Buying a home with cash limits your liquidity, which can be a big disadvantage if you don't have other investments. Having some debt in your home may allow you to invest in other assets, which could increase your wealth over time. 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.
Buying a home with cash doesn't eliminate recurring expenses. You'll continue to pay property taxes and, if you're wise, homeowners insurance. However, you can take the money you would have spent on monthly mortgage payments and save it for retirement or emergencies (or spend it). For many people, the mortgage is the biggest bill they pay every month.
If you buy your home with cash, you essentially eliminate a huge monthly payment from your budget, allowing you to invest that money and accumulate wealth quickly. This is why wealthy individuals often strategically apply for a mortgage for leverage, even though they could repay the loan at any time. When you pay cash for a house, you avoid paying all that interest, not to mention having six-figure debt. An experienced real estate agent can also help you create more attractive offers that are accepted, shortening your housing search process.
Some people have the ability to pay for a home in cash, but they still prefer to apply for a mortgage on the property. You can make a cash offer on a home when you want to get noticed above buyers who only have a mortgage pre-approval. Beyond tens of thousands of dollars in interest savings, homebuyers take advantage of a number of other advantages when paying in cash. If a home is valued for less than the price, the lender can expect the borrower to get cash equal to the difference between the appraised value and the price in essence, a larger down payment.
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. Shoppers who pay cash are less likely to overspend because the money not only represents a promise to return it one day, but it goes from being yours to belonging to someone else. 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. Kim is also the author of The Yellow Envelope, a memoir about the time she sold her house and traveled around the world.
Paying a mortgage can also provide tax benefits for homeowners who itemize deductions rather than taking the standard deduction. Buying a home with cash can be satisfying, but it's not necessarily the best option for everyone who can afford it. Buying a home with cash is almost the same as buying with a mortgage, with the huge exception of not having to apply for a loan and all the paperwork involved. However, for a buyer, there is a significant difference between paying cash for a home and seeking financing through a mortgage company.