Forgoing a home loan can have benefits but may not be the right choice for everyone.
Fidelity Wealth Management
Key takeaways
- In a competitive market, an all-cash bid may help you beat out other buyers, as well as close quickly and cut costs.
- Buying a home without a mortgage ties up a large amount of cash in an illiquid asset, while taking out a mortgage could leave you with more cash for short-term needs and other investments.
- A financial professional can help you assess what might be your best option for your family’s situation.
When mortgage rates were historically low, many buyers who could have afforded an all-cash deal opted for loans they could borrow at low rates. However, as interest rates rose to levels not seen for decades, the cash offer began to seem more appealing. Cash purchases accounted for about 34% of US home purchases in 2023, the highest level since 2014.1
There’s no question that skipping a loan can save you a significant amount in interest and other costs. If you bought a $1 million home with 20% down and opted for a 30-year fixed mortgage at the recent rate of 7%, for example, you’d pay over a million dollars in interest over the course of a 30-year loan. Plus, an all-cash offer might help you beat out other buyers and speed up the purchase process.
Even if you have the funds readily available, skipping a mortgage might not always be the best move. A mortgage might help you buy a property that you otherwise wouldn’t be able to afford with only cash on hand, and you may be able to deduct interest payments on your taxes, assuming you itemize. Here are some things to consider before you make an all-cash offer.
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How hot is the local housing market?
Perhaps the biggest benefit of paying cash is that it helps you stand out with sellers. Even as mortgage rates rise and homebuying has slowed down, competition among buyers remains fierce in some pockets of the market. “There have been many competitive bids on homes that high-net-worth individuals want, so you may get pushed to the front of the line if you come in with an all-cash offer,” says Michelle Caffrey, an advanced planner with Fidelity. Plus, with no mortgage approvals to wait for, the seller might even be willing to accept a lower price if there are no contingencies attached to the offer. You could also avoid numerous fees often associated with home loans, such as origination and underwriting fees. “From a cost perspective, you can’t really beat an all-cash offer,” notes Caffrey.
What else are you doing with the cash?
If all or some of the money you’d need to use is currently invested, selling those investments could potentially trigger capital gains taxes—and you may also forgo future earnings on the assets. “Volatile markets can make for an inopportune time to sell,” cautions Caffrey. Moving to cash during times of volatility could have a negative impacton long-term portfolio returns. If you only need temporary liquidity, you may want to consider alternative options to come up with cash without selling securities, such as a securities-backed line of credit. If over time you think you can earn more on your investments than the interest rate on a mortgage, you may want to consider keeping your money in the market and taking a loan to purchase the home, Caffrey suggests.
How much cash will you have post-purchase?
New homes can come with hefty new expenses. Will you want or need to do renovations on the new place? Are you planning to buy new furniture? Especially if you’re moving into a bigger home, you may also be facing higher annual maintenance and other carrying costs. Borrowing to buy a home can free up more cash and give you more flexibility. “You’re not tying your hands if you take out a mortgage,” Caffrey adds. On the other hand, taking out a mortgage can make it more difficult to borrow additional money in the future due to debt-to-income ratio limits.
How valuable are the potential tax savings?
By paying cash you lose a potentially valuable tax write-off in the mortgage interest deduction. Mortgage interest may be deductible on mortgages up to $750,000 for taxpayers who itemize (your property tax payments may also be deductible, regardless of whether you have a mortgage). However, the value of the deduction is based on your marginal tax rate and if you don’t have any other itemized deductions, it may be advantageous to claim the standard deduction, in which case there is no benefit to the mortgage interest deduction. The standard deduction for the 2024 tax year is $14,600 for single taxpayers and $29,200 for married couples filing jointly.
Moreover, Caffrey points out that the deduction can cut your mortgage costs, not eliminate them. “At the end of the day, mortgage interest expense is increasing the cost of the home, so you have to decide if it makes sense to pay that expense,” she says.
Your overall financial picture
Caffrey recommends discussing the “before and after” of how paying cash would affect your entire financial picture, including your future retirement needs, your current cash flow, and your investment portfolio. If you’re everunsure, consult with a financial professional about what might be the best move for your unique situation.
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