Why Buying a House with Cash is Not a Good Idea



buying a house with cash

Buying a house is the biggest purchase you will make in your lifetime.

But, not everyone needs a mortgage loan to buy their home.

If you can afford to pay for your home with cash there are many benefits.

In this article we’re going to take a look at the pros and cons of buying a house with cash.

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Paying Cash vs. Mortgage Loan + Investing

If you have the cash to buy a home it only seems like that would be the best option.

No mortgage payments, no PMI, no paying twice the purchase price in interest alone. But there are some drawbacks to using cash to buy a home. In a booming economy it may make more sense to get a mortgage loan and put the rest of your cash into an interest bearing investment account, such as the stock market, mutual funds, or bonds.

Let’s take a look at two different scenarios to see which one ends up being the more financially beneficial option.

Scenario #1

  • Buy a $200,000 home in cash Total out of pocket $200,000
  • Home appreciation over 30 years 100% Home value $400,000
  • Total 30 year return – $200,000 (100%)

Scenario #2

  • Get a mortgage for a $200,000 home putting 20% down and the rest into an interest bearing account.
  • $40,000 down payment
  • $5,000 closing costs
  • 4.35% interest rate – 30 year mortgage loan
  • Total loan cost $291,740 Remaining $155,000 into an account growing 5% annually
  • Total 30 year growth – $537,500
  • Home appreciation over 30 years 100%
  • Home value $400,000
  • Total 30 year return – $445,760 (223%)

Unless you have significantly more money in savings than the price of the home then getting a mortgage loan and putting the rest into an investment account will be more financially beneficial.

If you have a couple million in savings then paying $200,000 cash for a house may be worth the peace of mind of owning the home outright.

Comparing multiple loan quotes? Use our loan comparison calculator to see which loan term will save you the most

Pros and Cons of Paying Cash for a House

Sellers love cash, a cash offer will give you an advantage over other buyers in a buyers market. Buying a home in cash will help you avoid having to pay closing costs, which can be as much as 2-4% of the purchase price. However, unless the home you’re buying is a relatively small amount compared to the amount of cash you have, I wouldn’t recommend paying cash.

Interest rates are still hovering around historic lows, you can put 20% down to help you get the best deal on the mortgage and invest the rest of the cash. With a booming economy you can start earning compounding interest on your cash. Using a loan will also ensure you stay liquid in the event you need access to cash in a hurry.

Pros

  • May be able to negotiate a better price
  • Own home outright
  • No mortgage payment
  • No closing costs
  • No mortgage insurance
  • Home is yours no matter what happens

Cons

  • Less money in the bank
  • Money is not earning interest
  • Asset is not liquid

The Bottom Line…

Buying a house with cash comes with it’s own benefits and drawbacks. While the peace of mind of owning your home without any debt is very enticing, it actually isn’t the best financial decision long term.

Scenario #1  – Using cash to buy $200,000 home

  • Buy a $200,000 home in cash Total out of pocket $200,000
  • Home appreciation over 30 years 100%
  • Home value $400,000
  • Total 30 year return – $200,000 (100%)

Scenario #2  – Get a mortgage and invest the cash

  • Get a mortgage for a $200,000 home putting 20% down and the rest into an interest bearing account.
  • Remaining $155,000 into an account growing 5% annually
  • Total 30 year growth – $537,500
  • Home appreciation over 30 years 100%
  • Home value $400,000
  • Total 30 year return – $445,760 (223%)

As you can see by getting a mortgage and investing the cash you are able to earn more than twice as much money had you just paid cash for your home.

If you have a significant amount of money in savings and paying cash for a home will not deplete your savings then buying a house with cash can make a great deal of sense.

You should contact your financial advisor before making a decision on the biggest purchase you will make in your lifetime.

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