All-cash offer vs. mortgage: Positives and drawbacks

They say “cash is king” — and when it comes to making an offer on a home, sometimes the old adage holds true. An all-cash offer can give you an edge and make your offer more enticing to sellers when you're competing with other buyers against a shrinking supply of homes. But is ponying up cash for a home the best move or does a mortgage make more sense in the long run?

Wondering why cash offers are spiking in popularity? The answer is simple: Cash can be an attractive incentive for sellers to accept your offer .

When you buy with all cash, you and the seller can close the deal more quickly since there’s no waiting around for mortgage approval. And even better: Sellers don’t have to worry about a loan falling through at the last minute due to financing issues.

When you’re trying to buy in a competitive market, taking the all-cash offer route can help you stand out among other potential buyers. And if your offer is attractive enough, you may be able to skirt getting caught up in a bidding war , which can add stress, time and additional money to the homebuying process.

Making an all-cash offer may help you get the home you want, but you might make some trade-offs in the bargain.

If you’re able to pay for a home in cash, it may be worth considering. But it’s also important to mull over the potential benefits a mortgage can bring. Namely: The ability to build wealth over the long-term.

How? Instead of using a large lump sum to purchase a house outright, you may earn more money by investing your cash in the market through a brokerage like Ally Invest . While you’ll pay interest on your mortgage, it’s possible your investment portfolio will have a higher rate of return than your loan APR (annual percentage rate) — especially when interest rates are low. However, be sure to do your research and factor in the risks associated with investing to make sure it's the right decision for your situation.

Also, having a monthly mortgage payment may not seem ideal if you're trying to live debt-free. But consider the numbers:

Say you want to buy a $300,000 home and have the full amount available to pay in cash. Instead of paying in cash, however, you choose to take out a $240,000 mortgage after putting $60,000 down. For this example, you choose a 30-year loan at 3.4%. If you never refinance and stay in the home, then you'd pay $143,168 in interest over the life of the loan.

Compared to the $1.8 million you might generate by investing, the interest costs on a mortgage don't seem that bad. Even if you factor in the expenses of owning and maintaining the home year to year, you may still come out ahead by investing your cash and getting a mortgage instead.

Keep in mind: While an all-cash offer can give you an edge amongst other bidders, it’s not the only way to grab the attention of a seller. Being prepared with a mortgage preapproval letter from a lender like Ally Home can help you stand out and show sellers that your finances are already in order.

Whether you're shopping in a hot housing market or one that's cooling off, you want to put your best foot forward when making an offer on a home. While cash offers are one way to do so, remember you can still be competitive and land the home you want with a mortgage — allowing you to retain more of your monthly income for other priorities.