affordable home or fixer-upper you like, maybe even an investment property, and have the cash on hand, you might be tempted to plunk down the purchase price upfront.

There can be advantages and disadvantages to foregoing financing, which presents the question: Should you pay cash?


Advantage: You pay no interest

Even when mortgage interest rates are low, the total interest paid on a home loan over 30 years (the most common term) can be substantial. At a rate of 3 percent on a $200,000 loan, you'd pay $103,000 in interest payments over the life of the loan.

For much of the length of a 30-year loan, interest payments make up the majority of your overall mortgage payment. When you pay cash, you have no mortgage payment to fit into your monthly household budget.


Disadvantage: You have no mortgage interest deduction

Tax rules change, and mortgage interest deductions aren't what they used to be for many people, but paying no mortgage interest means losing that tax deduction.

If you have other deductions, it might not matter. If the amount of the deduction doesn't save you much in tax owed, it's probably not a big deal. But if having a deduction bumps you down a tax bracket, the savings could be more substantial. It's a good idea to talk with a tax professional before paying cash for a home.


Advantage: Your offer is probably more attractive

In seller's markets where multiple-offer scenarios pit homebuyers against each other for a home seller's consideration, having a stronger offer might be the difference between getting a home or losing out.

Cash offers are usually more attractive to home sellers for two main reasons. First, it's less likely for a home deal to fall apart, as financing is the number one cause of sales failing to close. Secondly, cash purchases usually give more leeway to the buyers and sellers in setting the timeline for the deal to close. Having no lender involved means having fewer time constraints.


Disadvantage: Opportunity costs

If you find a $250,000 home you love and have the savings to pay cash, will you have enough left over to do any remodeling you'd like to do? If a home needs work, you might not want to empty your bank account to buy it and have nothing left for work needed. Putting thousands of dollars of remodeling costs on a credit card isn't exactly a prudent financial move.

Another opportunity cost could have major financial implications, too. If the cash you pay for a home could have made you more money by investing than it's saving you in interest, you're leaving money on the table. For example, if that $250,000 could earn an 8-percent annual return in a relatively safe index fund, and you're only saving 3 percent in mortgage interest, you're actually losing a net of 5 percent.


The bottom line

There are a few other factors to consider as well, including what paying cash means for a buyer's appraisal or inspection contingencies and title insurance. Those are protections a lender might insist on but are now largely up for negotiation. Paying cash for a home also eliminates the need to qualify for a mortgage, which even with good credit can be tough sometimes if you're a contract worker or self-employed.

If you're considering buying a home with cash, consider the major advantages and disadvantages and apply them to your own personal situation. Every homebuyer has their own set of circumstances, and there's no one-size-fits-all answer. Contact a local real estate agency near you to discuss which option might be best for you.



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