Although it may seem like a great idea to pay for a house with cash, doing so can bring both negatives and positives. Aside from the benefit of having no house payment, deciding whether to pay cash for a home requires careful financial thought. Create a sound financial game plan for your future before signing on the dotted line. With some investigation of pros and cons, you can decide if doing away with a mortgage is the right choice for your situation.
Con: Reduced Liquidity
Most financial planners suggest you keep at least six months of liquid assets tucked away for backup. Paying cash for a home can drastically limit your overall liquidity, which may seriously hinder your ability to maneuver a financial crisis or unforeseen life event. Important factors for consideration before making your decision might include the amount of funds needed for retirement, college and tuition expenses or the cost of obtaining sufficient life and heath insurance.
Pro: More Negotiating Power
A big plus in purchasing a home with cash is that it typically gives the buyer a higher degree of negotiating leverage. Most sellers understand that a cash buyer can close quickly with little complications. Because of this, many homeowners are willing to reduce their bottom line in order to accommodate a cash buyer and bring a deal together. According to Nasdaq, cash buyers often can nab a house for five percent less than the listing price.
Con: Missed Investment Opportunities
Buyers who put all their eggs in one basket may end up missing out on investment opportunities that would eventually net them a higher return. This is especially true when mortgage interest rates are fairly inexpensive. You may choose to consider putting that extra cash into some type of investment vehicle that provides a higher low-risk return than what you would gain not paying mortgage interest. Alternative options can include certain stocks, Treasury bonds or even investing in small business.
Pro: Avoid Gruesome Mortgage Process
Buyers who pay cash for a home bypass the mortgage approval process, which can be lengthy and complicated. The amount of paperwork required for borrowers has increased in recent years and can include tax returns, income documentation, asset statements and bank statements. Additionally, cash buyers won't have to pay certain lender required fees, such as loan origination costs, mortgage insurance and title insurance. There's also no worrying about an underwriter or low appraisal putting the brakes on the deal at the last minute.
Con: No Mortgage Interest Deduction
For most tax payers, there can be great tax rewards for having a mortgage. Mortgage interest is tax deductible and depending on your mortgage interest rate this amount can really add up at the end of the year. Although paying mortgage interest is never better than paying none, it may make better financial sense to use your cash to pay off other non-deductible credit obligations with higher interest rates. Only you can decide how important tax deductions are to your financial situation.
Meribeth Phipps has been a real estate broker since 2000, specializing in residential new home sales. She holds a bachelor's degree in business and marketing.