You can technically use a credit card to buy a house, but you probably shouldn’t. Credit cards usually have much higher interest rates than other financing options, particularly if you use a cash advance. However, a credit card may be the only option available to homebuyers who need a little extra money to pay for closing costs, other fees, or part of the down payment.
The thought of buying a house with a credit card may sound crazy. And although it’s probably not the best to finance a home, it is possible if your credit limit is high enough. While this isn’t as straightforward as walking into a real estate agency with your credit card, the right credit score and cash advance may be enough to purchase a house (or at least part of it).
Does using a credit card ever make sense? A lot of that depends on why you are purchasing the home, how much other debt you have, and how quickly you can repay that debt. Keep reading to learn more about using a credit card in a real estate transaction.
Understanding down payment and mortgage
Before we delve into credit cards and their pros and cons, it’s important to understand how a home purchase is structured. There are effectively two options in buying a home.
First, you could pay all cash for the entire home. Second, you could pay for part of the house with a down payment and the rest with a mortgage.
1. Buying a home with all cash
Buying a home with all cash is the concept of paying for the house, closing costs, and taxes upfront with cash.
Many buyers prefer to pay all cash to avoid paying interest or because they don’t have the credit to qualify for competitive rates and terms. However, paying all cash has other advantages as well.
Paying all cash for a home means that you can pay everything upfront. This means no mortgage loan application is necessary, allowing the whole transaction to wrap up quickly. There is no need to provide a debt-to-income ratio or come up with your credit report in order to borrow money. Just provide the cash (through a wire transfer or certified check) to the title company, and you should be good to go.
Paying a home all upfront means that you don’t take out any debt. If the market goes down by any amount, you need not worry about the worth of your home becoming less than the debt you owe to the bank.
2. Buying a home with a mortgage
Most individuals in countries such as the U.S. and U.K. will look for a mortgage lender when they are buying a home. There are essentially two main advantages to doing this.
Less money needed
Obviously, those who can pay all cash for a home are few and far between. The median home price in the United States currently sits at around $400,000. Most people don’t have $400,000 to splurge on a home.
Rather they will pay as little as a 5% down payment in some cases ($20,000) and rely on a lender to supply the remaining 95% (a mortgage). Rather than having to pay everything upfront, they will make mortgage payments on their debt to the bank every month.
Better return on investment
One of the advantages of using a mortgage, or leverage, is that your return on your down payment can be a much greater percentage-wise than if you paid cash. If the value of the property moves up by 5%, and your down payment was only 5%, you can achieve a 100% return on your investment.
Want to take advantage of current home loan rates available in your area? Here are some recommended options for you to consider.
How can you buy a house with a credit card?
A credit card can be used to buy a home in multiple ways. While you can pay for the entire property and closing costs using just your credit card, the interest rates will be extremely expensive. To illustrate, a $300K mortgage with a 5% APR will have a monthly payment of around $1,600. However, if you pay with a credit card and have a 16% APR, it will cost you nearly $3,800 a month.
On the other hand, you can use your credit card to pay for a portion of the down payment or just the closing costs.
Buy the home all-cash using your credit card
Although the median home price in the US is close to $400,000, this doesn’t mean that ALL homes are $400,000. There are, of course, fixer-upper homes that can sell for as little as $25,000 or $30,000.
In this scenario, it’s possible to use your credit to buy the entire home through a cash advance. Most credit card companies will give you a cash advance of up to 30% of the amount of credit you are granted. If the home is worth $25,000 and your credit limit is $100,000, you should be able to get a cash advance for $30,000. This should be enough to buy the entire home.
However, you can’t just swipe your credit card with a machine owned by the home seller. You need to use a third-party title company or solicitor in order to legally transact the home in most markets. This can be done by purchasing a certified check (like a cashier’s check) and then bringing that check to your title company or solicitors for your deposit.
Keep in mind that you must enter both the cash advance and the interest on your cash advance into your ROI. A cash advance for a credit card can have a fee of up to 5%. Furthermore, the interest on the cash advance can be as high as 17% or more, depending on the credit card issuer.
This means that unless you expect the housing market to beat the interest rate on your credit card on a yearly basis (17%), it doesn’t make any sense. This works only if you are an investor looking to flip the home as soon as you finish fixing it up and in a hot market as well.
Buying a home with a credit card and using a mortgage
If you have good enough credit to buy a home entirely with cash through a cash advance, you have good enough credit to get a mortgage. This is a huge plus because mortgage interest rates will typically be much lower than credit card rates.
Use a credit card for closing costs
Some homebuyers may consider using a credit card to pay for closing costs. Closing costs are additional fees, such as taxes or conveyancing fees, that need to be paid in addition to the price of the home.
For instance, fees such as title company service, conveyancing fees, and tax are all considered closing costs. Sometimes, you can pay these with a cash advance to the title company, and sometimes you can pay some of these fees directly by swiping your credit card for those fees that accept credit cards.
Use a credit card to pay part of the down payment
Sometimes you might have almost enough cash for a down payment on a house but not quite enough. In this case, you can pay part of your down payment using a credit card.
For example, if the house is worth $100,000, and the down payment is 10%, your down payment will be $10,000. If you have only $8,000, you can use your credit card for the additional $2,000. However, using a credit card cash advance to pay for a down payment is not cheap even if you pay off the balance before the due date. Typically, cash advance fees are 3% to 5% of the amount you withdraw. So, if you borrow $2,000 and have a 5% cash advance fee, you will have to pay a $100 fee. If you don’t pay it by the due date, the interest will add up quickly. Using our $2,000 example, it would take you 6 years and six months to pay it off (assuming your minimum payment is 5% of the outstanding balance) and it will cost you $790 in interest.
The table below shows the cost of using your credit card to pay for closing costs assuming you get a cash advance and pay 5% of the credit card balance every month.
|Amount||5% Cash Advance Fee||Months to Pay||Total Interest||Interest + Fee|
Needless to say, paying for closing costs or a down payment with your credit card usually only makes sense if you can pay it back quickly.
Use a credit card for mortgage payments
When you receive a mortgage, you need to make monthly payments on both the debt and interest. Sometimes you can link these directly to your credit card to make the monthly mortgage payment every month and take advantage of any credit card rewards your card might offer. This is probably the most common way that people use their credit cards to buy properties.
Can you buy a house with a credit card for points?
Many people love the idea of racking up credit points offered by their credit card company. To do this, they take out large cash advances or use their cards to pay for a part of their homes.
However, it’s important to note that the points you are getting must be greater than the burden of credit you are taking on. Also, you probably won’t earn any points if you use a cash advance. Reward points are usually exclusively for regular credit card purchases. Also, maxing out your credit card accounts will usually hurt your credit score. Therefore, you should check whether you will earn any points with the transaction and take into account the cost of interest and any potential damage to your credit score.
Can you buy a house with a debit card?
Yes, a debit card works the same way. You can use your debit card to transfer cash to the title company or solicitor for the transaction.
How much credit card debt is okay when buying a home?
If you use a credit card to purchase a home, you must make sure that you can manage and pay off the credit card debt quickly. Without a fast repayment plan, you’ll be subject to high interest rates. Even if you can meet the minimum monthly payment, you should try and pay it off. If you are going to use a mortgage to pay for the house, try to keep your credit card debt as low as possible. Most lenders will only consider borrowers with a debt-to-income ratio that is at or below 43%.
How to buy rental property with credit cards?
In addition to buying a home and car with a credit or debit card, you can also buy a rental property. However, to ensure this is a good deal, make sure the rental yield from your property exceeds the interest you are paying on your credit card debt.
Can I use my credit card on a house before the closing date?
Yes, you can use your credit card to either take a cash advance to transfer the down payment to the title company or pay some of the closing costs before the closing dates.
- Buying a home with a credit card is possible, but it’s not as straightforward as one may think.
- There are two ways to buy a home, either all cash or using a mortgage.
- Buying a home in all cash is generally safer and quicker. However, your potential ROI on the down payment is much less should the market go up.
- Buying a property using a credit card to pay the full amount through a cash advance may only work if you can sell the property right away.
- You can use a credit card to pay part of the down payment, the mortgage payment, or closing costs.
- Credit points are great, but make sure you don’t have too much of a credit burden if you are going to use them.
View Article Sources
- What is a home equity loan? — Consumer Financial Protection Bureau
- Home Equity Loans and Home Equity Lines of Credit — Federal Trade Commission
- The Definitive Guide to Cash-Out Refinancing — SuperMoney
- Best Home Equity Investments — SuperMoney
- Reverse Mortgage vs. Home Equity Loan vs. HELOC: Pros & Cons — SuperMoney
- Is It Wise To Use A Home Equity Loan For Debt Consolidation? — SuperMoney
- What Is a Second Mortgage? (And How To Get One) — SuperMoney
- Home Improvement Financing: How to Finance Home Renovation (Updated 2022) — SuperMoney
- Home Equity Lines of Credit: Reviews & Comparisons — SuperMoney