Whether you've received a big inheritance or huge bonus or you've been saving up for years, if you've got the cash you may want to buy a house without taking out a mortgage. When weighing your decision, don't limit yourself to just financial considerations. For some people, emotional factors such as the security of not having a mortgage payment is worth more than any loss of investment opportunities.
No Mortgage Interest
The obvious advantage to paying cash is that you don't have to worry about making your mortgage payment every month. Plus, you don't have to pay any interest on the debt. In addition, some states also have a homestead protection in the event you have to declare bankruptcy, which protects your home from all creditors except a consensual creditor, like a mortgage holder. For example, in Kansas if your home is mortgage-free, you can often keep it despite having to declare bankruptcy.
Avoiding Mortgage Fees
Mortgage interest isn't the only extra cost you take on when you get a mortgage. You also have upfront closing costs for just taking out the loan and prepayment penalties that can get you if you try to pay it off early. According to a 2012 survey by Bankrate.com, the average closing costs on a $200,000 mortgage ranged from just over $3,000 in Missouri and Kansas to over $5,400 in New York.
Even if you get a small or inexpensive home, it still won't be cheap. After buying, you won't be able to use that cash for other expenses that come up, which could cause you to borrow money at a higher interest rate. For example, say you use up all of your emergency savings to buy the home, and two months later your car breaks down. When you go to buy the new car, you'll need to take out a loan, which will likely have a higher interest rate than a mortgage.
Missing Out on Alternative Investments
When determining whether paying cash is right for you, consider how you would use the money if you didn't pay for the home outright. If you're just letting the money sit in a low-interest account, you'll pay more money in interest on the mortgage than you earn on your account. But, if you're confident that you can earn a higher return on your money than the interest rate you pay on your mortgage, it may make sense to borrow the money so you can earn a higher return investing. Plus, the mortgage interest can reduce your tax bill.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."