For the vast majority of the population, there’s only one realistic way to purchase a house. You call a few banks and credit unions, speak with lenders, and get pre-approved for a mortgage that specifies how much house you can buy. You then put down some cash to supplement the loan and spend the next 10, 15, or 30 years making regular payments until the house is paid off. It’s a tried and true formula and there’s absolutely nothing wrong with it.
But for people who have deep pockets, there’s another option: buying a house in cash. However, just because you can purchase a house in cash, doesn’t mean you should. There are some pros and cons to cash purchases. Ultimately, you’ll have to decide whether or not it makes sense for you.
The Pros of Paying Cash
- More attractive buyer. As a cash buyer, you’re much more attractive to a seller. They know there are fewer contingencies in place, including financing and appraisal. This speeds up the process and significantly lowers the chances that a deal will fall through. If it’s your offer against a similar offer that’s contingent on lender financing, your offer will win 9 times out of 10. (You might even be able to bring a lower offer price.)
- Less hassle. From your perspective, buying in cash streamlines the purchase process and eliminates all of those frustrating administrative tasks that make purchasing a house so challenging. There’s no underwriting or required appraisals or inspections (though you may want them anyway).
- No interest payments. As low as today’s interest rates are, mortgages are still very expensive when viewed over the entirety of the loan. Even at a low rate of 3.25 percent, a $300,000 loan over 30 years is going to cost you more than $170,000 in interest! When you buy in cash, you get to keep all of that money that would otherwise be handed over to the bank.
- Lower monthly expenses. Think about what your monthly budget would look like without a mortgage payment. You’d have hundreds or thousands of dollars in extra monthly cash flow that could be applied towards saving, investing, or spending.
- No risk of foreclosure. When you own 100 percent of your house, there’s no bank or mortgage company that can threaten to foreclose on you. Life instantly becomes less stressful. As financial guru Dave Ramsey often tells his radio listeners, the grass just feels different beneath your feet when you own a house in cash.
The Cons of Paying Cash
- Could stretch you thin. Depending on how much cash you have on hand and what the purchase price of the property is, buying in cash could stretch you thin and leave you with a much smaller safety net in your bank account. You might be fine now, but what happens when unforeseen expenses suddenly emerge?
- Limits investing power. Any cash that you tie up in your house is less cash that you have to invest. Let’s say, for example, that you buy a house for $250,000 in cash, as opposed to financing $200,000 of it through a mortgage. If the average rate of return in a good index mutual fund is 7 percent, you’re basically missing out on $14,000 per year in potential returns. Is that worth it? You’ll have to be the judge.
- Lower liquidity. Real estate isn’t nearly as liquid as other types of investments – like stocks, bonds, or mutual funds. Tying up a bunch of cash in a house limits your ability to quickly access your cash. (You’d have to sell the house.)
- Lower ROI. When you purchase a piece of real estate with borrowed funds, your potential ROI is much higher than when you purchase in cash. If you want to increase your leverage, cash is not the smartest move (assuming the house increases in value).
- Missed tax benefits. With mortgage rates as low as they are, financing a purchase is a really good idea. And not only are rates low, but the tax benefits are high. In most situations, you’re able to deduct mortgage interest on your itemized taxes. Depending on the loan amount, this could significantly reduce your income tax burden.
How to Complete a Cash Transaction
Let’s say that you decide to buy your house in cash. What does this look like, practically speaking? In other words, how do you actually pay for the house?
For starters, let’s be clear about one thing: We’re not talking about paying in $100 bills. While you technically could hand over a few hundred thousand dollars in paper money, you’re just asking for trouble. Large cash withdrawals and deposits get scrutinized and the government will require a lot of reporting on the back end.
The Financial Crimes Enforcement Network (FinCEN) has certain regulatory requirements around these transactions. Any time you request a currency-based transaction of $10,000 or more, FinCEN gets notified. On their report, they make note of personal information, Social Security numbers, tax identification numbers, driver’s license ID information, and other important details. And once the government starts digging around, they’re going to snoop until they find something. (In other words, don’t use cash!)
The normal process of purchasing a home in cash involves paying via check. And in all likelihood, a closing attorney is going to request a certified check (which assures the seller that the funds are actually in the account).
In addition to writing a check for the home’s sale price, you’ll also need checks for certain closing costs (like attorney fees, inspections, appraisals (if you got one), etc.).
Buy and Sell With Green Residential
Green Residential is proud to be one of the most well-respected and experienced real estate companies in the Houston area. In addition to offering industry-leading professional property management services, we also represent buyers and sellers.
For additional information on how we can help you list your current house and/or find a home of your dreams, please don’t hesitate to contact us today!
Michael is Green Residential’s Vice President. He helps to keep the team organized and running smoothly. Prior to joining Green Residential, he spent 12 years working at Cadence Bank in the mortgage loan servicing department, where he specialized in loan audits, modifications, and bankruptcy-related issues for the mortgage portfolio.
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