You’re Prepared to Make an All-Cash Offer on a House. Should You?

Image of a cat in a fishbowl with cash

In real estate lingo, an all-cash offer means the buyer isn’t borrowing money to finance a house purchase. The buyer is using money straight from a bank, credit union, or investment account to cover the price of the home. These funds could be saved up and ready, or they be freed up through a sale of other real estate.

If you have the money, buying with cash might seem simple and effective. Here are some important arguments for and against a cash purchase, so you can decide which one resonates with you.

The Argument For Buying With Cash

Assertive buyers may come in with cash offers just to compete successfully in a seller’s market. Their all-cash offers have an edge over the bids that are contingent on financing. This is because:

  • Sellers love the certainty and speed of closing on an all-cash deal.
  • A buyer sweetens an offer by putting down more in initial earnest money, the full down payment, and the home price. It’s the idea that “cash is king” in today’s real estate market.
  • Neither the buyer nor the seller is forced to wait around for mortgage processing and possible surprises that could cause an underwriter to balk at the final approval stage. So, a cash deal bypasses the main delay points on the way to closing.
  • For the buyer, a cash deal means avoiding the paperwork, fees, stress, and scrutiny of the mortgage application and underwriting procedures. It means saving tens of thousands of dollars in interest that the bank would have charged over the course of the mortgage. It means not having to pay for the lender’s title insurance policy, and not even thinking about the costs of private mortgage insurance.
  • When the home’s title is free of a mortgage lien, its owner isn’t worried about potentially losing the house through a mortgage default.

You might find the idea of owning a house free and clear extremely compelling — especially if you or someone you know has endured the stress of a foreclosure. And you can always apply for a loan against your home later, or perhaps rent out part of the home, drawing new funds from the asset you have purchased.

It goes without saying, but we’ll say it anyway: If you pay cash for the house, do hold on to ample cash for utilities, emergencies, repairs, routine upkeep, taxes, association dues if applicable, and insurance.

The Argument Against Buying With Cash

Close up image of Lincoln's picture on the five dollar bill.

All-cash offers are getting tremendous attention in this competitive market. Let’s examine this.

Yes, all-cash purchases are happening at an elevated rate now. That said, few ordinary home buyers can make them. That’s because home prices are rising much faster than the population’s overall income growth.

As of February 2022, the median home sells for $354K — a sum which most people don’t have handy. So, even now, the vast majority of home buyers finance their home purchases. Clearly, cash is not a must-have to buy a house in this market.

What’s more, even when they are in the position to make all-cash offers, many buyers won’t. Why not?

  • Many homeowners prefer to sweep their cash into their 401Ks or other tax-savvy retirement accounts. While it’s delightful to have a fully paid-for house, it’s at least as delightful to have a healthy IRA that leads to retirement as early as possible.
  • Some buyers want to hold a hefty amount of cash in interest-bearing savings accounts. They might plan to tap these funds for travel, education, or major home improvements.
  • Some buyers might do all of these things, plus buy fine art or non-traditional assets.
  • Mortgage interest may be tax-deductible, too. A tax expert can advise on whether its best to itemize and deduct mortgage, or to take the standard deduction. Peruse the current IRS information on mortgage interest deductions to account for any updates to the tax code.

Based on the factors we have just reviewed, many buyers who have the option to pay cash take out a mortgage loan instead. During times of low interest rates, it can make a lot of sense to take out a mortgage and invest in assets with the potential to deliver strong returns. If a homeowner gets a mortgage with a 5% interest rate, while investing in assets that return 7% or more, those investments earn more yearly income than the homeowner pays to obtain the mortgage loan. In such cases, investing cash rather than putting it all into a house saves the homeowner money overall.

Pro tip: The mortgage process has other benefits, too. There’s value in the vetting and due diligence that an underwriter does when the buyer takes out a mortgage to buy the home. Together with the lender, the home buyer can benefit from an objective assessment of the buyer’s financial health, the value of the house, and the integrity of its chain of title.

Hybrid Approach: The Argument for Having It Both Ways

A middle way is to put more money on a down payment than the standard 20%. If you purchase this way, you can have the peace of mind of paying a large chunk of the house off, while still financing your purchase.

And say you go for a 30-year, fixed-rate mortgage — the most popular mortgage loan product — at an attractive rate. If and when you wish, you can always “overpay” — pay it off faster than required. This way, the bank will change less interest over time. It’s simply a matter of setting your monthly mortgage auto-pay feature to take out another $100 a month or more from the outstanding loan principal.

You could opt to overpay in some years, and just make the minimum monthly payment through other years. You can adjust this yourself, depending on other purchases you need to make, or how your investments are faring from year to year.

Pro tip: These days, buyers can even make all-cash offers and finance them too.

Decision Time: Should You Buy A House With Cash?

As you can see, it all depends! Living mortgage-free means you hold your home’s full equity. Saving some of that cash means you have more money to spend or invest. Each decision results in its own type of value. There is no set-in-stone rule here. It’s just as possible to go ahead with a hybrid plan, or refinance later.  

Buyers in strong financial positions are usually eligible for the lowest available mortgage rates. This makes it especially likely that investing in equities will more than make up for the mortgage interest over the years ahead.

Individual circumstances could change this equation. So, if you are in the enviable position of having the option to make a cash offer, consult with your accountant or financial adviser. And congrats to you for being a remarkable saver!

Supporting References

Dr. Jessica Lautz, VP of Demographics and Behavioral Insights at the National Association of REALTORS®: Economists’ Outlook – 40th Anniversary Top 10 Highlights [From the NAR] Profile of Home Buyers and Sellers (Nov. 11, 2021).

Molly Grace for Rocket Mortgage®: If You Can Pay With Cash, Should You? Pros and Cons of Buying a House With Cash (Jan. 31, 2022).

Lauren Nowacki for Rocket Mortgage®: The Average Mortgage Length In The U.S. (Nov. 19, 2021).

Ben Luthi for US News & World Report: Adjustable- or Fixed-Rate Mortgages: Which Is Better? (Dec. 6, 2021).

IRS Publication 936: Home Mortgage Interest Deduction (current).

Photo credits: cottonbro and Karolina Grabowska, via Pexels.