It’s a question every potential homeowner asks: Should I take out a mortgage or pay in cash? The answer, as with every major financial decision, is it depends. It depends on mortgage rates. It depends on your available funds. And it depends on other personal and financial factors.
Before deciding, let’s consider what buying a home in cash really means.
Why more buyers are considering paying in cash
The monthly median mortgage payment has increased 20% since 2021, now sitting at around $2,225—the highest on record in more than two decades.1
The increase is due in large part to interest rate hikes over the past couple of years, combined with a recent rise in home values. While local housing market trends vary, from May, 1992 to December, 2024 home prices increased on average around 5.4% year-over-year.2
So now current homeowners—particularly those who secured a sub-3% rate at the beginning of the decade—may be less incentivized to sell, and current homebuyers are stuck wrestling with historically high home prices and monthly payments.
As a result, home inventory remains relatively low, and the barrier to entry for new homeowners stays high. Given all that—high mortgage rates, high home prices, and low inventory—those who can are considering paying in cash.
Don’t you need a mortgage to buy a house?
No, you don’t. In fact, paying in all cash can make you an even more attractive homebuyer to some sellers, and it’s not all that uncommon.
Around 32% of homebuyers in 2024 opted for all cash purchases.3 This option can be particularly appealing for older homeowners looking to sell their large family home and downsize into a condo or single-level residence.
Besides selling an existing home, some homebuyers may be able to purchase a new home outright with their savings, investments, or a large windfall like an inheritance, among other reasons.
No matter how you’re buying a house, you will still likely have to provide proof of funds (POF) documentation. That paperwork will verify your ability to cover the cost of the home outright and may be required by the real estate agent and home seller.
Just remember, if you do pay in cash, a home costs more than what’s on the “for sale” sign. Other expenses to consider include:
- Taxes
- Closing costs
- Real estate agent’s fee
- Home inspection (if you choose to get one)
- Moving costs
All in, prepare to spend around 2% to 5% of the home’s value in additional costs. Though, without a mortgage, you may be able to save on some of these final closing costs, too.
You’ll also want to set aside money for certain recurring costs like property taxes and homeowners insurance. Typically, when you take out a mortgage, the lender will set up an escrow account to cover these expenses. But since you’ve paid in cash, you’ll have to pay out of pocket or set up a third-party escrow account.
What’s the advantage of paying cash?
First and foremost, paying with cash means you avoid a mortgage altogether, which is certainly an advantage if you’re concerned about current mortgage rates or prolonged monthly payments.
A cash sale also tends to speed up the closing process because buyers have fewer hoops to jump through. With a quicker closing and less uncertainty about lender approval, buyers may be more willing to negotiate the price, agree to additional terms, or move your bid to the top of the pile—avoiding the potential of a bidding war to commence.
When you pay in cash, you also bypass any credit checks or direct hits to your credit score.
Plus the home is yours outright, and you can begin building equity in it right away. You won’t have mortgage payments to account for in your monthly budget, and you won’t accrue interest over time.
Are there advantages to taking out a mortgage, even if you don’t have to?
When you take out a mortgage, you don’t have to worry about paying for the house all at once. All you’re responsible for are the closing costs plus the down payment, which can be as little as 1% or traditionally closer to 20%. Each month, you’ll make payments toward the home as the mortgage accrues interest, allowing you to keep your savings and investments intact.
Here’s where your personal preference and financial goals can play an important part in your decision whether to obtain a mortgage or pay all cash:
For example, say you have the option to pay cash outright for a $500,000 house or put $100,000 down and take on a $400,000 30-year fixed-rate mortgage at 6%.
Option A (pay cash): The home is yours—no interest accrues, and there’s no monthly payments to budget for.
Option B (take a mortgage): You’ll need to make monthly payments until you pay off the loan. That’s around $2,400 per month out the door before insurance and taxes. At the same time, you can invest the $400,000 not spent on your home.
Now let’s assume that $400,000 earns an average annual return of around 9%—a touch conservative compared to the 10% average annual returns for the S&P 500 over the last 30 years.4 After 30 years, if you had invested that $400,000 in a fund that tracked the S&P 500 with no additional investments, you’d end up with approximately $6.58 million in returns gross of fees.5 Just remember: the past won’t always look like the future, and those calculations don't include capital gains taxes or fees.
While all that’s happening, you’re still paying your mortgage. After 30 years, you’ll have made 360 payments (assuming no additional payments on principal) for a total cost of ownership at $963,352.76 ( $463,352.76 in interest, plus the $500,000 purchase price).
So once you account for everything, you may find it more lucrative to take out a mortgage and invest the rest.
But just keep in mind: Like most financial decisions, the choice isn’t just about numbers; it’s personal. For some homeowners, the peace of mind a paid off home brings is worth covering the cost with cash upfront, even if, technically, they may be able to benefit more from investing it instead.
If you’re still unsure, speak with a financial professional who can review your specific circumstances and provide more tailored guidance.
Either way, don’t skip your due diligence
Whether you choose to pay in cash or take out a mortgage, you’ll still need to consider a few things before placing a bid:
- Your full homebuying budget and ongoing expenses (property taxes, insurance, utilities, upkeep, etc.).
- Whether the house is a good fit for your family and how comfortable everyone will feel living there.
- Most lenders will also want a home appraisal to help verify the asking price of a home. They’ll also require that the borrower meets certain financial criteria regarding their work history, income, debt-to-income ratio, and other factors.
- Lenders will also typically require a homeowners insurance policy. Paying all cash means no homeowners policy is technically required, but that doesn’t mean you should skip out on getting adequate coverage for your home.
- As a cash buyer, it’s up to you to determine what best fits in your budget, as well as include certain contingencies (like a home inspection or appraisal) in your offer.
The takeaway
Choosing whether to pay cash or take out a mortgage isn’t a one-size-fits-all decision
If you have the funds to do so (without jeopardizing your financial wellness or long-term goals, like retirement), it may make sense to pay cash for your next home—especially if you aren’t happy with current mortgage rates or need a competitive edge.
Alternatively, leveraging a lender may help free up more of your assets to pursue other goals (like investing towards retirement).
With any major financial decisions, it’s always a good idea to weigh your options carefully, consider your full financial landscape, and speak to a financial professional if you’re unsure which course of action works best.
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