Paying all the cash for a home may make sense for some people and in some markets, but be sure to consider the potential downsides as well. Disadvantages include immobilizing too much investment capital in an asset class, losing the leverage provided by a mortgage, and sacrificing liquidity. Paying cash for a home eliminates the need to pay interest on the loan and closing costs. Lenders don't charge mortgage origination fees, appraisal fees, or other fees to evaluate buyers, says Robert Semrad, JD, senior partner and founder of Chicago-based DebtStoppers Bankruptcy Law Firm.
In addition, a homebuyer who puts less than 20% down payment will have to pay private mortgage insurance (PMI), which ranges from 0.5% to 1% of the loan amount annually. When you pay with cash, private mortgage insurance is not required. On the other hand, if paying cash for a house completely erases it, you might want to reconsider it. You can make a cash offer on a home when you want to get noticed above buyers who only have a mortgage pre-approval.
Paying cash for a house isn't always the right financial move, even if you have a few hundred thousand dollars gathering dust. The answer depends on what else you could do with that money, should you decide to use it for something other than buying a house. You can pay for a house with cash, but that doesn't mean that the advantages of paying for a house with cash outweigh the disadvantages. Without a monthly housing payment, you can channel more money into income-generating investments, travel, or simply a better quality of life.
Buying a home with cash has many benefits, such as making your offer more attractive to sellers. Beyond tens of thousands of dollars in interest savings, homebuyers take advantage of a number of other advantages when paying in cash. An experienced real estate agent can also help you create more attractive offers that are accepted, shortening your housing search process. Kim is also the author of The Yellow Envelope, a memoir about the time she sold her house and traveled around the world.
A cash buyer's home is not leveraged, allowing the homeowner to sell the home more easily even at a loss, regardless of market conditions. Paying for a home in cash means that the buyer will transfer the money or issue a cashier's check on the closing date instead of resorting to a mortgage company. Even so, the advantages of paying for a house with cash may be enough for people to buy their home with cash. You could save less than the money you could have earned if you had taken out a mortgage and invested the money you didn't spend on your home.
While there are several benefits to buying a home with cash, there are a few instances where you may want to seek financing. You can still be approved for a mortgage through a Federal Housing Administration Loan with a starting 10% if your credit score is at least 500. The IRS doesn't care that someone bought a home with cash, except in the rare case where someone owes back taxes and the IRS wants to impose a lien on that person's assets.