Buying a House With Cash vs. Getting a Mortgage

Benefits of Buying a House in Cash

There are several reasons to consider making a cash offer instead of using a mortgage loan, including the following.

More Negotiating Power

While every seller wants to secure the highest price for their home, they also want to ensure the deal they make with a buyer won't fall apart because of a financing issue.

For this reason, cash buyers who don't have to rely on the decisions of mortgage underwriters are especially attractive to sellers. As such, sellers are often willing to negotiate a considerably lower price in exchange for the assurance of a cash transaction.

No Mortgage Interest or Fees

Purchasing a home with cash also allows you to avoid paying the monthly payment, interest and fees associated with a mortgage.

If you experience a disruption in income or suffer financial setbacks, you won't have to worry about making your payments or facing foreclosure. What's more, eliminating this expense from your monthly budget allows you to allocate more income toward achieving other financial goals.

Faster Closing

When you buy a home with cash, you can skip the entire mortgage approval process, which often includes income verification, credit checks, home appraisals and underwriting reviews.

Without a lender involved, there's less paperwork and fewer third parties to coordinate with. This can cut the closing timeline significantly, depending on the seller's readiness and any title or inspection requirements. Quickly closing on a home sale can be especially attractive in competitive markets or to sellers who need to move fast.

Learn more: How to Make a Cash Offer on a House

Downsides of Buying a House in Cash

Although there are some clear perks to buying a home outright, it's also important to think about the drawbacks. Here's what to keep in mind.

May Be out of Reach

Buying a house with cash simply isn't an option for the vast majority of buyers. It requires access to more liquid cash than many buyers may ever accumulate in their lives—especially in the absence of a large windfall or proceeds from selling another house.

In addition to the purchase price, you'll also need to make sure you have enough reserves to cover ongoing maintenance and repair needs, along with homeowners insurance, property tax and financial emergencies.

Opportunity Costs

Before you buy a home with cash, consider your potential housing-related expenses as well as your financial goals. If mortgage interest rates are relatively low, for instance, you might reap a higher return by stashing that money in your retirement account or in other investments.

Additionally, if your home needs significant upgrades, you could finance your home and use your cash to pay for repairs or renovations.

No Tax Benefits

If you itemize your taxes, the IRS allows you to deduct your mortgage interest. Note that this deduction is limited to the first $750,000 of mortgage debt ($375,000 if married filing separately) if you buy your home by the end of 2025.

Benefits of Buying a House With a Mortgage

For many homebuyers, a mortgage loan may be the only option. But even if you have the choice between cash and financing, here are some reasons to consider a mortgage loan.

Preserves Your Liquidity

Using a mortgage allows you to keep more of your savings available for emergencies, investments or other goals, rather than tying it all up in a single asset.

For example, you may want to catch up on retirement savings, invest in home improvements, start a business or direct the money toward your child's education.

Leverage a Higher Return

Instead of using all your cash to buy a home, you can invest that money elsewhere and potentially earn a higher return than the mortgage interest rate.

For example, the average annual return of the S&P 500 is historically around 10%. Even at their highest, mortgage interest rates have barely cracked 8% over the past 25 years.

Inflation and Tax Benefits

In addition to getting a deduction on your mortgage interest, you'll also get some other money-saving features with a mortgage loan.

With a fixed-rate mortgage, for instance, your monthly principal and interest payments stay the same, even as the cost of other goods and services go up over time. This phenomenon effectively reduces the real cost of borrowing over time.

Learn more: The Complete Guide on How to Get a Mortgage

Downsides of Buying a House With a Mortgage

Before you choose a mortgage loan, carefully consider the potential disadvantages you may experience.

Interest, Fees and Other Costs

You must pay interest on the money you borrow to purchase your home, which often runs into the hundreds of thousands of dollars over the course of the loan. In the early years of your home loan, most of your monthly payment goes towards paying the mortgage interest.

You'll also need to pay closing costs, which can range from 2% to 5% of the purchase price, translating to thousands or even tens of thousands of dollars. Finally, if you don't put 20% or more down on a conventional loan, you may need to pay private mortgage insurance.

Risk of Foreclosure

Since your property is the collateral that secures your mortgage loan, you could lose your home if you default. The foreclosure will also appear on your credit report for up to seven years, and your credit score could drop substantially. Such credit damage could make it more challenging to obtain a mortgage in the future.

Slower Closing Process

As previously mentioned, closing on a mortgage can take 30 to 60 days, which may not line up with your need to get into a new home. You'll also need to do a lot of legwork to manage income verification, appraisal, inspection and other due diligence to close on time.

Is It Better to Buy a House Outright or Have a Mortgage?

The decision to buy a house with cash or a mortgage loan is a personal one, so it's crucial that you carefully consider all of the advantages and disadvantages to determine which one is best for you.

That said, here are some situations where it could make sense to buy the home outright:

• You have sufficient assets to buy the home and meet other financial obligations, needs and goals.
• You want to save money on the purchase price, closing costs, interest and other fees.
• You're not concerned with maximizing the mortgage interest tax deduction.
• You've determined that the benefits of using cash outweigh the opportunity costs.
• You have less-than-stellar credit and can't qualify for a mortgage loan.

On the other hand, here are some scenarios where it may be better to use a mortgage loan:

• You don't have enough cash to buy a home and effectively manage other financial obligations, needs and goals.
• You want to leverage your cash with investments or other financial opportunities.
• You're looking forward to taking advantage of the tax break and inflation protection.
• Your credit history is good enough to qualify for favorable terms.
• Maintaining liquidity is a top priority for you.

Frequently Asked Questions

Consider Your Financial and Lifestyle Goals

Buying your home with cash offers you the security of owning your home free and clear, without the hassle of monthly mortgage payments and the added cost of interest. By contrast, financing your home with a mortgage could allow you to use your cash for other purposes, such as catching up on your retirement plan savings or funding a child's higher education.

Ultimately, the decision to buy a house with cash or a mortgage will depend on your financial situation and goals. Many homebuyers prefer the security of knowing they'll always have a roof over their head. Conversely, some would rather use the cash for investments, travel or other lifestyle considerations.

If you decide to take out a mortgage loan, consider reviewing your credit before applying. You can get your credit report and credit score for free with Experian and, if necessary, take steps to improve your credit. With good or excellent credit, you may have more lending options and qualify for more favorable terms.