- Most buyers can't purchase a home in cash.
- If you have that option, you may be considering it -- even though it's a mixed bag.
Does plunking down a pile of cash really make sense?
The housing market has been tough to crack since 2020, when real estate inventory started plummeting. In fact, because inventory has been so limited, home buyers have really had to duke it out to get an offer accepted. That means entering bidding wars and making offers well above homes' asking prices.
But some buyers are resorting to another tactic -- making cash offers. In a newly released HomeLight survey, 31% of recent home buyers purchased their properties with cash. But is that a smart way to go?
The upside of buying a home in cash
In a competitive market, a cash offer could spell the difference between getting to buy a home or not. Sellers tend to favor cash offers because they're more of a sure thing. Those who sell a home to a buyer needing a mortgage risk a scenario where that home loan falls through. Plus, mortgages can take a longer time to close on than cash transactions.
The other benefit of paying cash for a home is not having to spend money on mortgage interest. Even in a competitive mortgage rate environment, interest on a home loan can add up over time. And these days, with mortgage rates being on the rise, the savings can be even more substantial when you pay in cash.
Imagine you're buying a $300,000 home. If you put down 20% and mortgage the remaining $240,000 over 30 years at a fixed rate of 4.8%, you'll end up spending $213,309 on interest in the course of repaying your home. That's not a small amount of money. And so if you have the cash, it could pay to use it.
The downside of buying a home in cash
While a cash purchase might make your offer stand out, in today's market, you may not be the only buyer willing to pay cash. That's something to keep in mind.
But more so than that, when you buy a home outright, you tie up a lot of cash in an asset that can be pretty tricky to sell. Let's imagine you invest $240,000 in stocks and need some of that money back a few years later. At that point, you can simply sell those stocks and get your cash immediately.
But if you have that $240,000 tied up in a home, it could take months to access it. You'd need to list your home, find a buyer, and wait for the sale to close.
Plus, as much as you might save money on mortgage interest by purchasing a home in cash, you'll lose out on the chance to invest that cash. These days, you're looking at an average rate of around 4.8% on a 30-year mortgage. But the stock market has, over the past 30 years, delivered roughly twice that return. You might come out ahead financially investing your money rather than using it to buy a home outright.
What's the best call?
Paying cash for a home has its pros and cons. In today's market, it may be a strategic move that gets your offer accepted. But make sure you recognize the drawbacks of tying up cash in an asset that's hard to liquidate in a pinch.
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