Should You Buy a House with All Cash?

If you are able to purchase a house using all cash, should you do it? While the answer seems obvious, experts caution that there are certain drawbacks to paying all cash. Here are the arguments for and against paying only cash for a house. 

The reasons for making an all-cash offer are simple and persuasive.   

A cash purchase costs you less. 

Obviously, paying cash saves you money in the long run, because you won't be paying interest on borrowed (mortgage) funds. However, keep in mind that the calculation is not quite that simple because the money that you use to purchase the house could otherwise be invested and earning interest. Also, paying cash eliminates the need to pay fees such as the mortgage origination fee and the appraisal fee.

Cash wins bidding wars. 

An all-cash offer is more attractive to the seller because it removes the uncertainty about whether the buyer will be able to obtain a mortgage for the required amount. Also, an all-cash offer speeds up the whole process because there is no need to wait for the buyer to finalize a mortgage.

Paying cash simplifies your finances and your life.

If you pay cash for a house, all the arrangements, headaches, and anxiety associated with a mortgage are eliminated. You never have to worry about making those monthly payments (the largest monthly expense for most people). Also, you don't need to agonize over decisions about interest rates and other features of mortgage loans.  

The reasons for taking out a mortgage (even if you could pay all cash) are less obvious, but they are worth considering.

Paying cash eliminates the financial leverage associated with taking out a mortgage.

According to this perspective, your return on investment is lower when you use all cash (assuming the value of your house increases). This is because using a mortgage means that you're investing a smaller amount of your own money than when you pay all cash. Obviously, the value of the house increases by the same amount whether you use a mortgage or not. So the return on investment is greater when you use a mortgage.  

Paying cash reduces your liquidity of your investments. 

There are obvious advantages to being able to withdraw your funds from investments quickly. When you use only cash to buy a house, this one large amount is tied up in an investment that can't be easily converted to cash - because it normally requires months to prepare a house for sale and complete the transaction.

Paying cash goes against the advice to diversify.

 Individual investors are always told to diversify their investments. Well, if the amount you would pay for a house constitutes a large proportion of your savings, paying cash means your investments won't be diversified - because most of your funds will be tied up in one investment.

  

Deciding whether to use a mortgage to purchase a house or pay all cash requires a careful review of your financial situation. It is also advisable to solicit the advice of a financial professional.