Paying Cash for a House? 4 Financial Risks You Take

Are you considering buying your next home with cash instead of financing it? While this certainly has the advantage of saving you the cost of interest, putting all your liquid money into your home can also have risky repercussions. To help you decide if paying cash or financing is right for you, here are a few of the risk factors cash homebuyers may face. 

1. Stretched Finances

Whether you plan to use a windfall, an inheritance, or the proceeds of your last home sale, using an entire lump sum for one purchase can stretch your finances. Even though you may not have a monthly payment, you also may not have the cash to pay for major repairs like a roof replacement, do any planned renovations, or cover insurance deductibles in an emergency. 

2. Opportunity Costs

Home mortgages tend to be among the least expensive ways to borrow money. And because they allow you to cheaply use borrowed funds rather than your own money, you can then do other proactive things with your own cash. For many Americans, this includes important activities like paying down more expensive debt, funding higher education, and investing for retirement. 

The valuable activities — opportunities — you cannot do because funds have been used for another purpose is called the opportunity cost of that purchase. Cash homebuyers should carefully consider the opportunities they may miss out on. 

3. Lack of Down Payments

Do you plan to buy another home when you sell this one? If buying again, you may find that not having cash in hand makes the next purchase more difficult. Will you have a sufficient down payment available to put on your next house? If not, you may end up not being able to move forward until long after you close on the current house. Keep a reserve available to facilitate the next move. 

4. Lower Credit Scores

Borrowing money and paying it back in a timely manner is how you build a good credit score. But if you don't take out any credit or loans, you can't build up a pattern of proper repayment. Not only does your score depend on a long and responsible history, it also needs a good mix of credit types. Since a home loan is the largest installment loan most Americans take on, not having one could impact your scores. 

Where to Learn More

Clearly, every buyer should carefully assess the best use of both cash funds and borrowed funds before buying real estate. The best place to start is meeting with a home financing provider in your area today. With their guidance, you can find the best path for your personal circumstances. 

To find out more, contact a home financing service such as FNCB Bank.