Why is it cheaper to buy a house with cash?

Paying for a home with cash eliminates the need to pay interest on the loan and any closing costs. Lenders don't charge mortgage origination fees, appraisal fees or other fees to evaluate buyers, says Robert Semrad, senior partner and founder of the Chicago-based bankruptcy law firm DebtStoppers. Of course, you can borrow with the capital of your home, through a home equity loan, a home equity line of credit, or, if you're at least 62 years old, a reverse mortgage. However, as Garry points out, all of these options have drawbacks, such as fees and borrowing limits, so they should not be taken up casually.

If you really want to insure that home, keep in mind that another buyer might feel the same way. If that's the case, a cash offer can make all the difference. A recent Zillow survey revealed that 41 percent of real estate agents say that making a cash offer is the best strategy for winning a bidding war. However, remember that real estate is a hyperlocal industry.

If you're buying in a busy housing market like Austin or Denver, paying in cash may be the ideal option. If you're buying in an area where sales have been slower, you may be just as successful at winning if you get pre-approved for a mortgage. Yes, buying a home with cash saves you money in interest. However, those savings could be less than what you could earn with your money by investing it.

Paying cash for a home isn't always the right financial decision, even if you have a few hundred thousand dollars accumulated collecting dust. Compare that to the current average 30-year mortgage rate of approximately 4.2% at the time of writing this article, and it quickly becomes apparent the potential investment gains you could have lost, assuming you had taken out a mortgage and invested the money you would have spent on housing in a well-diversified portfolio of stocks and bonds. Without a monthly housing payment, you can channel more money into income-generating investments, travel, or simply a better quality of life. In addition to saving on the lifetime cost of a mortgage, paying for a home with cash can save money in other ways.

For example, if you plan to move in about five years from now, the value of the home may not have a chance to appreciate. In a hypercompetitive housing market, prospective buyers are doing everything they can to close deals on new homes, and for some, the winning tactic is a cash offer. If you're thinking of buying a house with cash or taking out a mortgage, you can use Bankrate's mortgage interest tax deduction calculator to understand how a mortgage will affect what you owe. While many more retirement-age Americans have housing debt than 20 years ago, according to data from the Federal Reserve, many financial planners and retirees see at least a psychological benefit in retiring debt-free.

Beyond the tens of thousands of dollars saved in interest, homebuyers take advantage of a host of other benefits when they pay in cash. There are fewer foreclosure fears if you don't owe a lender (although you could still lose your house if you don't pay property taxes, for example) and you don't have to worry about not paying a mortgage loan, which could adversely affect your credit. Eliminating mortgage payments tends to reduce the higher monthly expense of most U.S. households.