Buying a House With Cash: Is it Worth It?

When the real estate market reached new levels of intense competition this past year, cash buying soared, soon accounting for 23% of home sales in the U.S. Part of this is because sellers highly prefer cash buyers - so even though far more buyers were ready to pay for their home through a lender, their offers were getting declined.

Is it worth it to pay for a house in cash? The answer might seem like an easy “yes” assuming you have the cash on hand. However, there are both pros and cons of making a cash offer on a house. There's also one way you can "pay in cash" to close the deal, without actually having cash on hand. Here’s what you need to know.

Can you buy a house with cash? What are the advantages?

If you have the money, you can always buy a house in cash. There are a few reasons homebuyers opt to pay for their house in cash.

Saves you money 

One important benefit of buying a house in cash is the savings it grants you - both upfront in closing costs, and in the longterm when it comes to interest rates.

In the short term, you get to avoid some (though not all) of the closing costs associated with using a lender. Loan origination fees, for example, are typically .5 to 1% of the loan amount. Using the U.S. median home price of $440,000, the typical cash seller would save $2,000-$4,000 in mortgage origination fees.

"In terms of closing costs, it’s not dramatically different between paying all cash and getting a mortgage. You’re still going to get title insurance, transfer tax, government recording fees, etc., so it doesn’t save you money there," notes Casey Hansen, Houwzer's Director of Lending.

The real savings are longterm. The same home bought for $440,000 with 10% down with a 5% interest rate would end up costing the mortgage-backed homeowner $305,500 in interest alone over the lifetime of a 30-year term loan (approximately) - for a total paid amount of $727,500. 

Compared to someone who puts less down than 20% on their home loan, cash buyers also save by not having to pay PMI (private mortgage insurance) which can add up to several hundred dollars every year. 

Sellers prefer cash buyers

The other major benefit of buying a home in cash is that it’s easier to buy the home - period. Sellers prefer cash buyers to financed buyers. According to a survey from Opendoor, 75% of sellers say a financed offer would need to be about 10% higher than a cash offer in order to win a bidding war. 

"Certainly, buying all cash gives you an advantage in terms of your positioning over other offers. If I had 10 offers in front of me and one is cash, I would probably take the one that’s all cash - unless it’s dramatically lower than the other offers," explains Hansen.

Why are cash offers better? The reality is that home selling is a stressful process, and a lot hinges on transactions going smoothly. If your deal falls through, the seller’s next deal - to buy their next house - may fall through as well, or their moving timeline might be thrown off.

Even if you’re pre-approved with a lender, they might still turn you down for buying the home. This can happen if interest rates climb before you can lock them in (meaning you now qualify for less house), or if the appraisal comes in low and you can’t make up the difference (this happens for 8% of appraisals).

What are the downsides of buying a house with cash?

Of course, there are pros and cons to anything - including buying a house with cash. 

One of the big things to consider is whether your money would go further in other investments. If you would’ve qualified for a mortgage rate of 4%, for example, that makes the money relatively cheap to borrow. 

Depending on how you would otherwise invest your cash, you might actually stand to make more money by borrowing your house at a relatively low rate - then making a much larger return by investing in the stock market or real estate investment trusts (REITs). Or you could use some of that cash as the down payment for property, allowing you to build your investment portfolio and generate additional income as a landlord. 

"You can call that opportunity cost - if you pay in all cash, what else could you have done with that cash instead of sinking it all in the property?" explains Hansen.

Another potential drawback of paying for your home in cash is having fewer liquid assets as a result. Of course, if the cash you pay for your home only represents a fraction of your total available cash, you’re good. However, if paying for your home in cash leaves little on hand, then you might struggle to cover unanticipated costs (either of home buying or in other aspects of life). 

How can I buy in cash while also paying off my home with a mortgage?

It’s not uncommon for homebuyers to make a cash offer, then later take out a mortgage anyway. This is fine so long as the buyer can purchase the home in cash if need be, because it has the same result: it removes the financial contingency from the home sale. The seller is assured that the sale won’t fall through due to financing complications, increasing the likelihood of a quick and less complicated transaction.

"A lot of people go in with the approach of 'we can pay cash, but we don't want to - we’d rather get a mortgage and leverage these low interest rates. We’ll waive our financing contingency, but we’re still going to get an appraisal and still going to apply for a mortgage.' As long as it’s communicated up front, that’s quite common," explains Hansen. "Which is probably the best of both worlds. Even if rates have spiked a little bit, some people would rather hold on to their hundred of thousands of dollars and pay 5% - which is most likely tax deductible interest, and spread out over 30 years - and take that money and instead and invest it."

Frequently Asked Questions about buying a home with cash

Is it suspicious to buy a house in cash? 

No - not unless you’re paying in literal dollar bills. That would not only suspicious; it’s doubtful the seller wants to personally confirm that several hundred thousand dollars are authentic currency, or carry around a suitcase full of cash.

Simply paying for your house with money from your bank account, though? That’s perfectly normal, and perfectly acceptable.

Can you buy a home in cash if you have no job? 

If you’re paying for your home in cash, no one cares if you have a job. The only time this matters is for home loans (and even then, you could get approved without one - depending on your financial circumstances).

How does buying a house with cash affect your taxes? 

When you pay for your home in cash, and don’t take out a mortgage, you miss out on the mortgage interest deduction. With this itemized deduction homeowners can lower their taxable income. Currently, single filers and married couples filing together can deduct the interest on up to $750,000 for a mortgage.

Is it okay to skip the inspection?

Appraisals and inspections are required by lenders in order to qualify for a mortgage, but cash buyers can opt out of either test. If you decide to buy your house in cash, don’t cut out any services that help safeguard your investment just to save a few hundred dollars - you never know what could happen in the future. 

If an emergency happens or an unexpected move is necessary, you might need to sell the house much quicker than anticipated - and if it turns out you have a $50,000 roof problem that needs to be fixed first, you’ll regret not having had an inspection done.

Note: Houwzer's real estate blog does not constitute financial advice.