Buying a home with cash isn’t just possible—it’s something one in four homebuyers achieved in May 2023. Before joining in and purchasing a home without financing, stop and take some time to think it through.
7 Things to Think About Before Buying a Home with Cash
1. All-Cash Offers Will Make Your Offer Stand Out
Sellers like to see all-cash offers because there’s no financing contingency. The seller doesn’t need to worry about the buyer being unable to obtain financing, even if they were successful with a mortgage pre-approval.
Although most home sales stick after an accepted offer, some fall-through. From February to April 2023, five percent of real estate contracts were terminated—either the buyer or seller walking away. Financing issues are one of the big culprits—in May 2020, issues related to obtaining financing caused 21 percent of contract terminations.
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2. All-Cash Offers are Typically Faster
When you buy with cash, you have more control over the timetable. You’re not waiting on a mortgage underwriter or a required appraisal before settling on your new home.
It’s another reason why sellers like to work with cash buyers. They can settle quickly—potentially within a week or two—and with less risk.
3. You Need to Make a Decision About an Appraisal Contingency
If you plan to buy a home with cash, the appraisal and appraisal contingency are up to you.
An appraisal contingency protects the buyer in case the home doesn’t appraise for the sale price. It lets you back out of the sale without penalty if the house appraises for less and you can’t secure financing. Mortgage lenders typically require an appraisal to ensure the home value is at least worth the sales price. After all, a lender doesn’t want to lose money if you default on your loan.
Leaving out an appraisal contingency can make your all-cash real estate offer more attractive—one less roadblock in the seller’s eyes.
It can also be risky. Even if you have the funds to pay for a $500,000 property in cash, would you still want to if it appraises for only $450,000?
Adding an appraisal contingency gives you the opportunity to back out of the sale without penalty if the house doesn’t appraise for at least the sales price. It also gives you some negotiating power. You can make a counteroffer based on the appraisal results without being locked into the contract.
4. Lower Closing Costs
All-cash buyers face fewer closing costs than buyers who take out a mortgage, but you still need to account for them! And they’ll need to be paid for in cash.
In Florida, closing costs for homebuyers cost an average of $8,554 in 2021. Expect to owe between 2 to 5 percent of the home’s sale price.
Every contract is unique, but homebuyer closing costs in Florida for cash buyers usually consist of:
- Appraisal fee
- Title search fee
- Survey fee
- Settlement fee
- Prorated taxes
- HOA or COA fees
- Property tax escrow
- Attorney fees
- Home inspection
- Homeowner’s insurance premium
5. Buying a Home with Cash Makes Homeownership More Affordable
You’ll owe fewer closing costs and won’t need to make mortgage payments each month. Not only does that keep your monthly expenses low, but it also means you’re not losing money to mortgage interest. Data from the American Community Survey in 2021 found that the median monthly home payment was $1,616 per month in Florida.
6. Evaluate the Opportunity Cost
When you buy a home with a mortgage, you owe interest in addition to any mortgage fees. When you buy a home with cash, you don’t incur those costs. However, there’s still an opportunity cost—the future interest you could earn or investment returns you could make if you saved or invested the money.
Before you pour your cash into your new home, consider the opportunity cost. Could you invest the money, save it for retirement, or keep it in a high-interest savings account and earn more than what the interest rate would be on a mortgage?
Think about what works for your financial situation. Does the opportunity cost matter to you? Or would you rather have lower monthly expenses and free up more of your future income for savings or investments?
7. You Can ‘Untie’ Your Money After the All-Cash Transaction
As you evaluate whether or not to buy a home with cash, remember this—you can always “untie” your cash. Buyers can do an all-cash deal (to make their offer more attractive) and then pursue delayed financing.
In this scenario, you buy your house with cash and then obtain a cash-out refinance mortgage within six months of the purchase. You receive a lump sum to repay some of what you spent on the home. Then, you owe monthly principal payments with interest until you repay the loan.
Cash buyers (and other homebuyers) can also take out home equity loans or home equity lines of credit (HELOC). Again, this puts some cash in your bank account, but you’ll need to make monthly principal payments with interest until you repay the loan.
Home equity loans, HELOCs, and cash-out mortgages typically have lower rates than credit cards and personal loans.
Final Thoughts: Pros & Cons of Buying a Home with Cash
Buying a home with cash doesn’t make sense for everyone. But it could be the right move for you and your family. Before taking the plunge, think through your financial goals and weigh the pros and cons.
Pros
- Peace of mind: You don’t need to worry about losing your home as long as you keep up with property taxes, etc.
- Saves time: You can likely close faster. Plus, no time is spent on mortgage preapproval or mortgage applications.
- Saves money: You’ll owe fewer closing costs and won’t owe interest.
- Sellers like it: They’ll find your offer more competitive than an offer with a financing contingency
- You can still access your cash: It might take a little time, but you can borrow against your home’s equity if you need cash later on.
Cons
- Opportunity cost: It could be more financially beneficial to invest or save your cash and make mortgage payments instead.
- Being strapped for cash: If you don’t leave a cushion in your savings account, you might not have enough for home maintenance and repairs until you tap into your home’s equity or save up again.
- Tax implications: If you don’t have a mortgage, you don’t pay interest, so you can’t claim the mortgage interest deduction and lower your tax bill
