The least cumbersome way to buy real estate is to pay cash.

If you've got the money, paying cash will save dollars by eliminating loan discount fees ("points"), loan application charges and loan origination fees (generally one percent of a mortgage). Settlement costs will also be reduced since there is no need to set aside escrow funds for the payment of taxes, private mortgage insurance or other expenses. The result is that a cash sale generally produces a lower recorded price because both buyer and seller face fewer financing expenses.

But if buying a home with cash has attractive aspects, there are also problems. The most basic is that few people have the dollars needed to buy a home without financing. But even when the dollars are available, buying for cash is not always a sound financial choice.

A home without a mortgage is a home without a major tax deduction. If liquidity--the immediate availability of cash--is important, cash deals are not the way to go since real estate equity (the value of the property less any mortgages or other claims) can only be freed by refinancing or through the outright sale of the property, two expensive ways to raise capital.

Given the balance of benefits and problems, when should people buy real estate for cash? The answer depends on two central factors.

Wage Stream. From the time we enter the work force until retirement most of us expect that personal income will gradually rise with experience, training and seniority.

This means that for individuals at the beginning of the wage stream, buying real estate for cash is a poor strategy for three reasons. First, a mortgage, particularly one with fixed monthly payments, will be repaid in future years from a larger income base and thus become relatively more affordable. Second, at the beginning of the income stream individuals tend to make major consumer purchases--furniture, appliances, etc.--which are generally financed at rates above those charged for mortgage loans.For example, if mortgage rates are 12 percent and the cost of consumer credit is 21 percent, dollars are better invested in consumer purchases. Third, inflation over time--even at rates of one or two percent a year--will eat away at the value of cash. Paper money will buy less and less which means that set mortgage costs are being paid in ever-cheaper dollars.

At the end of the wage stream are those who are entering retirement and for these individuals paying in cash makes sense because real estate requirements, in terms of space, are commonly reduced as children grow up. So it is possible to move into smaller housing without lifestyle sacrifices. Retirement also means less income for most of us and getting rid of monthly mortgage payments significantly reduces out-of-pocket cash expenses at a time when such reductions may be important.

At retirement then one would expect to see individuals selling larger homes and purchasing smaller units for cash. Not only does this occur quite frequently, but the federal government encourages this process through the tax system. At age 55, individuals may benefit from a one-time exemption under which profits from the sale of a personal residence may be sheltered from taxes.

In looking at the income stream concept, individuals should be wary of hidden factors that can affect economic planning. New technologies, economic declines, tax preferences and changes in the availability of energy are just some of the conditions which can influence future income and employment. Assess your work. Can you take income-producing skills with you if you move or are they tied to a particular location? Is the business or industry with which you are associated on a long-term decline? If so, how are you affected?

Flexibility and Alternative Return. Paying cash for real estate means investing at a given rate of return. If the cost of mortgage money is 14 percent for new loans and you pay all cash, you are effectively receiving a 14 percent return on your money.

In those periods when interest rates are relatively low, fewer homes will be bought for cash since money can easily and profitably be invested elsewhere. When rates are high, relatively more homes will be bought for cash because such purchases make good investments when compared with the risks and rewards of alternative financial choices.

Some element of crystal ball gazing is required when looking at alternative returns because while current and past interest levels are known, future rates are not. A 12 percent mortgage, or whatever rate, may seem high or low today but the question is how will it look tomorrow. If you pay cash for a house today when rates are 13 percent and the rate rises to 16 percent next year, it means that 13 percent mortgages are a relative bargain. For those who paid cash or obtained a 13 percent loan, their home buying dollars have been well invested.

But what happens if rates go down? For those who can afford to pay cash there are two alternatives. One choice is to take the new and lower rate plus refinancing costs such as loan origination fees, points, settlement charges, etc. to see if it is worthwhile financing the property. The decision here should be based on whether the cash taken out of the property can be invested at a higher return than the overall cost of a new mortgage.

When rates go down, cash purchasers also have another choice. They can simply do nothing, an alternative that effectively controls monthly cash flow regardless of interest fluctuations in the marketplace.

Questions To Ask. What is the prevailing interest rate for conventional mortgages in your community?

What is the current return you can expect from the conservative investment of your funds?

How large is the one-time profit exemption from the sale of a personal residence? (Speak to a CPA or tax attorney for current information.)

Do you anticipate reduced income as a result of retirement in the next decade?

Do you expect to move to smaller housing within the next 10 years?

Do you believe that home mortgage rates will generally rise or fall from current levels over the next several years?

As a matter of personal preference, would you want to own a home which is free and clear of any mortgage debt? If the answer to this question is "yes," economic considerations will be less important if not irrelevant.

NEXT WEEK: A look at conventional financing.