Pros And Cons Of Buying A Home With Cash
It's helpful to consider both sides of the coin when you're considering a cash home purchase.
Pros
The advantages of buying a house for cash buyers include:
Save Money On Interest And Fees
Buying a house in cash can allow you to save money on interest, fees and closing costs, which on their own typically run 3% – 6% of the home price. It could save you thousands of dollars. You can avoid fees like mortgage origination fees because you won’t be working with a lender that would need to originate your loan.
The interest alone can make paying for a home with cash compelling – mortgage interest is the amount a lender charges for a loan as a percentage of the total loan amount. It can save you tens of thousands of dollars over your loan term.
Enjoy A Faster And Simpler Closing Process
A cash transaction also typically takes less time than applying and qualifying for a mortgage – you can close in as little as 1 – 2 weeks if you pay for a home with cash, if all other parts of the purchase move swiftly, too.
A cash offer can also come with fewer contingencies, which are clauses included in an offer stating that specific conditions must occur before a deal closes. For example, buyers and sellers can rest assured that a financing contingency won't have to happen, which occurs when a buyer cannot obtain the mortgage they need to finance the home.
Have A Greater Competitive Advantage Over Non-Cash Buyers
Paying in cash can mean you're putting in a stronger offer and that you could win out over other prospective buyers. Paying in cash can come in handy if a bidding war occurs over the home you want. A seller may see cash offers as stronger because there’s no financing contingency for a mortgage loan, and thus the offer may be more likely to close.
Skip The Mortgage Payment
You won't have to make room for mortgage payments in your budget every month, which can free up disposable income to use for investments, savings, expenses or fun things like vacations and renovations on your new home.
Own The Property Outright
Owning your property outright means that you own 100% of the equity in your home, and you are not at risk of foreclosure by a lender. That equity immediately gets added to your overall net worth.
Cons
On the other hand, you may want to consider some downsides of purchasing a home with cash.
Have Less Cash On Hand
Paying cash for a house means you'll have to dip into your savings or other investments and potentially spend a significant chunk of your money on a home. You'd have less cash for an emergency fund, repairs, insurance and other home expenses.
Evaluate what you'd do if something came up in the next few months and you didn't have the money to pay for it.
Miss Out On Mortgage Interest Tax Deductions
You'll miss out on mortgage interest tax deductions when you purchase a home using cash. A mortgage interest tax deduction allows you to subtract the interest you paid on a qualified mortgage from your taxable income, lowering your tax liability or increasing your refund. You must itemize your tax refund to get the benefit, but buying a home with cash means you completely miss out on this benefit.
Risk A Lower Return On Investment
You'd also risk a lower return on investment because a home might not appreciate quickly. In other words, you might get a better return on your investment if you invest in the stock market, for example. A home might offer a minimal return over one year, while a stock might earn a 10% return during that year. Note that this is an example, and you must research to determine the returns on investment you may get.
How To Buy A House With Cash
Here's how the purchase process works when buying a house with cash..
1. Consolidate Your Money
Unlike working with a lender, you'll start the process by gathering your money and showing sellers you have all the money you need to purchase the home. You may need to pull money from multiple sources – savings accounts, investment funds, etc. Consider meeting with a financial advisor or tax professional to ensure you're making the right moves financially.
2. Choose A Real Estate Agent
You'll want to find a real estate agent or REALTOR® to help you find the best deal for your situation because an agent will approach the process differently when you plan to purchase a home in cash. Some agents even specialize in cash deals and can help you navigate the paperwork the right way.
3. Obtain Proof Of Funds
A proof of funds letter from a bank will do just that – document that you do have the funds available to buy the home. This part of the process is instrumental in showing sellers that you do have enough money to buy the house. You can request a proof of funds letter from your bank in person and online.
4. Negotiate And Make An Offer
Your real estate agent can help you through the process of making an offer on a house you want to purchase. They will send your official offer letter to the seller and seller's agents, and the seller can accept, counter or decline your offer. You can choose to accept, decline or counter their counteroffer. Ultimately, if the seller accepts or you accept their counteroffer, you'll sign a purchase agreement.
5. Request A Property Title Search
If you purchased a home through a lender, they would order a title search of the property. However, when paying in cash, you must request a property title search on your own. Your real estate agent may have some suggestions on a good title company to work with.
What exactly is a property title search? It examines public records to confirm that the seller is the property's legal owner and can sell the house and transfer title. If the title isn't clear, it could mean you're in charge of the liens, such as unpaid property taxes, homeowners association (HOA) fees, bills, etc.
A home with a messy title could encourage you to walk away from the sale.
6. Get A Home Inspection And A Home Appraisal
A home inspection and appraisal will look a little bit different with a cash purchase versus working with a lender.
If you went with a mortgage, a lender would require an appraisal, which occurs when an expert appraiser evaluates the property and compares it to other properties in the area to determine the fair market value of the home. It ensures that the price you plan to pay for the home is fair. However, you're in charge of getting your appraisal on your own when you opt for a cash purchase.
You're not required to get a home inspection, but it's worth the cost, because an inspector will check out every part of the home to ensure there's no damage or issues. It could save you from unknown expensive issues in the future.
7. Secure Your Earnest Money Check
Earnest money is the money you put down for a home to show a seller how serious you are about buying the home. It's optional, but if you really want the home, this good faith offer can cement you into the seller's good graces. If you close on the home, the deposit goes towards any minimal closing costs you'll pay.
Aim for 1% – 3% of the purchase price with the earnest money deposit using a cashier's check.
8. Purchase Homeowners Insurance
You'll still want to get homeowners insurance when buying with cash – the only difference is that your lender doesn't require you to get it when you're purchasing your home in cash. Homeowners insurance may cover disasters like fire, snow and wind damage and injuries on your property that you might be liable for.
Homeowners insurance gives you peace of mind that you won't have to pay to replace your home out of pocket if something happens.
9. Close On Your Home
Finally, you close the deal. Since you won't borrow any money, you can likely sidestep the mound of paperwork you'll need to sign. Bring a valid government-issued ID photo, a cashier's check or wire transfer to buy the home and anything else your real estate agent or the seller needs from you.
