For most people, monthly housing costs take a significant part of their monthly income, with experts recommending people to keep it below 30 percent. If you can pay cash for your house, though, you’ll have hundreds or thousands extra to spend each month, although you’ll still be responsible for insurance and property tax. However, paying cash for a home completely changes the buying process, especially when it’s time to close. In many ways, it’s much simpler, but it’s important to know the differences from the start.
Paying Cash for a Home
When you pay cash for a home, that property is 100 percent yours. No matter what happens with the economy or the real estate market, you’ll have that investment. There’s a comfort in that, especially if you’re nearing retirement age. Simply knowing you don’t have that monthly payment is perhaps the biggest benefit since you’ll know you’ll have a roof over your head no matter what happens with your finances. By paying cash, you’ll also be able to avoid paying interest on your home. If you purchased a home for $260,900 and made a 20 percent down payment, at an interest rate of 4.44 percent you’d pay $169,390 over the course of the loan, or $5,646 per year.
As a cash buyer, you’re also more attractive to both real estate agents and sellers. You’ll eliminate the concern that you may put an offer on a house only to have financing fall through for one reason or another. If you live in a competitive market, paying cash can give you an edge over buyers who will need to finance the deal, potentially letting you bid lower than others and still win. There’s also less legwork on your end since you won’t have to spend hours gathering documents and sending them to your lender in the days leading up to finalizing the purchase. On the day of closing, the process will also be much easier, requiring only a cash transfer from your lending institution to the seller’s mortgage holder.
Reasons Not to Pay Cash
Before saving to pay cash for your next house, you should be aware of several buying a home with cash pros and cons. The pros are obvious, but you may not realize that there are some negatives as well. Perhaps the biggest reason not to pay cash is that you’ll be tying a large part of your net worth in one asset. Experts recommend investors always diversify, and unless you have a significant amount of wealth, you’ll be putting all your money into something that could lose value. This also means that you may give up liquidity, meaning that if you need $1,000 for an emergency and all of your money is in your house, you’ll have to put yourself in debt to make the purchase.
Another thing you’ll be giving up by paying cash for your house is the tax deductibility of the interest you pay each year. This is more of an issue when you first buy your home, when the majority of the money you pay each month goes toward interest rather than principal. If you pay cash, you’ll no longer be able to deduct on your income taxes the interest you pay on the first $750,000 of mortgage debt. However, the money you save on interest will likely make that sacrifice well worth it.
Costs for Cash Payers
Purchasing a home with cash doesn’t mean you won’t have extra costs, though. Closing costs still apply, no matter how you pay. You’ll avoid lender fees, but you’ll still have to pay fees for title transfers, inspections, appraisals and processing. Closing fees can be as high as 3 percent for cash payers. If you’re using a real estate agent, your agent and the seller’s agent will split the 5 to 6 percent fee, which will probably be factored into the selling price no matter how you pay.
Long after move-in day, you’ll have recurring costs associated with owning a home. The biggest of these will be property taxes and homeowners' insurance, which would be paid monthly if you had a mortgage payment. Without a lender, you’ll pay these costs directly, and they vary depending on where you live and how much your home is worth. Since you aren’t renting, you’ll also be responsible for replacing or repairing anything that breaks, including your heating and air system, your appliances and the home’s structure, as well as landscaping maintenance costs. If you’ve sunk your entire life savings into purchasing the home, this could be a problem. Lastly, some homes are located in neighborhoods subject to homeowners' association dues, which are generally in the $200-$300 range per month.
Setting Money Aside for a Home
If you’re struggling to pay your existing housing costs each month, saving to buy a house outright can be a serious obstacle. You’ll probably already be saving for a down payment, but gathering enough money for the full cost can take time. If you can stay where you are for a while, it will be well worth it. It can help if you don’t have existing debt, but if you do, you’ll need to double down on paying it off first and then use the extra money you were spending on interest to help with your home savings.
Before you start saving, first determine the amount of house you hope to buy and then divide that number by the number of years you plan to save before making the purchase. This will help you determine exactly how much you’ll need to set aside each year in order to pay cash for your dream home. Increasing your income is the easiest way to bring in the extra cash you’ll need each month. If that isn’t an option, though, you’ll probably need to cut back on extra expenses and reduce costs as much as possible to get to your goal within your desired timeframe. Even something as simple as taking your lunch instead of dining out and cutting cable in favor of streaming services can make a big difference.
Shopping for a House With Cash
Once you have your house money in the bank, you can start shopping. Since you’re buying a house with cash, you don’t have to worry about getting prequalified or strengthening your credit. You can just start shopping. If you plan to use a real estate agent, let that agent know up front that you’re paying cash to give yourself the best leverage possible when shopping. If you’re searching on your own, make sure you leave enough money in savings to cover closing costs and home maintenance costs after you’ve moved into your new home.
You won’t be completely lender free when looking for a new home, though. When you finally find your ideal home and make an offer, you’ll need to have proof of funds in hand. This is necessary to give the seller the peace of mind necessary to take a home off the market. Although you’ll probably have a day or two to provide this proof once your offer has been accepted, it can help to get the ball rolling before making that offer. Your lender will simply provide a letter proving that you have the funds to pay for the purchase. Instead of a letter from your lender, you may be able to simply provide a bank statement showing that you have a balance that meets the purchase price.
- CNBC: Here's How Much of Your Income You Should Be Spending on Housing
- Investopedia: Should You Pay All Cash For Your Next Home?
- MarketWatch: What the New Tax Law Will Do to Your Mortgage Interest Deduction
- Dave Ramsey: 3 Simple Steps to Pay Cash for Your Home
- Realtor.com: Proof of Funds Letter for a Real Estate Purchase: Why Home Buyers Need It, Bad
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.