Paying for a house in full may seem like a great idea for some people and in certain markets, but it's important to consider the potential drawbacks as well. Disadvantages include tying up too much of your investment capital in one asset, losing out on the leverage that comes with a mortgage, and sacrificing liquidity. Paying cash for a home eliminates the need to pay interest on the loan and closing costs. Robert Semrad, JD, senior partner and founder of DebtStoppers Bankruptcy Law Firm in Chicago, notes that lenders don't charge mortgage origination fees, appraisal fees, or other fees to evaluate buyers.
In addition, if you put down less than 20% when buying a home, you'll have to pay private mortgage insurance (PMI), which ranges from 0.5% to 1% of the loan amount annually. When you pay with cash, PMI is not required. On the other hand, if paying cash for a house completely erases it, you may want to reconsider it. You can make a cash offer on a home when you want to stand out from 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 sitting around. The answer depends on what else you could do with that money if you decided not to use it for 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 put more money into income-generating investments, travel, or simply enjoy 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 some cases where it may be better to seek financing. You can still be approved for an FHA loan with as little as 10% down if your credit score is at least 500.
The IRS doesn't care whether someone bought their home with cash or not - except in rare cases where someone owes back taxes and the IRS wants to impose a lien on their assets.