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paying cash

Is Paying Cash for a Home the Way to Go if You Can Swing It?


[Updated: Dec 11, 2020] Feb 14, 2020 by Matt Frankel, CFP
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If you're in the fortunate position to be able to pay cash for your next home, doing so might seem like a no-brainer. After all, wouldn't it be nice to live without a mortgage?

While there are certainly some good reasons to pay cash for a house if you can, there are some solid arguments to be made in the other direction. With that in mind, here are some of the pros and cons of paying cash for your home, and what you should consider before making your decision.

Advantages of paying cash for your home

The advantage of paying for your home in cash is obvious -- no mortgage. Owning your home free and clear is an excellent way to keep your monthly expenses as low as possible. You'll still have to pay taxes and insurance on an ongoing basis, but the out-of-pocket cost is almost certain to be a fraction of what you'd pay toward a mortgage.

In addition, all-cash offers are typically more appealing to sellers than those that come with a financing contingency. So, paying cash can make it more likely to get into your dream home.

Reasons you should still get a mortgage

On the other hand, a mortgage is generally considered to be a good type of debt. Not only is it backed by an asset that tends to appreciate in value over time, but it's one of the lowest-interest types of debts you can find. The average 30-year fixed-rate mortgage APR in the United States is 3.77% as of this writing. Compare that with 5.2% for a 60-month new car loan, more than 10% for an unsecured personal loan, and about 14% for a credit card.

In fact, financial planners often tell their clients to prioritize not only the repayment of other debts over their mortgage but to prioritize saving and investing as well.

Think about it this way: The S&P 500 has historically produced total returns of about 9.5% per year. If you can borrow money at less than 4% interest and earn returns of nearly 10%, wouldn't it be in your best interest to invest your extra cash rather than accelerate your mortgage repayment?

Key considerations

It's tough to give a definitive yes or no answer to the question of whether paying cash is a smart move. Simply put, there are too many variables that may or may not exist in your specific situation. With that in mind, in addition to the "good debt" argument, here are a few other things you should consider before deciding to pay for your home in cash:

  • Other debts: Paying for your home in cash isn't the best idea if it leaves you with other higher-interest forms of debt. If you can pay off your credit cards, auto loans, and any other debts you might have and afford to buy your house in cash, then you may want to consider it. But it's generally a smart idea to prioritize higher-interest debts before deciding to go without a mortgage.
  • Your credit score: If you have bad credit, you may find it difficult to obtain a mortgage, and if you can, you'll likely pay more for it. A borrower with a "fair" FICO score of 620 would pay roughly $82,000 more on a 30-year $250,000 mortgage than someone with excellent credit would. If you have so-so credit, that could be a good reason to consider paying cash.
  • Emergency fund: Don't pay for your home in cash if it leaves you without any accessible cash to deal with emergency expenses. Period. Financial planners generally suggest that you should keep three to six months' worth of expenses in a readily accessible place like a savings account. If paying cash for your house would take your savings below this threshold, it's likely not a great idea.
  • Retirement plans: If you're not on track to have enough money saved for retirement, it can be smart to use your cash for that purpose instead of paying cash for your home.

The Millionacres bottom line

The key takeaway is that while it can be a good idea to pay cash for your home, it isn't always the best move even if you do have the money.

Having said that, some people simply don't like the feeling of owing money, no matter what the reason. So, if being mortgage-free gives you peace of mind -- provided you don't have any other outstanding debts -- there's absolutely nothing wrong with using your cash to own your home free and clear.

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