You’ve just sold your home and are ready to buy again. For the first time in your life, you may have enough money to pay cash for a home—but should you? Buying a house with cash has its upside and its downside, too.
Let’s explore the pros and cons and what you could stand to gain–or lose—if you purchase your new home for cash.
Know Your Goals
Having a clear financial game plan for your future can help you decide whether buying a house with cash or financing the home is the right thing to do. Ask yourself these questions:
Does owning a home free and clear benefit my financial goals?
Can I save money buying outright?
Will buying a home with cash now affect me in the future?
Planning for the future now can help you avoid some pitfalls later. For example, paying cash for a property may make sense if you are trying to avoid paying loan fees and settlement costs.
But if you finance the property later, you’ll be paying these costs as both the seller and the buyer.
Where You Stand Financially
Evaluate your personal circumstances before buying a house with cash. Make sure you have enough cash reserves to cover these possibilities:
Funds set aside for retirement
At least six months of emergency funds in a savings account
Sufficient health, life and disability insurance
Paying cash for a property may drastically limit your liquidity. This can be especially critical if you’ll send kids to college soon or need to assist an elderly relative with living costs.
But if you are close to retirement, buying a house with cash will cut monthly mortgage expenses. Just make sure you have enough income from other sources to live comfortably after you pay taxes, insurance and maintenance costs on your new home.
Tax Considerations
How important are interest deductions to your tax picture?
A home without a mortgage is a home without a major tax deduction (even though paying interest is never better than paying none). It just may make more sense to use your cash to pay off non-deductible credit obligations than to put cash into a home.
Future Loans
You can’t also predict the future, so it makes sense to consider all the “what ifs” before you put up a large chunk of cash. Ask yourself these questions in case you find yourself needing to take out a loan later:
What size monthly payment would you be comfortable making?
What would you qualify for?
Are your financial circumstances likely to change so you couldn’t qualify for a loan?
It may be wise to consult with a lender now to see if changes in your financial picture could later restrict you from getting a loan.
Investment Alternatives
Finally, ask yourself how does a mortgage factor into your total investment picture? Are there other investment vehicles that could give you a greater financial yield with a similar amount of risk?
And don’t forget, you’ll be paying your mortgage payment (as well as your home expenses) with after-tax, not pretax, dollars.
It’s wise to consult with a financial professional to help you evaluate the dollars and sense of buying a house with cash. But you shouldn’t overlook the fact it may have intrinsic psychological value to own your home, free and clear.
In today’s world where many homeowners are cutting back on expenses rather than incurring new ones, owning a home free and clear could be the financially and mentally liberating experience you need.
Updated from an earlier version by Shirley J. Hagler.