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Cash vs. Mortgage: Which is Better for Buying a House?

“Cash is king,” as the saying goes, and this has certainly been the case in the U.S. housing market in recent years. According to data from Redfin, over 30% of homes were purchased entirely with cash in 2022, peaking at 32% in October. This figure represents the highest share of cash homebuyers since 2014. However, saving to buy a home outright is a daunting task, with the median sales price for new single-family homes at $438,200 in February 2023, according to a U.S. Census Bureau report. But if you have the means, is it better to buy a house with cash than with a mortgage?

Why Cash Offers Are Better for Buying a House

Sellers often prefer cash offers to financed offers because there’s no mortgage approval to worry about. As a cash buyer, you’ll own your home outright, and you can save tens or hundreds of thousands of dollars in finance charges over the life of the loan. Another reason cash offers are so beneficial is that they simplify the transaction process for both buyer and seller.

• Less risk for the seller: Sellers are more likely to receive contingent offers from buyers looking to finance their purchase. For example, a common contingency is that the sale is not binding if funding is not approved. Consequently, home sellers generally prefer cash offers because there’s no risk the financing will fall through.
• Fast closing: Cash sales typically close within two weeks, while a mortgaged purchase may take 45 to 60 days to close.
• Fewer inspections and appraisals: Mortgage lenders often impose another contingency that buyers will ask for appraisals or inspections before closing. These procedures add time and money to the homebuying process.

Pros of Buying a House With Cash

Buying a home with cash gives you peace of mind about owning your home outright, along with the following benefits:

• More Negotiating Power: Cash buyers who don’t have to rely on the decisions of mortgage underwriters are especially attractive to sellers. As such, sellers are often willing to negotiate a considerably lower price in exchange for the assurance of a cash transaction.
• No Mortgage: Owning your home free and clear can give you valuable peace of mind. If you experience a disruption in income or suffer financial setbacks, you won’t have to worry about making your payments or facing foreclosure. This security is particularly beneficial for retirees and others who are no longer in the workforce and may be living on a fixed income.
• No Interest and Fees: Purchasing a home with cash allows you to avoid paying the interest and fees associated with a mortgage. According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage was 6.42% as of March 2023. If you financed a new home purchase with a $400,000 mortgage loan at that rate, you’d pay over $502,615 in interest over the life of the loan. Additionally, you may have to pay private mortgage insurance (PMI) each month if your down payment is less than 20% of the purchase price, depending on the type of loan you have. With a cash purchase, you can keep all that money to yourself.

Cons of Buying a House With Cash

To be sure, cash purchases are not without their downsides:

• May Be out of Reach: Buying a house with cash simply isn’t an option for the vast majority of buyers. It requires access to more liquid cash than many buyers may ever accumulate in their lives—especially in the absence of a large windfall or proceeds from selling another house. For this reason, financing with a mortgage is seen as typical when buying a home.
• Other Options May Be More Beneficial: When you put all your liquid cash into buying your home, it can be difficult to access that money quickly if you ever need it to cover an emergency or unexpected expense. Before you buy a home with cash, consider your potential housing-related expenses as well as your financial goals. For example, you might reap a higher return by stashing that money in your retirement account or in other investments. Additionally, if your home needs significant upgrades, you could finance your home and use your cash to pay for repairs or renovations.
• No Tax Deductions: If you itemize your taxes, the IRS allows you to deduct your mortgage interest. Note that this deduction is limited to the first $750,000 of mortgage debt ($375,000 if married filing separately) if you bought your home between January 1, 2018, and January 1, 2026.

Pros of Buying a House With a Mortgage

According to a 2022 National Association of Realtors (NAR) report, 78% of recent homebuyers used financing to purchase their home. Financing your home may make more sense than a cash purchase, particularly if the following benefits apply:

• Leverage a Higher Return: Financing your home purchase means you’ll pay less out of pocket to complete the transaction. Consequently, you could potentially earn a higher return on investment (ROI) if your property value rises.
• Utilize the Funds Elsewhere: While living in a mortgage-free home may seem bliss, the cash you may otherwise use to buy a house outright may be better spent on other expenses or financial goals. For example, you may want to catch up on retirement savings or direct the money toward your child’s higher education.
• Opportunity Cost: Some financial experts argue that investing your money in the stock market could produce higher returns over a 30-year period. Seeking Alpha reports the average annual return on the S&P 500 index has been 10.67% since 1957. By contrast, Freddie Mac data reveals that interest rates have been in the single digits every decade except one since the 1970s. The 1990s began with 10.13% average interest rates on 30-year fixed-rate mortgages and have fallen every decade since, despite rising in recent years.

Cons of Buying a House With a Mortgage

Before buying your home, consider the following downsides of mortgages:

• Must Pay Interest: You must pay interest on the money you borrow to purchase your home, which often runs into the hundreds of thousands of dollars. In the early years of your home loan, most of your monthly payment goes towards paying the mortgage interest.
• Risk of Foreclosure: Since your property is collateral to secure your mortgage loan, you could lose your home if you default. The foreclosure will also appear on your credit report for up to seven years, and your credit score could drop substantially. Such credit damage could make it more challenging to obtain a mortgage in the future.
• Addition of Mortgage Insurance: Most lenders prefer a down payment of at least 20% to offset their risk and to demonstrate you have sufficient income and the ability to save over time. Still, coming up with a 20% down payment is challenging for many homebuyers. If a 20% down payment is out of reach, you may need to pay for private mortgage insurance (PMI), adding an extra expense to your monthly payment. Private mortgage insurance can cost up to 1% of your loan amount annually or an extra $100 per month per $100,000 on your mortgage loan.

Should You Buy a House With Cash?

While cash offers are certainly better from a seller’s perspective, you should consider your financial situation as a buyer before making a cash purchase. Ensure you can reasonably afford to pay in cash without overextending yourself. If you’re considering a cash purchase, you should have the means to cover the purchase price, closing costs, property taxes, insurance, and ongoing maintenance. It’s also wise to consult your tax advisor to understand the tax consequences of buying a home with cash. You should also assess whether a cash purchase would cause you to miss out on potential returns from other investment opportunities, including the stock market or income property.

Consider Your Financial and Lifestyle Goals

Buying your home with cash offers you the security of owning your home free and clear, without the hassle of monthly mortgage payments and the added cost of interest. By contrast, financing your home with a mortgage could allow you to use your cash for other purposes, such as catching up on your retirement plan savings or funding a child’s higher education. Ultimately, the decision to buy a house with cash or a mortgage will depend on your financial situation and goals. Many homebuyers prefer the security of knowing they’ll always have a roof over their head. Conversely, some would rather use the cash for investments, travel, or other lifestyle considerations.

If you decide to take out a mortgage loan, consider reviewing your credit before applying. You can get your credit report and credit score for free with Experian and, if necessary, take steps to clean up your credit. With good or excellent credit, you may have more lending options and qualify for more favorable terms.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team of experts is ready to help you navigate the home buying process and find the best mortgage solution for your needs.

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