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All-cash offer vs. mortgage: Positives and drawbacks

What we'll cover

  • Buying a house in cash vs getting a mortgage

  • Learn the advantages of all-cash offers

  • Benefits of getting a mortgage

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?

Advantages of all-cash offers

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.

Is all-cash always right?

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

Before you lay your cards (and your cash) on the table, take these factors into account:

  • Rising home prices: Paying cash for a home could make sense when prices are stable. But making an all-cash offer could quickly drain your reserves when home prices are skyrocketing and you’re trying to land a home you really want in a super competitive market.

  • Loss of liquidity: Buying with all cash means you’re trading a highly liquid asset (cash) for a non-liquid asset (real estate). Since all that money is now tied up by your home, you lose the ability to quickly access it should you need to.

  • No tax breaks: Having a mortgage gives you the ability to deduct interest paid toward the loan on your taxes, which can help reduce what you owe or boost your refund. You lose this benefit by paying all cash.

  • Less cash for homeownership or other priorities: The purchase price is just the beginning of what you'll pay to own a home. Other costs of homeownership include property taxes, homeowner’s insurance, homeowner’s association fees if you live in an HOA, maintenance, and upkeep. If you spend all your cash to buy the home itself, you’ll have less money left over to pay for the ongoing costs of owning it or for other financial commitments such as investing or other monthly expenses you may have.

When a mortgage makes sense

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.

In this same example, you decide to invest the remaining $240,000 cash balance in a portfolio of low-cost exchange-traded funds . Over the course of a 30-year period, let's say you earn a 7% average annual return. Even if you never contribute another dime to your investments, your money would potentially grow to approximately $1.8 million.

Build wealth with your mortgage. Mortgages come with inevitable interest payments. But by investing your extra cash, you could potentially cover the cost and make a profit. For example, let’s say you have $300,000 cash on hand and want to buy a $300,000 home. Instead of paying all cash, you put down $60,000. A $240,000 mortgage with a 3.4% rate leaves you with some interest. You would pay $66,712 in interest over the course of a 15-year mortgage, $91,105 over 20 years, and $143,168 in interest over 30 years. This would leave you at a total mortgage of $306,712 in 15 years, $331,105 in 20 years, and $383,168 in 30 years. But simultaneously investing $240,000 cash at a 7% annual return will make you some money. A $240,000 cash investment with an annual return of 7% would land you $662,168 in 15 years, $928,724 in 20 years, and $1,826,941 in 30 years. Over the span of a 30-year mortgage, your investment earnings may end up being more than the cost of your mortgage interest, earning you $1,663,773. Over the span of a 20-year mortgage you may earn $837,619, and $595,456 over the span of a 15-year mortgage.

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.

King cash or mortgage majesty?

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.

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