Buying a home with cash is an increasingly uncommon occurrence, especially as rising home prices outpace income growth. The median home sale price is currently over $417,000, making it difficult for even the most diligent of savers to pull together enough cash to buy their home outright.
Most buyers – 80% of recent home buyers, according to the National Association of REALTORS® 2023 Profile of Home Buyers and Sellers – finance their purchase, using a loan to cover the cost.
However, if you have the money in your bank account, buying a house with a cash offer might seem like the smart financial move. If you’re jumping into the real estate market as a cash buyer, you might consider buying a house with cash.
Can You Buy A House With Cash?
A cash buyer is someone who is using their own funds to cover the full purchase price of the home, meaning they aren’t taking out a loan. These funds could come from savings, investments or the sale of another property.
But why might you want to purchase a home without a loan?
Buying a house "with cash” can benefit both the buyer and the seller with a faster closing process than with a mortgage loan. Paying in cash also means no interest and can mean lower closing costs.
How To Buy A House With Cash
The process of buying a home with cash looks similar to buying with a mortgage, but there are differences you’ll want to be aware of.
1. Find The House You Want
Unsurprisingly, the first step in the process is to choose the home you want to buy. Since you want to buy with cash, make sure you can afford the home and verify you can access enough money to pay for it.
2. Hire A Real Estate Professional
Now is a good time to hire a real estate agent to help you with the rest of the home buying process. Consider choosing one that has experience with all-cash home purchases.
3. Acquire Proof Of Funds
Cash buyers are required to acquire proof of funds, also called a POF letter, from their financial institution when submitting a cash offer. This document proves how much money they have available.
4. Negotiate The Price And Sign A Contract
After gaining the assistance of the real estate professional, consider negotiating the sales price of the house. Your real estate agent should monitor housing market conditions and work with you to make a competitive offer. Since offering all cash will often give you a leg up on other home buyers, you should be able to negotiate a fair price.
Once the buyer and seller have agreed on a price, you’ll sign the official contract, often called a purchase agreement. Before signing, verify the agreement has a home inspection contingency. That way, you won’t be on the hook for the price if something is significantly wrong with the property.
5. Hire A Professional Home Inspector
Mortgage or no mortgage, a home inspection is always a good idea. Be sure to hire an experienced professional for that much-needed reassurance that you’re purchasing a quality home. To get the best idea of the overall value of the property, consider getting a home appraisal.
6. Close On The House
On closing day, you should have the final amount of cash ready, whether you pay via wire transfer or with cashier’s checks. You’ll also need to bring a form of ID and proof of homeowners insurance.
Pros Of Paying Cash For A House
Here are some of the advantages of buying a house with cash that you may want to consider.
Cash Home Buyers Are Often More Attractive To Sellers
If you’re in a competitive market, being a cash buyer can give you a leg up against buyers who plan to finance their purchase.
Sellers often prefer to work with cash buyers if they can because they don’t have to worry about a buyer’s financing falling through at the last minute. That can happen with mortgages if the buyer isn’t able to get approval.
Plus, because cash-only transactions typically happen faster, sellers who are eager to close might be more willing to negotiate with a cash buyer than they would a borrower with a mortgage.
No Mortgage Payments, Interest Or Other Fees
Not having a monthly housing payment is a pretty great perk. Paying in cash means you get to skip the mortgage process and all the costs and fees that come with it, including interest rates or mortgage insurance.
Skipping out on interest can save you a lot of money in the long run. Say, for example, you take out a 30-year fixed-rate mortgage for $450,000 to buy a home with an interest rate of 7%.
Once the 30 years are up and you’ve paid back the $450,000 principal balance, you’ll have spent an additional $418,527 on interest. If you pay in cash, that’s money you get to keep in your wallet.
Avoiding a monthly mortgage payment can be especially beneficial if you’re using cash to buy a second home or investment property. This means no extra mortgage payment to worry about each month and a larger profit margin on rental income.
Lower Closing Costs
When you get a mortgage, your lender will charge you for certain services that add to the amount you’ll owe at closing. This includes things like lender fees, an application fee, loan origination fees or discount points. You may also have other costs related to the loan or home purchase that are required by the lender, such as a lender’s title insurance policy.
When you pay in cash, you won’t have to deal with lender-related closing costs, which translates to lower closing costs for you.
Faster Closing
From start to finish, the closing process when you purchase a home with a mortgage can take over a month. By contrast, when you buy with cash, it’s possible to close on a home in as little as a week or two.
When you aren’t getting a mortgage to buy a home, you don’t have to wait for the lender to approve, underwrite and process your loan, significantly cutting down on the amount of time you’ll spend waiting to close.
Simpler Closing Process
Barring any unforeseen issues, the closing process will also likely be a little easier when you pay with cash, since you won’t be responsible for keeping track of all the documentation borrowers need to send to their mortgage lenders.
Your Home Is Yours
When you own your home outright, you don’t have to worry about losing your home (as long as you make payments on other things that could put your home at risk if left unpaid, such as your property taxes).
The peace of mind of knowing you’ll always have a roof over your head can be one of the biggest and most consequential benefits of buying a home with cash. And you can always transition into a home loan through delayed financing if you decide you need access to the equity in your home immediately.
Cons Of Paying Cash For A House
Now that you know some of the benefits, let’s take a look at some of the disadvantages of buying a house with cash.
Your Money Is Tied Up In The House
When you pay for a house using cash, you’re putting a large portion of your money into an asset that is fairly illiquid, meaning you can’t tap into that money easily or quickly.
For example, if you need money fast, it’s easier to pull money from a savings account than it is to go through the process of selling your home and using the funds from the sale.
If you have enough cash to purchase a home without a mortgage, it’s worth at least considering what your goals are and if that money could be put to better use elsewhere. You might, for example, see better returns by putting that money into investments or bolstering your retirement savings. Or, perhaps it makes more sense to use a mortgage to purchase the property and then use some of the cash you have in savings to make improvements or renovations to your new home.
While owning your home outright can provide great peace of mind, it shouldn’t come at the expense of your overall financial security and becoming house poor. If you have to use all your savings to do it, you could end up in a spot where you have no emergency savings for unexpected costs and no money to make necessary repairs to your new home.
Cash Buyers Miss Out On Mortgage Tax Deductions
If you itemize your deductions, you could be missing out on the mortgage interest deduction, which allows homeowners with a mortgage to deduct interest paid on the first $750,000 of their mortgage, reducing their taxable income.
If you forgo a mortgage, obviously, you won’t have this option.
Additional Expenses Still Apply
Just because you don’t have a mortgage doesn’t mean you’re completely free of regular housing-related payments.
There will still be property taxes, homeowners insurance, utilities and, if applicable, homeowners association (HOA) dues. You’ll also need to budget a certain amount of money each year to be put toward regular repairs and maintenance of your property.
The Bottom Line: Should You Buy A House With Cash?
If you’re considering buying a house with cash, you might first consider consulting with a financial advisor or tax professional who can look at your individual situation and give you an idea of how that might affect your finances.
Some things to think about include the opportunity cost, how much liquidity you require in your financial portfolio and what the tax benefits and consequences might be.
