Nationally, about a quarter of homes are sold in all-cash transactions. If you have sufficient cash to purchase outright without a mortgage, is this the best choice? Let’s examine the factors to consider.
What an all-cash transaction means to the buyer.
Buying a house for cash can feel liberating. Cash purchases eliminate not just your monthly mortgage payments, but the hundreds of thousands of dollars you might otherwise pay in interest on your home loan.
Cash buyers pay less in closing costs. Paying all cash for a home means you will not pay a loan origination fee, typically one percent of the loan amount. All-cash buyers will also avoid paying for the title insurance that lenders generally require buyers to purchase for the lender’s protection. You will still receive an owner’s title policy, but the seller usually foots the bill for that insurance. Because cash purchases generally give sellers more certainty, a buyer who pays cash may find the seller willing to accept a lower sales price.
Cash purchases don’t eliminate all the buyer’s closing costs, however. Cash buyers who choose to have a new home inspected and appraised, which is advisable, will still bear those costs. And the buyer remains responsible for attorney’s fees, recording fees and other sundry costs associated with the closing.
All-cash buyers still must pay for items such as property taxes and homeowners’ association dues. They miss out on the annual tax deduction for mortgage interest paid, one of the benefits of financing a home. The buyer can still deduct property taxes, but the 2017 federal tax law has significantly limited this benefit by capping the deduction.
What an all-cash transaction means to the seller.
When a buyer comes with cash in hand, a seller’s eyes light up. Why? Because a cash deal is streamlined, with fewer chances of deal-killing complications.
A buyer with cash means a deal closes faster since there is no waiting for the buyer’s mortgage loan to be approved and no chance a low appraisal could potentially torpedo that approval. (Buyer and seller can still renegotiate the sales price if the appraisal comes during the option period.) And with no lender involved, there’s no chance the seller will be required to repair problems found during the inspection in order to ensure the mortgage will be approved.
When deciding whether you should buy for cash or get a mortgage, consider which option will yield a higher return on your investment. Would you be better off taking a mortgage and putting your cash in securities? You might pay four percent interest on the mortgage but be able to put your saved cash into an investment with a six or seven percent return. That difference of two or three percent might make financing your home the better choice.
A mortgage also may give a buyer more financial flexibility to deal with other expenses. Be sure that paying cash for a home doesn’t leave you unable to deal with a financial emergency should one arise before you replenish your savings.