I recently saw a question from someone who had $400,000, and she asked if she should buy a house outright for cash.  When most people (including me) say cash these days, we really mean digits in a checking account.

I am assuming that the lady asking the question actually wants to buy a house.  Assuming she lives in an area that does not have a high cost for housing, then it would probably be a good decision, as long as she plans to stay there for a while.  If she isn’t planning to live there for at least 7 years, then it is not worth the closing costs on both sides of the transaction.  Of course, there is the option of renting it out after moving out, but she did not indicate this would be the case.

I do believe she is in a relatively low cost-of-living area.  I don’t remember if she said what a new house would cost, but I am going to assume it was around $200,000.

Her question boiled down to whether to pay for a house in full (no mortgage), or to just pay down 20% and invest the rest.

I know that most people are not in this situation, but these types of situations are still good to think about.  Maybe you will be in this position one day.  Maybe thinking about this will motivate you to be more money conscious.

My recommendation here is to pay cash (digits out of a checking account) for the house.  I am assuming that this person has no debts to start with.

First, it is not as if she is going to deplete her entire cash balance.  It would be much more questionable then.  If she had $200,000 and was buying a $200,000 house, then it would be tough to go to near zero in the checking account, especially since houses can cost money with repairs.

Even if that were the case, I wouldn’t give a definitive “no” in paying cash for the house.  If she makes a good income and saves a lot each month, then she could likely build up her cash balance quickly, especially without a mortgage payment.

But given the reality of the situation that she would still have a lot of money left over after buying a house paid in full, I recommend doing it.

Second, she will have a reduced living expense.  She no longer has to pay rent.  She will still have to pay for property taxes, any association fees, and repairs, but it will be significantly lower.  Therefore, her cash flow should be good, assuming it was decent in the first place.  She will be able to save more money much more quickly than if she had a mortgage.

Third, I think having money ready is a great tool for negotiation when buying a house. This is something that I doubt she had thought about.  If you are buying a house that someone else bid $200,000 on, you may be able to get it for $197,000 with a really quick close.  You make the offer and say that if the inspection goes well, then you will close in 2 weeks.  This is very attractive to many sellers, especially if the house is already empty.  Even if they will end up with slightly less, they would rather go for the quick turnaround in many cases.  The longer the time between the offer being accepted and the time of closing, the better chance there is that something goes wrong.

The seller won’t have to worry about a bad appraisal or a loan not getting approved.  Waving that cash in front of the seller (not literally) is worth quite a bit.  You may be able to get a discount of 5% or more if the seller is desperate enough.

There is also a bonus for paying for a house in full.  I’m not saying this should be part of the decision, but it really is a bonus. When you go to closing, you hand over the cashier’s check if it hasn’t already been done through an electronic transfer.  You sign a few pieces of paper and walk out with the keys.

When most people go to closing, it can take up to an hour of signing paper after paper.  Most of this is for the lender.  If you don’t get a mortgage, most of this paperwork does not have to be done.

In conclusion, for this scenario, I would recommend that the woman buy a house without a mortgage, assuming she was planning to buy a house anyway.  She will still have money left over, and she can save up more quickly because of not having a mortgage.

Even at today’s low interest rates, I would take the sure thing.  You aren’t guaranteed a 4% return after taxes, but you are getting this equivalent if that would be the interest rate on a mortgage.

I wouldn’t borrow $200,000 at 4% to invest, so why would I do what is essentially the equivalent in this situation?  I’ll take the guaranteed “return” of having a house that is paid in full.