Should You Pay All-Cash For That Home?

Most home buyers have trouble coming up with the initial down payment to buy a home. But there are people out there lucky enough to be paying for their homes in full in cash. Finding a great property and forgoing all the bank paperwork, fees, and loan repayments may seem like a dream, but it can, in fact, be a mixed blessing. So, if you are looking to buy a home and could afford to pay all cash for it, should you?

Looking at the Numbers

A great place to start in this process is figuring out how much money you would save buying a home in an all-cash payout vs. traditional loan payments. Compare the sales price with what you will eventually pay for the home after your loan term is up. Yes, you will save money on interest, but don’t forget to factor in the loss of the mortgage interest deduction at tax time. Also, consider what paying in cash will do to your savings — emergency, retirement or otherwise — in the short term. If it’s not money you will need anytime soon, you shouldn’t have to worry.

should i pay all cash for san diego home

Pros

If you truly have the extra funds available immediately and it won’t put you in jeopardy of going into debt if an emergency were to come up, you will most likely save money by not paying interest and fees like closing cost on a loan.

If your credit history isn’t great, this won’t be a factor to come into play. You will also have 100% equity in the home, since you own it free and clear. Furthermore, you can only lose the amount of money you have put in because you are not leveraged, meaning you do not need to get as concerned about market changes.

For many, a great benefit is psychological — you actually own your house, giving you a sense of security and pride. And if you ever look to buy another home, you are a very attractive buyer to motivated sellers, which gives you an edge over other buyers. The deal will be smoother and faster for both sides. Buying in cash may even put you in a position you to get a better deal. After all, time is money.

Cons

Paying cash for your home likely means most of your savings or at least a lot of your money will be tied in one asset, leaving less money to invest in other, diversified assets classes. Real estate has a historically lower return on investment than stocks or bonds, meaning you could be losing out overall, if other investments would have outperformed the interest you pay on a mortgage. Here is a good calculator.

Additionally, you are sacrificing liquidity, so it’s probably only a good idea to buy a house with cash only if you can afford it without taking all the money out of your emergency fund. Homes normally take months to sell, and borrowing against your home’s equity brings fees and borrowing limits into play. You further lose the financial leverage a mortgage provides because your payment is locked in for the life of the loan (assuming you have  a fixed rate loan) and hopefully you received a favorable interest rate. Lastly, you will not qualify for the tax deductions mortgage payers receive, which often total tens of thousands of dollars.

How you pay for your home is a very personal decision and paying in all cash will likely work for some people but not for others. The bottom line is it generally makes sense if the home’s price does not subtract a significant portion of your liquid assets and/or the interest rate you would pay on a mortgage is higher than what you could earn on other investments. It’s important to properly assess your financial situation and long-term investment strategies, the drawbacks as well as the benefits.

 

For more information on this topic:

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Ryan@RyanYourRealtor.com
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