Buying a house with cash vs. a mortgage

If you’re thinking about making a cash offer on a house, you’re not alone. All-cash deals made up 28 percent of home purchases as of March 2024, according to the National Association of Realtors (NAR). Even if you have the means to pay for a home in full, it doesn’t necessarily mean you should do so. There are pros and cons to buying a house in cash vs. getting a mortgage.

Buying a house in cash vs. a mortgage

An all-cash offer occurs when a buyer purchases a home with their own money instead of taking out a mortgage (and using the home as collateral) to finance the purchase. Instead, the buyer taps their savings, investments or funds from the sale of another property or another source, such as gift money from family members.

All-cash offers are similar to offers financed with loans in some key ways. With an all-cash offer, you’ll still need to provide financial documentation, since the seller will want proof you have the funds you plan to use to buy the home. In fact, you may need to provide even more, or more detailed, statements than a lender might ask for.

Even when buying a house in cash, it’s a good idea to arrange an appraisal to ensure that you’re paying an appropriate price for the home, as well as a home inspection to check for any safety issues.

In addition, you’ll still have to set up an escrow account. You’ll make an earnest money deposit when you sign the purchase and sale agreement, usually 1 to 2 percent of the home’s purchase price, which will be held in escrow until the transaction is finalized.

Come the closing, you’ll still have to pay for a real estate attorney, a title search and title insurance and other administrative expenses. But you’ll get to skip lender-related closing costs, such as origination fees.

Advantages of using cash to buy a home

• Beat out other buyers
• Speed up the homebuying process
• Save on closing costs
• Lower your long-term costs

Beat out other buyers

A shortage of housing inventory has fueled an insanely competitive market. In fact, there are 3.1 offers on average for every property sold, according to NAR data from March 2024. An all-cash offer stands out from the crowd. Put yourself in the seller’s shoes: If you’re comparing three bids that all hinge on the ability to get full lender approval with one offer that requires nothing, but is ready to go — which would appeal to you more?

Speed up the homebuying process

Paying with cash can also simplify the home-purchase process. There’s no loan application, preapproval or approval, so you’ll save yourself the potential stress of shopping for and dealing with a lender. You can likely save some time, too, since that lender won’t need to gather and comb through all your paperwork, deciding on whether to approve you. All told, side-stepping the mortgage can speed up your closing by as much as a month.

Save on closing costs

If you have the funds, paying all-cash for a home definitely saves you money, since you won’t have to pay any of the costs associated with taking out a mortgage. The origination fee and other closing costs can add up to 2 to 5 percent of the purchase price. So, if you’re purchasing a $300,000 home, eliminating closing costs might help you lower your bill by somewhere between $6,000 and $15,000.

Lower your long-term costs

Along with saving on upfront fees, paying in all-cash means you won’t pay any interest, which adds up to huge savings. For example, let’s say you’re comparing a $425,000 cash offer with a $340,000 30-year mortgage (a loan on the same home after 20 percent down) with a 6.5 percent interest rate. Over the course of that loan, Bankrate’s mortgage calculator shows you would pay nearly $433,651 in interest, for a total cost of $773,651. If you can swing the cash offer in that scenario, it might be beneficial, depending on how you would otherwise invest the sum.

Advantages of getting a mortgage to finance a home

• Use your money elsewhere
• Reduce your tax bill
• Build your credit

Use your money elsewhere

Before you think about writing a check for the entire cost of a new home, think about what else you might do with that cash. Do you need to cover college expenses for your kids? Are you behind on your retirement savings? Do you think that investing in the stock market or other asset class would yield a higher return than the mortgage rate a lender will offer you?

Take a long look at your finances to understand how much liquid assets you’ll have remaining if you buy a house in cash vs. get a mortgage. If the amount of cash needed to purchase a house seems like a potential source of major stress, getting a mortgage is a better option. You can make a sizable down payment and keep most of those funds free for other uses.

Reduce your tax bill

If you normally itemize deductions on your tax return, getting a mortgage can reduce what you owe since mortgage interest payments are tax-deductible. This can be very important for high earners who typically itemize and want to maximize their deductions.

Build your credit

Having debt isn’t necessarily a bad thing. Having a mortgage gives you the chance to make those regular payments that make you look great in the eyes of the major credit reporting agencies. In the long run, managing your mortgage debt on a regular basis can help improve your credit score.

Other homebuying considerations

As you ponder buying a house with cash or a mortgage, ask yourself these questions to help guide your thinking:

What’s the state of the housing market?

If you really want to secure that home, keep in mind that another buyer might feel the same way. If that’s the case, an all-cash offer can make a big difference. Forty-one percent of real estate agents say that making a cash offer is the best strategy to win a bidding war, according to a Zillow survey from 2021. Remember that real estate is a hyper-local industry, though. If you’re buying in a very hot housing market like Austin or Denver, all-cash can be the ideal route. If you’re buying in an area where sales have been more sluggish, you may be just as successful at winning by getting preapproved for a mortgage.

How much more will you pay with a mortgage?

Say you’d like to purchase a $400,000 home. You put down a 20 percent payment of $80,000 and finance the remaining $320,000 with a 30-year mortgage at a fixed interest rate of 7 percent. Closing costs typically amount to 2 percent to 5 percent of the loan principal, so in this case, $6,400 to $16,000.

By the end of the loan term, you’ll pay about $446,430 in interest. Adding your total interest to your closing costs, you would end up paying an additional $452,830 to $462,430 over a 30-year period. Your total cost for the loan over 30 years would be about $766,000 — almost double that of the original loan amount.

How much money will you have left if you pay in cash?

If you pay cash for a home, you might feel good knowing you won’t have a big bill each month, but make sure you don’t stretch your finances too thin to accomplish that. You’ll still need to have an emergency fund in place, and you’ll need to have enough money to cover home maintenance and repairs, as well as property taxes and utilities. You’ll also want to make sure your cash purchase doesn’t impact saving for retirement or other long-term plans.

Cash offers vs. mortgages: What’s right for you?

Ultimately, deciding between a cash offer and a mortgage depends on your financial situation, the current market and your personal preferences. If you have the means to pay cash without negatively impacting your financial health, it could be an ideal option. A cash offer could also make financial sense if you’re looking to buy an investment property in need of substantial repairs but can’t get approved for financing.

That said, if you want to use the funds for other financial goals or invest them elsewhere, a mortgage could be a better fit. Taking out a home loan also means you can capitalize on tax benefits and build your credit over time as you make monthly payments.

“From a purely financial perspective, the savvy move is to carry a mortgage balance and invest the proceeds in the stock market,” says Jeff Ostrowski, principal mortgage writer at Bankrate. “That certainly works well if you locked in a 3 percent mortgage rate. However, today’s higher rates complicate the borrowing decision. And for many homeowners, paying cash provides valuable peace of mind.”

FAQ

• Do you need to pay cash if you have bad credit?

  Not necessarily. There are home loan options for borrowers with a low credit score, but you might receive less generous terms, such as a higher interest rate. Look into government-backed mortgage products, like FHA loans, that only require a 580 credit score and 3.5 percent down payment. Or you could qualify for an FHA loan with a score as low as 500 if you make a down payment of 10 percent.

• Are cash offers better?

  Cash offers can help simplify the home purchase process as you’ll get more bargaining power and likely close faster. Sellers may also be more inclined to accept cash offers since they indicate you have the funds on hand to make the purchase, and the deal is less likely to fall through.

• Can your home be foreclosed without a mortgage?

  Falling behind on mortgage payments is a common cause of mortgage foreclosure, but it’s not the only reason a homeowner can be hit with default proceedings. Missing payments on a home equity line of credit or home equity loan also can trigger a foreclosure. Other culprits can include unpaid property taxes and municipal fines for code violations. In some cases, a homeowners association can initiate foreclosure proceedings for unpaid dues or assessments.