Here’s What Happens When You Buy a Home Without a Mortgage

Most people who want to buy a home can't afford to do so outright. Because of that, they finance their home purchases by taking out a mortgage loan. 

But you're not required to take out a mortgage to buy a home if you don't need one. Perhaps you're buying a home in an inexpensive market and have the cash to cover your purchase in full. Or maybe you received an inheritance and are able to use it to buy a home outright. 

When you buy a home without a mortgage, you simply hand over a check to your seller for your home's purchase price. Purchasing a home without a mortgage has certain benefits, so if the option is available to you, you may want to consider it. 

The upside of buying a home without a mortgage

When you purchase a home in cash instead of taking out a mortgage, you can reap savings in different ways. First, by not borrowing money, you don't sign up to pay interest on a home loan. Given that today's mortgage rates are pretty expensive, not taking out a mortgage could work to your financial advantage. 

The average mortgage rate as of this writing is 6.71% for a 30-year loan, according to Freddie Mac. Meanwhile, let's say you're buying a $300,000 home. If you pay cash, it'll cost $300,000. If you put down 20% and finance the remaining $240,000 at 6.71%, you'll end up paying about $318,000 in interest alone. That's more than the cost of the home itself.

Also, when you take out a mortgage, you're charged closing costs to finalize your loan. Those can amount to 2% to 5% of the sum you're borrowing in many cases, which is yet another added expense. 

In fact, recent research from The Ascent shows that the average U.S. home buyer pays $6,905 in closing costs. That's money you'd probably rather not shell out if you can avoid it. 

What's more, by purchasing a home without a mortgage, you can give yourself an advantage over other buyers when several of you are competing for the same home. There's always the chance that a mortgage will fall through, leaving a seller in the lurch. If you come in as a cash buyer, the seller takes on less risk. So a seller may be more apt to work with you if you're not relying on a mortgage to purchase their home.

Finally, it takes time to finalize a mortgage, which can make it so the closing process takes a good 30 to 60 days or more from when you enter into a home purchase contract. When you buy a home in cash, you don't have to wait for a loan to be finalized. That means you can commonly close on your home more quickly.

Should you buy a home without a mortgage?

Buying a home without a mortgage does mean tying up a lot of cash in a home. That means you won't be able to do other things with that money, like invest it, have it on hand for emergencies, or use it to renovate. 

But if you can afford to buy a home without a mortgage, it might not only save you money, but also make the process faster and easier. And in the case of competing offers, it might spell the difference between a seller choosing you versus your dream home going to someone else.