Paying cash for a home eliminates the need to pay interest on the loan and closing costs. Lenders don't charge mortgage origination fees, appraisal fees, or other fees to evaluate buyers, says Robert Semrad, JD, senior partner and founder of Chicago-based DebtStoppers Bankruptcy Law Firm. Your closing costs will be approximately 2% lower if you buy a home with cash. It's 2% of the purchase price.
If you're buying in a popular housing market like Austin or Denver, everything in cash may be the ideal route. When you pay cash for a house, you avoid paying all that interest, not to mention having six-figure debt. When you close the deal to buy your home and actually take title to the property, you'll have to pay the closing costs. Once your offer for a house is accepted, you set in motion the process that will eventually lead to having a set of keys in hand.
If you can pay 20 percent or more of the total home price, you generally won't have to pay mortgage insurance, a premium that protects the lender if you don't repay the loan. Buying a home with cash is almost the same as buying with a mortgage, with the huge exception of not having to apply for a loan and all the paperwork involved. That means buyers need to be prepared to make multiple offers and keep in mind that they may have to pay more than a home is on the list, sometimes thousands of dollars more to get their offer approved. There may be more productive ways to use the money, even if you have enough cash to pay for a house directly.
But remember that in addition to the mortgage, buying a home includes additional one-time payments that can add up quickly, including closing costs, legal fees, and other expenses associated with the purchase, such as home inspection. Co-op boards like strong financial buyers, so a cash purchase and the resulting low monthly payments (building maintenance only) will make you an attractive buyer. If a home is valued for less than the price, the lender can expect the borrower to get cash equal to the difference between the appraised value and the price in essence, a larger down payment. If you're considering buying a home with cash or applying for a mortgage, you can use Bankrate's mortgage interest tax deduction calculator to understand how a mortgage will affect what you owe.
After you make the decision to buy a home and calculate the amount of the down payment you'll make, you need to figure out how much you'll need to borrow and what type of mortgage you'll want to get. Buying a home with cash can be satisfying, but it's not necessarily the best option for everyone who can afford it. You could save less than the money you could have earned if you had taken out a mortgage and invested the money you didn't spend on your home. We'll go into the details below, but for now, just know that paying cash avoids mortgage registration tax when you buy a home or condo.