Paying for a house is confusing and complicated. Luckily, Wise Bread has your back with all of the pros and cons of buying your new home in cash.
My husband said that when we do buy a house, he wants to just buy it with cash so we can own it outright and in our way say "screw you" to the banks. I like that idea, but just like any financial decision, there are pros and cons to doing this.
No Credit History Needed
A long time ago I read a story of a guy who avoided credit cards and loans like the plague so he did not have a credit history, but he had considerable savings. When he wanted to buy a house no one would give him a loan, so he bought a house outright with his savings. In situations where you do not have the ability to get a reasonable loan, then paying cash might be the best option.
RELATED: Building a Credit History
Risk Free Savings
If a mortgage costs 7% and you pay cash, you would essentially be saving 7% in interest risk free. So in the case where mortgage interest rates are higher than what you can get on your investments, you would come out ahead by paying in cash.
Read on for more.
You Actually Own Your House
I think psychologically there is a big benefit in knowing that you own your house free and clear. You also free up quite a bit of income because you will have no rent or mortgage.
You Are Not Leveraged
Buying a house with cash means that if the value of the home goes down by 10% then the money you put in also goes down by 10%. The most you can lose is the amount of money you put in. In the case of a 20% down mortgage, if the house's value goes down 10% then you lose 50% of the money you put in because of leverage.
Negotiate a Better Deal
When you have the cash to pay for the full amount of a house, it means that there will be no contingencies on getting a loan and the amount of time needed to close a deal is shorter. This generally gives you the buyer more negotiating powernegotiating power for a discount on the price of the home.
Having a mortgage lets you free up your cash for other investments. It is also not wise to put all your liquid assets into buying a house with cash because it is harder to free up that money in case you need to use it. If you buy a house with cash, any new mortgages would be considered refinances and carry a higher rate than a first mortgage.
You Are Not Leveraged
Leverage goes both ways, so if the value of the home goes up, then the percentage gain of an all cash buyer would be comparably lower than the person who purchased with a mortgage.
No Tax Advantage
Mortgage interest is deductible on income taxes in the United States. If you are in a high tax bracket that benefit lessens the bite of the interest by quite a bit. In contrast, buying a home with cash does not give you any tax deductions.
Generally, I think it makes sense to pay for a house with cash if the following conditions apply to you:
- The amount of cash you spend does not consist of a significant portion of your liquid assets.
- The interest rate on a mortgage is higher than what you can earn on your other investments.
- The amount of savings you get from an all cash deal versus a loan deal is significant.
- You do not want to deal with a credit agency in any manner.
Currently, I think mortgage rates are still low enough for mortgages to be worthwhile, but as banks raise their lending rates and housing prices fall further it may make more sense to buy a home with cash in the near future.
Check out these smart tips from Wise Bread: