Buying a House: Getting a Mortgage vs. Paying Cash



Buying a home is a big decision. But the decisions don’t end there. 

Once you’ve decided to take the plunge, you’re left with another big decision to make: do you empty your life’s savings or call a Mortgage broker

If you are one of the lucky 12% who can choose how you’d like to fund your home purchase, read on to find out the pros and cons of each.

Advantages of Getting a Mortgage

Paying for a home in cash isn’t always the best decision – even if you have the funds. 

By getting a mortgage, you can invest your wealth elsewhere, improve your credit rating, leverage your debt for the best returns, and claim tax benefits.

It Doesn’t Tie Your Money Up

By getting a mortgage to fund your property purchase, you can keep your money liquid and invest your cash reserves elsewhere. 

If the average rate of return on the stock market is higher than current mortgage rates, it may make more financial sense to invest your nest egg to retain more flexibility. 

Because getting a mortgage requires only a small percentage of the loan upfront, you are not tying a lump sum up in one asset – leaving you free to cover repairs and other unforeseen expenses that may arise later on. You can also keep your cash to fund proper maintenance, or indeed, use it however you see fit. 

You Can Improve Your Credit Score

Because home loans are generally regarded as “productive debt” by credit reporting agencies, getting a mortgage and making the monthly payments on time will improve your credit profile in the long term. 

Even though it’s not the quickest way to build your credit score, forgoing the chance to improve your credit with a home loan over several years is a missed opportunity.

You Can Leverage Your Debt

Once you’ve paid cash for your home, you can’t use it anywhere else. Because that cash is locked in the asset, it is rendered inaccessible until you refinance your home, get a home equity loan, or sell it. Because your money is tied up, its growth is entirely dependent on the appreciation of the asset.

If the property market does not improve or if it declines, getting a negative return on your investment is a very real possibility. Taking out a mortgage for a portion or the entire amount of your home will ensure that you have cash reserves while leveraging the mortgage’s low interest rates. 

It’s Tax-Deductible

Another advantage of funding a home purchase with a mortgage is that it is tax-deductible. Generally, couples can write off as much as $375,000 in mortgage interest on their tax returns if they are filing their taxes separately.

Advantages of Paying Cash

Buying your home with cash’s main advantage is that you’ll own it outright. You won’t have to worry about lenders, possible foreclosure, or bad credit as a result of defaulting on your mortgage payments. 

Owning your home also comes with another major benefit: you have the option to take out an equity loan of 100% against your home equity if the need arises.

You’ll Have Lower Monthly Payments

In most households, the monthly mortgage payment is the largest expense. By paying cash for your home, you will eliminate mortgage repayments – leaving you with a significant amount of cash flow from your income for other expenses.  

Bear in mind, though, the costs of owning a home don’t end after you’ve purchased it. Other ongoing expenses may include property taxes, utilities, maintenance, repairs, and homeowner’s association fees – and you’ll have to pay these even if you don’t have a mortgage.  

You’ll Save on Interest

Most mortgages span over a 15 to 30 year period – and the accumulated cost of the interest can be anything from thousands to hundreds of thousands of dollars. To put it into perspective, taking out a mortgage for $160,000 at an interest rate of 4.375% can cost as much as $120,000 by the time it’s paid off over 30 years. 

Nevertheless, mortgage debt is still the cheapest form of debt in terms of the annual percentage rate – so it’s worth evaluating whether you want to tie up your cash in one asset or concentrate on an investment portfolio elsewhere to keep your cash liquid.

Close Faster and Pay Lower Closing Costs

Purchasing a home with cash does give you the upper hand when it comes to closing faster and spending less on closing costs. 

By buying in cash, you can avoid all the fees that come with a loan – such as credit report fees, underwriting, origination, and mortgage insurance payments. These extra fees add up quickly, so you could potentially avoid spending thousands of dollars.

Cash offers also tend to close faster – and they may even win out over a higher bid that’s dependent on a mortgage loan. You don’t have to worry about going through a lender or your credit score, either.

Get an Advantage Over Other Buyers

Sellers prefer cash offers because they cut out the third party – which is the lender. This means that the deal can close faster and doesn’t have to follow the lender’s timeline. The process of scheduling appraisals and underwriting is eliminated with an all-cash buy. This way, the buyer and seller can close the deal on a mutually agreed-upon timeframe.

In a buyer’s market, making a cash offer is a way to make yourself more attractive to sellers because no loan has to be approved. If you have cash in hand, the chances are that the seller will take your offer over other buyers – even if they are preapproved. 

Final Words

When deciding whether to pay for a house in cash or take out a mortgage, it’s essential to consider your financial goals. If you plan on saving for retirement or opening a college fund for your children, it may be wise to avoid tying up your cash in one asset. 

If you don’t have enough cash to carry you through financial changes and emergencies, consider taking out a mortgage to fund your home purchase.

If you have a nest egg that’s large enough to purchase a home outright and have enough left over for other monthly expenses and fees, you can consider buying your property in cash.   

Comments

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