National Consumer News

How to buy a house with cash


By Deacon Hayes, Clark Howard 

Many experts tout owning a home as an essential part of the American Dream. One of the problems with that dream is that it can come with a high cost. Taking out a 30-year mortgage on a home purchase can mean that the true cost of the home including interest paid can nearly double the original purchase price on the home.

For instance, if you buy a $250,000 home with a 5% down payment, and get a 30-year mortgage at a 4.00% interest rate, your total cost for that home if you choose not to pay it off early will be $408,191.

That’s quite a bit of money to be paying in interest, but there is a better way. Yes, you could take out a 15-year mortgage and slash your total home price down to $316,216 (assuming the interest rate stays at 4.00%) but even with a 15-year mortgage you’re still paying over $66,000 in interest on your $250,000 home.

So here’s a better – and cheaper – idea: Pay cash for your home.

Read more: 16 foods you never want to put down your garbage disposal

Cash buying is possible

Sound unrealistic? Consider this scenario of a couple who chose to rent for six years and pay cash for their $250,000 home.

Rob and Jennifer both work. Rob makes $50,000 a year, and Jennifer makes $40,000 a year. The couple decides to live frugally off Jennifer’s income while putting Rob’s after-tax income of $3,500 a month into the bank.

$3,500 a month x 72 months = $252,000, not including interest earned.

How can they survive on $40,000 a year? By living on a frugal budget. There are many ways to cut down on monthly expenses so that you can save more money. By renting instead of owning (as you save up cash for your house), and by keeping a lid on fluctuating costs such as grocery, entertainment and transportation costs, you can live on less and increase your savings rate at the same time.

Here’s an example of how our fictitious couple, Rob and Jennifer, cut their expenses down so that they could live on Jennifer’s $40,000 a year income and put all of Rob’s earnings into savings and pay cash for their house:

Jennifer’s income of $40,000 and the couple’s annual expenses

Taxes: $13,900 per year

Rent: $600 a month/$7,200 per year

Utilities: $150 a month/$1,800 per year

Food: $250 a month/$3,000 per year

Entertainment: $75 a month/$900 per year

Transportation Costs: $300 a month/$3,600 per year

Miscellaneous: $300 a month/$3,600 per year

Giving: $500 a month/$6,000 per year

Total: $40,000

Since Rob and Jennifer are just starting out and don’t have kids yet, it’s notably easier for them to live frugally and save more. But even those who already have kids or have already bought their house and want to pay it off early have some options for spending less and saving more.

Here are some areas where most families can cut down on expenses so that they have more money to put toward their mortgage payoff.

By controlling costs in just these areas alone, it’s easy to add 10% or 20% to your savings rate and put that money toward saving to buy a house with cash or to pay your existing house off early.

Other benefits to buying a house with cash

We’ve pointed out the astronomical monetary savings that come with saving up to pay for a house in cash, but now that you’ve paid for your house with cash and have all of this extra money, what should you do with it and how can buying a home with cash help you in other areas of your life? Here are some ideas.

Increase your retirement savings

With the thousands of extra dollars you’ll have per year by not having a house payment, you can maximize contributions to your 401(k) plan or your IRAs. The more money you have invested and saved for retirement, the less you have to worry about living on a shoestring budget during your retirement years.

Invest for financial independence

Without a house payment, you’ll have an abundance of extra cash that can help you achieve your dream of financial independence. By choosing the type of investment(s) that you want to use to grow your non-retirement savings and putting the money that would’ve gone toward a mortgage payment into those investments, you’ll be on the fast track to financial independence.

Save for the kids’ college funds

A college degree can easily run into the six-figure range. Without a mortgage payment, you’ll have an option to increase the amount of money you put toward your child(ren)’s education substantially, helping them to start out on secure financial footing.Clark’s 529 plan guide will help you get started.

Save for the next big dream

Now that you’ve paid for your house in cash, what’s next? A new boat? A vacation home? Determine your next big “pay with cash” item and watch your savings account grow rapidly as you chase your next big dream.

The benefits to paying for a home in cash are much more than financial. The peace of mind that comes with owning your home outright truly is priceless.

Follow the link for more information Clark Howard

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