The first question you might have is, “How on earth did you get yourself into a position to buy a house with cash?” Well, that’s really not the purpose of this article, but I’ll give you the quick gist of the last 6(ish) years of my life:
- I was going backwards financially and got mad – I paid off $40,000 in consumer debt
- I figured, “why stop here?” and I paid off my steal-of-a-deal house (that I bought for $75k)
- I stayed intense and built up $90,000 in savings (it’s pretty easy when you have no bills)
- I searched through thousands of ads to find the perfect deal, and bought an $81,000 house
Wow, those bullet points make it sound so simple. And to be completely honest, it really was. Sure, scrimping and saving and living below your means isn’t always a blast, but buying a house with cash sure is!
So that was the how. Now it’s time for your second question:
“WHY on earth would you buy a house with cash? Don’t you know it’s wise to use other people’s money??”
Blah, blah, blah…
5 Benefits of Buying a House With Cash
When I bought this house with cash last year, I was heckled by nearly every person I spoke to about it.
“Derek, really?? Don’t you know that it’s smarter to use the bank’s money? And interest rates are so low right now, why WOULDN’T you take out a loan??”
Basically, everyone looked at me with that, “wow, you must be stupid” face, and it was really starting to tick me off. Deep down in my soul I KNEW it was smart to use cash, but why? How could I convince everyone that I wasn’t as stupid as they thought I was??
Here’s what I came up with.
#1. I’m Not Paying Interest
If you bought a $250,000 house today and scored a heck of an interest rate of 4%, guess how much you’d end up paying for the house over that 30-year loan period? $430,000! Yikes!
You know how much I end up paying when I buy the home with cash? Exactly $250,000. 😉
For all you finance “whizes” out there, you’re probably thinking, “This guy is such a simpleton. He’s not even considering the time value of money! Inflation on average is nearly 4%, so why not borrow at the inflation rate and use today’s dollars to earn more on something else?”
The answer I have for you is two-fold.
- The inflation rate in the last 10 years has been 1.8%
- The banks are massive corporations. Many highly paid intellects figure out the interest rates that make them the most money. Do you really think you’re going to win by playing their game?? Who’s the simpleton here?
By plunking down $250,000 in cash, I’d effectively be paying $324,000 in inflated dollars. Still sounds a lot better than $430,000 to me!
Savings = $106,000.
#2. No Appraisal Needed
When I bought the rental, I didn’t need to pay an appraiser for their estimate of the home’s worth. Appraisal costs are basically mandated by the bank so you can let them know that the house is worth more than the amount you’re borrowing from them. It’s insurance that the bank is requiring YOU to pay.
I knew I was getting a good deal based on my hundreds of comps over the past year. There was no need for an appraiser to come tell me what I already knew.
Savings = $350.
#3. Ridiculously Low Closing Costs
Our closing costs on the house were $532. I laughed when I saw it.
Most of today’s closing costs are really just admin fees from the bank to process your paperwork:
- Origination fee (a large flat fee from the bank for the overall processing)
- Credit report fee
- Loan application fee
- Private mortgage insurance
- Initial interest
- Title services
- Property taxes
You know what I paid for? A small amount of property tax and title insurance. That’s it.
Savings = $2,000.
#4. Reduced Price
The house we purchased was a bank-owned foreclosure and it was November. It had been sitting on the market since July when it was initially priced at $120,000, and was recently just dropped to $89,900.
Banks aren’t in the business of selling homes. It’s just a by-product of their mortgage lending business and they get stuck with it occasionally.
I knew this bank didn’t want to take care of this house through the winter time. If I gave them a cash offer, I was betting that they’d bite.
My first offer was $80,000. They countered at their full asking price of $89,900 (which I thought was pretty strange, but I kept playing their game). I countered at $80,000 (if they weren’t going to move, why should I??). They countered at $86,500. I countered at $81,000 (cash). They accepted.
I’m fully convinced that cash got me a deal of at least $5,000. They knew that if they accepted my offer, they were going to sell the house. There wasn’t a third party that had to get in the way.
Savings = $5,000.
Paying for a house makes the initial process simpler, but it also makes life more enjoyable after the house is purchased. Think about it:
- I have no mortgage payment to make each month
- I don’t have to deal with the escrow fund (management of this is typically terrible)
- I can change home insurance companies simply and easily, without permission from the bank
- I pay my property tax just once a year
The only thing I need to worry about each month is picking up the $1,200 rent check and taking it to the bank. Love it!
Savings = Roughly $0.
#6. Peace of Mind
I saved the best for last. Peace of mind.
The bank has absolutely no idea that our rental house exists, and that makes my heart smile. 🙂
So many people have paid their mortgage faithfully for years, had something happen (sickness, job loss, you name it), and the bank took away their home. I refused to become one of those statistics. And you know the best way to avoid it? You keep the bank’s grubby hands out of your home!
Savings = Priceless
If you want the ultimate peace of mind, commit to buying your next home with cash. Sure, people will think you’re crazy, but it’s honestly one of the best feelings in the world and I highly recommend it.
Author Bio: This post has been written by Derek Sall, owner of LifeAndMyFinances.com. His motto: Get out of debt, save money, and be rich!