1. Pay cash
Perhaps the most obvious alternative to buying a house with a mortgage is buying one in cash
. Still, just because it’s obvious doesn't mean it is a realistic option for most people. With a cost of living that continues to rise
, it can be challenging to save enough money for a down payment, let alone enough to pay for a house in full.
However, if you find yourself in one or more of the following situations, paying cash for a home may be an option:
- You’ve saved a lot of money
- You’re buying in an affordable area
- You’ve inherited a large sum of money
Benefits to paying cash for a home
Of course, there are benefits to paying cash for a home. For example, making a cash purchase can save you headaches and money in the long run. More specifically, you may experience some of the following benefits by buying a home outright:
- Not paying interest on a mortgage loan
- Saving on some closing costs, such as a property evaluation fee or mortgage default insurance
- Not having monthly mortgage payments
- Enjoying being debt-free
- Closing faster on a sale
- Skipping an appraisal (unlike with mortgages)
A cash purchase also has advantages for the seller, particularly if there is a bidding war and they want to make a quick sale. A cash offer means they don’t need to worry about you backing out of the sale because you are denied financing.
Drawbacks to paying cash for a home
There are some key downsides to paying cash for a home. For example, tying up your money in a home and not having enough left in your bank account could be an issue if you encounter financial troubles down the road.
Suppose you get laid off from your job and you lose your income. If you’ve invested all your savings into a home, you may not have enough of a financial cushion. Alternatively, if your home needs repairs and all your money is tied up in the equity, you may have a tough time covering the resulting costs.
In addition to keeping money readily available for emergencies and other things, some people argue that there are better ways to use and invest money.
Even if you can pay cash for a home, you could still get a mortgage and invest your money for retirement. By investing the money
in a diverse portfolio, your rate of return may exceed the interest on your mortgage
, leaving you with more money. Deciding whether you should pay cash for a home or get a mortgage and invest your money elsewhere depends on your financial circumstances, the mortgage’s interest rate, your age, and more.