Purchasing a home with cash can be a tempting option, but it may not be the best choice for everyone. Paying cash for a house eliminates the need to pay interest on the loan and closing costs, but it also limits your liquidity and doesn't eliminate recurring expenses. On the other hand, taking out a mortgage can provide tax benefits and allow you to invest in other assets. An experienced real estate agent can help you create attractive offers that are accepted, shortening your housing search process.
When you pay cash for a home, you avoid paying interest and other fees associated with taking out a loan. Robert Semrad, JD, senior partner and founder of Chicago-based DebtStoppers Bankruptcy Law Firm, notes that lenders don't charge mortgage origination fees, appraisal fees, or other fees to evaluate buyers. However, you'll still need to pay property taxes and homeowners insurance. Paying cash for a house eliminates the need for a large monthly payment from your budget.
This allows you to save the money for retirement or emergencies (or spend it). Wealthy individuals often strategically apply for a mortgage for leverage, even though they could repay the loan at any time. Making a cash offer on a home can help you stand out from buyers who only have a mortgage pre-approval. You may also be able to get more value from the purchase if the home is valued for less than the price.
In this case, the lender can expect the borrower to get cash equal to the difference between the appraised value and the price. When you pay cash for a house, you transfer the money or issue a cashier's check on the closing date instead of resorting to a mortgage company. This can help you avoid overspending since it's no longer your money once it's transferred. The IRS doesn't usually care that someone bought a home with cash unless they owe back taxes and the IRS wants to impose a lien on their assets.
Taking out a mortgage can provide tax benefits if you itemize deductions rather than taking the standard deduction. It also allows you to invest in other assets which could increase your wealth over time. Buying a home with cash is almost the same as buying with a mortgage, but without having to apply for a loan and all the paperwork involved. However, there are significant differences between paying cash for a home and seeking financing through a mortgage company.
Ultimately, it's important to consider all of your options before making such an important decision.
