Should you pay cash or take out a mortgage to buy a home?

No matter where you are in your real estate journey, the idea of never having to make a rent or mortgage payment again is probably pretty appealing, right?

If you pay cash to buy your next home, that could be a reality.

Not only will paying cash to buy a home give you get a leg up on the competition when you place your offer, but you could shift your financial priorities to saving for retirement, padding your emergency savings account and paying down higher interest debt.

While paying cash to buy a home has obvious benefits for some — foreign residents who have never easily qualified for U.S. mortgages or high net-worth individuals who could prefer not to have a mortgage, cash transactions still make up a minority of home purchases.

In 2016, Zillow’s Consumer Housing Trends Report said that only 23 percent of U.S. homebuyers paid cash for their homes.

Whether you are debating an outright home purchase or wondering if there are benefits to getting a mortgage even when you have the cash in the bank, there are some factors that you should consider.

Should you pay cash for your home?

If mortgage interest rates are low and the market is stable, a cash investment can fast track your deal and help you stand out in a multiple offer situation.

“There are some real advantages to paying cash,” said Chris Sears, a broker associate with Team Sears. “It gives sellers comfort and allows you to pay a lower price, or get the deal if there is competition. There are also some properties that aren’t financeable using traditional, residential lenders due to zoning issues, deal history or building condition.”

Stephen Chertok, a real estate broker in downtown Chicago, said that there is a lot of upside to paying cash for a property.

The only downsides, according to Chertok, are when the purchase would cause a disruption in necessary cash flow or if the investment portfolio and tax implications for the buyer can be improved by borrowing.

“I’ve had several cash buyers over the years ranging from small but successful households to multi-millionaires to real estate investors,” he said. “In each case, the cash purpose is a different proposition with different motivations, intentions and financial goals.”  

Then, there are some buyers who pay cash not because they want to – but because they have no other choice.

One Chicago homeowner paid cash for her first home because she had taken a break from the workforce to care for her young children and could not show ten consecutive years of employment history in order to qualify for a mortgage.

The second time, she invested the proceeds from her first home into a cash offer on her next home.

In another case, a successful Chicago couple wanted to take out a mortgage to bridge the gap between selling their home and buying a new one without liquidating their assets.

While the husband had retired and the wife was still working, the couple was financially secure and confident in their ability to qualify for a mortgage.

Much to their surprise, they were denied a mortgage because the husband was considered “unemployed.”

While they were eventually able to liquidate assets to purchase their new home, it was nonetheless a shock to be denied a mortgage and find themselves on an unexpected path to home ownership.

Should you get a mortgage to buy a home?

“For most people, the biggest variable is where [a buyer] would get the best return on their invested money,” said Jim Gramata of The Gramata Group. “When someone is buying a primary residence, the return would normally come through appreciation, not through income. An investment property or income producing property like a two-flat could include both appreciation and rental income (return) over time.”

Gramata generally discusses the benefits of leveraging a mortgage with most of his clients who plan to make a home or property purchase.

“If a buyer has $500,000 cash to invest and can buy one home for $500,000 cash, or take that money and put 20% down on a multiple property purchases, in most cases the latter example is the best long-term investment,” said Gramata. “The investment is best from both an income producing standpoint and from an appreciation standpoint.”

In this scenario, the buyer could purchase five $500,000 properties at 20% down ($100,000 down for each $500,000 purchase) which would equal an invested equivalent value of $2,500,000.

If those investments netted a return of a modest 6%, on the of $2,500,000, the buyer would net $150,000 on their invested $500,000.  In three years, they would more than double their $500,000 invested.

“This is a simplified scenario but if you asked most people if they would you rather invest in $500,000 or $2,500,000 with the same amount of money, most would agree with the larger investment,” Gramata added. “Even if this same buyer only took $100,000 and bought their house and invested the remaining $400,000 in the stock market long-term, they’d make out way ahead of investing all of the cash in the one single property. The risks are much greater and the return on investment is much lower.”

Whether or not you want to buy a home in cash, you should always talk to a financial advisor who understands the complete picture of your personal financial situation and a real estate professional who can guide you toward the best property for your needs that is priced at fair market value.