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Paying Cash for a House: Advantages and Disadvantages

Updated on February 22, 2011
Should you pay cash for this house?
Should you pay cash for this house? | Source

After saving up for many years, you now have enough money to pay the entire cost of a new house. Yet, you still have the choice of a mortgage loan so you can spend your savings elsewhere.

In some cases, it may be better to pay cash for your house than to choose a mortgage loan.

Where the Money Came From

Though you may have a large amount of cash or can get it fairly quickly, consider where the money is coming from before spending it on a house. Certain accounts, such as a 401(k) or an IRA, charge fees for taking out the money early. The fee you incur may not be worth the emotional security you get from buying a home with cash. Conversely, if the money was kept in a regular taxed account without penalties, using the money for realty is an easier choice.

Other Money Uses

Consider what else you could use the money for besides buying a house. Although there is financial security from paying the entire house price at once, the money could be spent in a better way. This is especially important to consider if the entire amount of cash you have saved up will be used on the house purchase, leaving you none leftover. Saving for emergency expenses such as house repair and optional expenses and investments might be better considered instead of spending all the cash at once. Then again, if you would have a lot of money left over even after buying the house, cash is a better choice.

Split the Cost

If you're set on using your cash for paying for a house, consider splitting the cost between cash and a mortgage. If you spend more than 20 percent of purchase price in a cash down payment, you won't have to pay private mortgage insurance. Paying a larger down payment will also greatly lessen the monthly mortgage payments. Use this option if you still want a considerable amount of money saved up for emergencies and other expenses.

Paying Extra on Payments

There are benefits from getting a real estate mortgage rather than paying in cash. Home owners who pay mortgage interest get to deduct this each year. You can deduct a percentage of the interest paid based on your tax bracket. If you paid $5,000 in interest and are in the 30 percent tax bracket, you could deduct $1,500 at the end of the year. If you plan to pay a mortgage instead, use the extra cash you have to pay over the principal monthly payment to pay off your loan quicker.

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