Does it make sense to buy a house in cash vs. getting a mortgage? Perhaps you're interested in downsizing from a larger house to a smaller one and you have the equity built up. Or do you just have the assets needed to buy the house outright with no mortgage?
This is a big decision! And one you don't want to rush into.
Before I make any big decision, I like to run through the pros and cons.
So in this post, that's what we're going to do. We're going to discuss the pros and cons of buying a house in cash vs getting a mortgage.
Pro #1: Simplicity of the Home Purchase
When you buy a house in cash, the home purchase process can become a lot easier.
Firstly, you don’t have to apply for a mortgage! For anyone who has purchased a home before, you know the mortgage application and approval process can be long and tedious.
I remember the process of getting approved for our last mortgage. In order to get approved, I had to scan a crazy amount of papers.
With one set of 9 documents, I remember that I didn’t scan the 9th paper because it was blank. I figured, “why would they need a blank piece of paper?” By not sending over a blank sheet of paper (document 9 of 9), the complex mortgage process got held up even longer. For a blank piece of paper!
This is just a small example of the many many steps it takes from mortgage pre-approval to final closing.
Outside of the mortgage approval process, you can become more competitive in the home purchasing process as well. Some sellers prefer to work with cash buyers because they are aware of these arduous paperwork delays in the mortgage approval process.
As a cash buyer, you could beat out the competition and get the home you really want a lot easier.
Con #1: You Could Make More Money in the Stock Market
As an advocate of long-term buy-and-hold investing, there’s no denying that you could make more money in the stock market if you didn’t buy your home in cash.
The average stock market return over the last century has been around 10%. Now, that's definitely not every year, but on average, over the long term, the stock market is a smart and lucrative place to invest your money.
Let’s say you get a mortgage interest rate of 5% or 6%. One could assume you’d make more money investing it in the market versus buying your home in cash.
But there are many factors that play into this potential 10% long-term return:
- What you invest your money in
- The amount and type of investment fees you’re paying
- How much your financial advisor or investment broker charges you
- Your willingness to keep your money invested in good times and in bad times
- How successful you are at portfolio diversification and using tax-advantaged accounts like the 401k, IRA and HSA
Also, you need to ask yourself if you’re actually going to invest the money. With more money in your life, you may be subject to lifestyle inflation and end up not investing as much as you’d think.
Pro #2: Makes Saving for Retirement (or Early Retirement) Easier
When you buy a house with cash, you’ll have no mortgage. Yes, you’ll still need to pay for things like property taxes, homeowners insurance, HOA dues, utilities, home maintenance and much more.
But without a mortgage, your annual living expenses will be a lot lower.
For example, let’s say your annual living expenses are $80,000 per year with a mortgage. If you decide to buy a house with cash and avoid a potential mortgage payment (principal and interest only) of $1,000 per month, your annual living expenses are now $68,000.
When you’re investing for your retirement, it’s important to consider those annual living expenses.
If you need to cover $80,000 of annual living expenses, then you may need up to $2,000,000 in today’s dollars to cover your needs in retirement (using the 4% rule).
With only $68,000 of annual living expenses, you’d need only $1,700,000. That’s $300,000 less!
By decreasing your overall cost of living, you’re making it easier to save for retirement (or your early retirement).
Con #2: Home Equity isn’t Easy to Access
Our family has a paid-off house valued at over $500,000. That’s cool, but we don’t really have access to that half million. It is purely the perceived value of an asset we own.
So if you are interested in having access to more of your cash, buying a home outright versus getting a mortgage might not be the right move for you.
A couple of reasons you might not want so much money tied up in your home would be…
- Short-term needs: Like the funds needed in an emergency (job loss, car repairs, insurance deductibles, appliances breaking down, home repairs)
- Mid-term needs (3-10 years): There is a larger purchase you have on the horizon (home upgrades, car purchase, home renovations, weddings for your kids, larger trips or vacations)
While a paid-off house surely does provide a great sense of pride, it doesn’t offer much in the category of liquidity. You could get a home equity line of credit to access that cash if needed, but that process isn’t necessarily quick and easy.
You could always sell the house too if you need the money. And that is definitely not quick and easy.
Pro #3: More Money to Enjoy Life Now
Living mortgage-free undoubtedly allows you to enjoy more life now. With a lower cost of living, you can modify or upgrade your lifestyle so each of your days TODAY are brighter.
For example, when buying a house with cash vs getting a mortgage, one could have the option of …
- Going from a full-time job to a part-time job
- Becoming a stay-at-home parent for a period of time
- Spending more on vacations
- Upgrading your home so it’s more relaxing and enjoyable
- Giving more of your money to causes and passions you care about so you can be the change you want to see in your community, country and world
The benefits of a paid off house are plentiful.
Sometimes we get lost in maximizing our wealth that we lose sight of our maximizing our happiness. That’s where I think a paid-off house comes in.
Con #3: You Could Lose Mortgage Interest Tax Deduction
Depending on your financial situation, you could receive a mortgage interest tax deduction. And that could be another reason to get a mortgage on your house instead of buying it in cash. Any opportunity to lower your tax bill is a good enough reason for me.
Before the Tax Cuts and Jobs Acts of 2017, a lot more people did receive a mortgage interest tax deduction. But after that Act was passed, the standard deduction increased significantly.
In 2017, the standard deduction for married filing jointly was $12,700. For the 2022 tax year, the standard deduction for married filing jointly is now $25,900!
That would mean that your deductions (including things like your mortgage interest) would need to exceed $25,900 (if you’re married filing jointly) for you to want to itemize your deductions.
Evidently, 90% of Americans took the standard deduction last year. So before you can call this tax deduction a true “con”, make sure you plan to itemize your deductions. Otherwise, you’re not receiving any true tax savings.
Final Thoughts on Buying a House in Cash Pros and Cons
In the end, the decision to buy a house in cash is up to you! Do the pros outweigh the cons?
If having more access to your money and maximizing more of your wealth in the stock market is important to you, then getting a mortgage on your house is probably a smart move.
On the other hand, if you’re looking to simplify the home purchase process, have more peace of mind, and the ability to experience more life now, buying a house with cash is a path you should consider.
A great place to start would be to learn more about your potential payments and how that could affect your homeownership path. Check out sites like Credible to compare rates with the top lenders and then calculate what your mortgage payment could be.
With a little more information, you can make an informed decision instead of an impulsive one. After all, this may just be the biggest financial decision of your life.
What do you think about buying a house in cash vs. getting a mortgage? What are the pros and cons for you?
Please let us know in the comments below.