Buying a House for Cash: Pros and Cons
Many are not in the position to pay off the entire house in cash right away. However, for those that could afford to do this, consider the pros and cons before making your decision.
There are many positives to paying cash up front for the house. The first being you do not need any credit history. People who avoid credit cards and loans will not have the opportunity to gain a credit history and as a result will not be able to apply for a loan. However, if you have enough in your savings and can pay off the house this way, you are not dependent on your credit history. This is risk free savings by paying cash, if for example a mortgage costs 7% you will be saving 7% on interest risk free. Furthermore, by paying off the entire house you have no more worries of paying rent or mortgage; this is psychologically a big benefit to know that you actually own your house. Also, you are not leveraged when buying a house with cash. For example, if the home value went down by 10% then the amount you put in also went down by 10%. On the other hand if you have a 20% down mortgage and the value of the house goes down by 10% then you lose 50% due to leverage. Lastly by having cash to pay the full amount of the house you have more negotiating power to get a discount on the price of the home. Although there are many positives to paying of the house right away in cash, there are also negatives.
By taking out a mortgage you can have cash for other investments. Putting all your cash in a house gives you less liquidity since it is harder to free up money. Likewise if you take out a mortgage after paying the house in cash it will be considered refinancing and the next mortgage will carry a higher rate of interest. Since leverage works both ways, if the home value goes up the percentage gain of the all cash buyer will be lower than that of a person who purchased with a mortgage. By making mortgage payments you also get the benefit of income tax deductions, and if you are in a high tax bracket the tax deduction benefit is substantial.
If you are in the position to buy a house with cash, do so if; this is not a significant portion of your liquid assets, the mortgage interest rate is higher than what you would earn on other investments, you will save a lot more by paying in cash versus a loan deal and if you want to avoid credit agencies.