Pro #1- No Interest
When you buy a home in cash, you don’t have to worry about interest accruing from taking out a mortgage. The cost of interest on a 30-year loan will likely end up costing you tens of thousands of dollars. Especially if you use the full 30 years to pay off the loan. Even with today’s low interest rates, a 30-year mortgage loan of $100,000 at 4% will cost over $70,000 in interest.
Pro #2- No Closing Costs
Because you are paying in cash, you can avoid paying closing costs associated with mortgage loans. You will pay no mortgage origination fees, appraisal fees or other lender fees. Although, it’s always a good idea to get an appraisal on any property you are buying to ensure you’re not overpaying.
Pro #3- More Attractive to Sellers
Private sellers usually prefer cash offers. In some cases, sellers will accept a lower cash offer than an offer from a buyer having to take out a loan. Paying in cash also reduces the risk of a buyer getting denied financing or the loan falling through for any number of reasons. This is often referred to as a cash discount for buyers.
Pro #4- You Can Usually Close Faster
If you’ve ever tried getting a mortgage, you know it can be quite the hassle. Getting a mortgage requires you to provide documents like, proof of income, bank statements, credit reports, debt-to-income-ratio, etc. When you pay in cash, you skip the entire mortgage process and can usually expedite the closing process and close the deal faster.
Pro #5- You Own the House Outright
Because your house is not leveraged against a mortgage, it’s easier to sell. Even if you have to sell it at a loss, if you own the property outright, it becomes much easier to sell, regardless of market conditions.
Pro #6- Your Credit Score Doesn’t Matter
Credit score is a big indicator for lenders to consider when accepting or denying a loan. If your credit score isn’t as high as it needs to be, paying cash will eliminate any need for a credit check because you aren’t taking out a loan. You don’t have to prove that you will be able to keep up with mortgage payments.
Pro #7- No Necessary Income Required
When borrowing a certain amount of money, mortgage lenders require you to make a certain amount of income. This is a way to measure the level of risk associated with you and your ability to make mortgage payments. If you are paying cash, it doesn’t matter how much money you make because you won’t be paying a mortgage.
7 Cons of Buying a House in Cash
Con #1- You Tie Up a Lot of Money in One Asset
Putting over $100,000 on a single real estate investment can be risky. If you tie up a large amount of money in one asset, your investment portfolio becomes less diversified, thus, increasing your risk for losing money.
Con #2- You Decrease Your Liquidity
Unlike other types of investments, like stocks or bonds, real estate is an illiquid asset. Meaning, it’s not quick, easy, or free to sell. Pouring most of your money into a house diminishes access to liquid assets.
Con #3- You Give Up Leverage
Nobody likes to be in debt. However, being leveraged in real estate actually presents an upside to debt. Assuming your mortgage is locked in and if you are able to get a low interest rate, you may be able to make money by having a mortgage due to the effects of inflation. If you paid cash, you give up that leverage.
Con #4- You Miss Out on Tax Benefits
In most cases, you can deduct up to a certain amount of mortgage interest on your itemized taxes. This can potentially knock out a huge chunk of money paid on interest and put money back in your pocket. If you’re using cash, you miss out on some really great tax benefits.
Con #5- Mortgage Rates Are a Cheap Source of Financing
As far as types of loans go, mortgages are typically the cheapest source of financing. Mortgage loans come with low interest rates, especially compared to other types of loans.
Con #6- Your Return on Investment May Be Less Compared to Other Options
Just because you can buy a house in cash, doesn’t always mean you should. It’s important to determine if your money could be better used for other investments. Run the numbers on other investment options and decide if putting some of your money elsewhere could yield higher returns than a house.
Con #7- House Rich and Cash Poor
Buying a house in cash and leaving little money in savings after doing so isn’t the best position to be in. What if unexpected expenses or major repairs arise and you don’t have the money to pay for them? Draining your savings in order to buy a house in cash is risky and could come back to haunt you.