Pros & Cons of Buying Your Next Home in Cash

If you have enough cash on hand to buy a home outright, you may be wondering if this is a better choice than taking out a mortgage. The answer, of course, is "sometimes." In order to decide whether buying real estate for sale in cash is a good choice for you, consider these pros and cons.

Pro: You'll pay less overall.

When you take out a mortgage, you pay for the cost of the home, plus interest over the life of the mortgage. While interest rates are much lower right now than they've been in years (many homeowners are getting 3.5% or lower rates these days), interest will still add up over the years.

Con: You'll miss the opportunity to invest that money at a higher rate.

By buying a home outright, you're avoiding paying 3% or 4% interest on a mortgage. However, you won't be able to invest that money in another endeavor. For instance, if you have a good investment available to you that you expect will pay about 12%, you can actually save money by taking out a mortgage at 3% and investing the money you could have spent on the home at 12%.

An exception to this, of course, is when the home you buying is, in and of itself, a good investment. For instance, if you're buying a home for $80,000 that you're confident will be worth $120,000 in a couple of years, then buying in cash is a good idea since the home itself is a lucrative investment.

Pro: You won't have to apply for a mortgage.

Applying for a mortgage can be a bit of a hassle, especially if you're self-employed, retired, or don't have much of a credit history. By paying in cash, you can avoid this process. This expedites the entire real estate transaction; it won't take you nearly as long to get into a home after making an offer. Plus, because closing on a bought-in-cash home tends to go more quickly, sellers are often more inclined to accept a cash offer rather than a mortgage offer.

Con: You'll be tying up a lot of your cash.

If you have hundreds of thousands of dollars above the cost of the home saved up, then tying up that amount of cash may not be an issue. On the other hand, if buying a home in cash will completely drain your account, it may not be the best idea. It's wise to have some cash on hand for emergencies. You might be better off taking out a small mortgage so you can have some safety net.