Can you buy a house with cash? After all, 86% of home purchases in the U.S. are financed, according to the 2020 Home Buyers and Sellers Generational Trends Report from the National Association of Realtors. That other 14% are cash buyers, and that’s a whole other ballgame -- one that can have an outsized influence on who gets the house and why.
Why buy a house with cash?
There are some pretty clear advantages to a cash sale if you’re a homebuyer. First and foremost, it’ll save you interest -- a lot of interest. Got a monthly mortgage payment now? Look at your statement. Note how much of your payment actually goes to the loan principal. A 30-year note for $100,000 at a mortgage rate of 3.5% requires $61,656.09 in interest payments over the life of the loan.
If you put down less than 20% as a down payment, you also may be required to buy property mortgage insurance (PMI), which can easily cost a couple thousand dollars a year and for which you get nothing. Unlike title insurance, which protects you, PMI only protects the mortgage lender.
A cash deal also can reduce the closing cost. You won’t have to pay mortgage points, for one thing. Also called discount points, points are the 1% of your mortgage loan you’re charged for the privilege of lowering the rate and getting a lower monthly payment. There’s also less documentation to pay closing attorneys for, if that’s a factor in your market.
You also won’t have to pay other lender fees or fund an escrow account. (You’ll get that property tax bill directly.) And your credit score won’t matter.
Also, if this is a vacation home or investment property you’re eyeing, being a cash buyer means your existing mortgage -- if you have one -- won’t be a factor when it comes to financing.
And remember, bidding wars are back. With low rates and very little inventory driving demand, along with the median purchase price, to new heights across much of the country, it’s easy to see why a seller would be less inclined to take an offer that’s contingent on financing -- much less financing plus the sale and closing of the buyer’s existing house -- when a cash offer is available.
All this is music to the ears of any real estate agent trying to entice their client to take your offer, because most of all, a cash offer without any need for mortgage financing is more likely to result in a purchase agreement. And that’s true for any real estate market.
How and when to do a cash offer
While there might be points in the negotiating process when holding your cards close makes sense, in a competitive market, if it’s a property you really want -- whether as an investment or as a home -- being clear up front that you’re paying cash is probably the way to go.
Think of it from the seller’s perspective. There are lots of potential pitfalls in getting a deal to close -- completed repairs, title issues, you name it -- but most significant is financing. A cash offer is far more attractive than one that comes with a financing contingency.
That’s why being preapproved for a home loan is so highly recommended when making an offer. But a lot can go wrong even after that preapproval is obtained. It’s not the same thing as the mortgage actually being underwritten and approved, and there are appraisals, LTV valuations, employment and income verifications, and all kinds of other things that can go south.
That’s why cash is king here. You do need to prove it’s there, but there’s no need to show the seller’s side your whole ledger; you can create an account, put the purchase amount in there, and present that.
If you really want the property and there’s a lot of competition in the market and for that house, you could do that in advance instead of waiting to be asked. You can also offer a hefty amount in earnest money, if you’re confident it will close with all the other factors considered.
Disadvantages to buying with cash, and what to do
Buying with cash can have different implications depending upon whether the property will be an investment or a primary residence. Investors need to make choices in the interest of generating income, while homeowners need to consider a bigger picture.
Remember, you can always buy the house with cash, finance all or some of it at today’s remarkably low mortgage rates, and then put that money to work elsewhere. If you can refinance at an interest rate of 2% and make even 4% investing those proceeds elsewhere, that’s a pretty good return on that money.
You do lose the mortgage interest deduction, making the mortgage much like any other personal loan. Other tax benefits still apply, of course, including the property tax deduction.
However, with the standard deduction now $12,200 for single filers and $24,400 for married couples filing jointly, that may well not make a difference in your personal situation, anyway.
There’s also a whole other set of considerations if you’re looking at paying cash for a rental property or other investment property where cash flow is what matters most. Check out this piece by Millionacres’ Matt Frankel, an experienced real estate investor, on that.
All things being equal, appearances could matter
You also may be concerned it could look suspicious to be able to buy a house with cash. The seller may not feel comfortable selling their house in a situation that looks shady, out of consideration for their neighbors or neighborhood.
With all things being equal, and multiple cash offers in hand, maybe that could be a factor. But with so many cash offers out there nowadays, I doubt it’s as much a concern as it was in the past. Just choose an offer you’re comfortable with, if you’re in that position.
Heck, this blog quotes an Oakland, California, real estate agent who says almost all her offers in the $2 million range and above are for a cash purchase. In that market, that’s a lot of homes. And with so many cash offers being made nowadays, they’re not unusual anymore at any price level.
I remember in the mid-'80s -- in the Miami Vice days -- I had relatives in that Florida city who sold a home for about $150,000. The payment was in cash, in a briefcase. My kin were pretty straitlaced folks. That must have been quite a closing.
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