Buying a home “with cash” can benefit both the buyer and seller with a faster closing process than with a home loan. Paying cash also means no interest and can mean lower closing costs. 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.
Buying a home with cash doesn't eliminate recurring expenses. You'll continue to pay property taxes and, if you're wise, homeowners insurance. However, you can take the money you would have spent on monthly mortgage payments and save it for retirement or emergencies (or spend it). In addition, a homebuyer who puts less than 20% down payment will have to pay private mortgage insurance (PMI), which ranges from 0.5% to 1% of the loan amount annually.
When you pay with cash, private mortgage insurance is not required. On the other hand, if paying cash for a house completely erases it, you might want to reconsider it. Yes, a cash purchase can be more attractive in a competitive market, and yes, a homeowner won't have to deal with long-term debt. If your goal is to save money on the total cost of housing, paying cash is definitely a plus.
Therefore, it stands to reason that buying a home with cash or investing as much cash as possible in your home to avoid the enormous debt associated with a mortgage is the smartest option for your financial health. There are several things that make buying a home with cash attractive, but the most basic thing is peace of mind. Many of these companies, such as house flaps or iBuyers, buy houses for cash, fix them and resell them. Even though an inspection isn't required when you buy a home with cash, it's a good idea to get one to make sure your new home doesn't come with costly surprise repairs.
Unless a homeowner has other financial resources besides the money they invest in buying the home, buying a home with cash limits the available cash. Many homeowners buy a home with cash using investment accounts that have accumulated substantial profits over the years. Home sellers also often favor cash buyers so they don't have to deal with loan terms, which means their cash offer is more likely to be accepted. Title research takes place whether you pay cash or get a mortgage, and it's always smart to get title insurance on your investment, which will protect you in the event that the title research hasn't filed any claims.
However, it's important to note that a cash home purchase doesn't literally mean a mountain of hundred-dollar bills. Another great advantage of buying a home with cash is that buyers have more control over the transaction. One thing that getting a mortgage does is provide the cash buyer with leverage, since they won't have to invest all their money in buying their home. And if the homeowner has to sell their home in a recession, they may not receive the money they prepaid for the home.
The IRS also has reporting requirements for large cash transactions, so it's usually not worth it. Just because cash can put a homebuyer in a dominant position doesn't mean that this option is always the best option in the long run.