Posted On Apr 02, 2022

Most people who buy a home can't purchase it outright in cash. That's because homes can cost hundreds of thousands of dollars, and most people don't have that amount of money just sitting in a bank account. Instead, home buyers commonly take out mortgages to pay off a home over time.

But what if you do have enough cash at your disposal to purchase a home in cash without having to finance it? In today's housing market, where real estate inventory is extremely limited, cash buyers have a huge advantage over buyers who need a mortgage. Sellers are usually more inclined to work with cash buyers since they eliminate the risk of a deal falling through due to not being able to obtain financing.

Is paying cash for a home a good idea, though? While it could work to your advantage, there's a clear drawback to consider.

The downside of paying cash for a home

A cash offer on your part could give you a serious edge over competing buyers. But there's a danger to buying a home in cash, and it's tying up too much money in that property.

It may be possible that by emptying out your savings and liquidating investments, you can buy a $300,000 home outright without needing a mortgage. But what happens if a need for cash arises down the line? At that point, you could end up in a jam due to having all of your money tied up in your home.

Remember, homes are considered fairly illiquid, which means it isn't easy to convert a home into cash. Stocks, by contrast, are very liquid -- you can generally sell stocks on a whim, and while you might sell at a lower price than what you paid, the option exists. If you need to sell a home, the process could take weeks, if not months.

A strategic way to pay in cash

If you have enough cash to buy a home outright but you also don't want to keep all of your money tied up in a home, then there's a solution you can explore -- paying cash at the time of your closing but getting a mortgage after the fact. It's a process known as delayed financing, and it allows you to get the best of both worlds -- the option to edge out the competition with a cash offer without having to keep your money tied up.

With delayed financing, you apply for a mortgage once you own your home. Your ability to get approved for that mortgage will hinge on factors like your credit score, your job status, and your income. But this is no different than the process to get a mortgage to purchase a home with -- in either scenario, a lender will need to verify you're not too risky a borrower.

From there, you simply take out a mortgage and pay it off over time. Doing so could free up a nice amount of money you can sock away for emergencies or invest with.

Of course, the downside to taking out a mortgage is having to pay interest on that loan. When you buy a home in cash, you don't end up paying more for it in the form of interest. But if you don't like the idea of having all of your money tied up in your home, then mortgaging your property after buying it is a route worth exploring.

A historic opportunity to potentially save thousands on your mortgage

Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.

Our expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!).

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

Original post: https://www.nasdaq.com/articles/should-you-buy-a-home-in-cash-if-you-