Should You Buy a Home With Cash? A Look at the Pros & Cons

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Stricter lending standards resulting in fewer foreclosures and scarcer properties for sale drove all-cash home purchases up 23.6 percent between the first quarters of 2013 and 2014, according to RealtyTrac. Combined with tougher financing, this creates a market favoring all-cash buyers such as institutional and individual investors, second-home and owner-occupant buyers and foreign-home buyers. If you’re considering making an all-cash purchase, you face an exceptionally competitive market—but you can get a leg up on the competition with some research.

The Pros to Paying With Cash

There are several major advantages to all-cash purchases:

• You’ll speed up the home-buying process by skipping past the loan qualification stage
• It makes your offer more attractive to sellers who would rather get their money early, which also gives you an opportunity to negotiate a lower price
• It minimizes closing costs
• You’ll avoid mortgage interest and payments and be left with less debt

And a List of Cons

You’ll need to weigh these benefits against other factors, including:

• How the amount you’d save on future mortgage interest stacks up against what you’d earn from using your current money for other investment options instead of a home
• Mortgages offer tax benefits, which you can estimate by using a calculator such as that provided by Mortgage 101
• The cash you sink into a home purchase won’t be available for emergencies or other investment opportunities

Consequently, if you find you need cash, you may end up needing to sell or mortgage your home, which can be problematic if you don’t have a regular income to attract lenders, as is the case with many retirees. Some strategies for countering this risk are using a home-equity line of credit or reverse mortgage to cover emergencies.

Coming up With Cash

If you decide paying for your home with cash is right for you, how do you find funds? To begin answering this question, let’s look at who pays for a home with cash upfront. Many all-cash buyers are simply wealthy, while others are downsizing empty nesters or investors with assets on hand. Other cash buyers may be recipients of a financial windfall, such as an inheritance, and still others sold their future structured settlement payments for a lump sum of cash. If you don’t fall into any of these categories, you could try:

• Saving with CDs. If you’re using a savings strategy to fund a home purchase, investing in long-term CDs is an option. CD investments have the potential downside of locking up your cash in a low-interest investment. To reduce this risk, Charles Schwab suggests considering investing in CDs scheduled to mature at staggered dates, a strategy known as CD laddering.
• Cash-out financing. Another option some homeowners can use is cash-out refinancing. This involves refinancing your current mortgage for a larger replacement mortgage and using the additional funds. Bank of America provides a detailed comparison of cash-out refinancing with home equity loans and lines of credit in order to help you weigh these options.