Everywhere you turn, you hear how bad it is to carry debt. And if you’re in the market to buy a new home, it’s normal to think that going the “cash” route to buy your home, or sinking as much money as possible into your sale transaction to avoid the brewing massive debt most associate with a mortgage, is the most logical way for your financial health.
Since a person’s buying capability differs per financial situation, there’s a lot to consider when contemplating purchasing a home outright versus applying for financing. To help you make the best choice for yourself, here are some points to ponder for each option.
ADVANTAGES OF CASH PAYMENTS
Lower monthly financial obligations
By paying for your home outright, you won’t have to dedicate a significant portion of your earnings toward a monthly mortgage payment, so you’ll have a more free cash flow for your other needs monthly. Of course, you’ll still be responsible for several expenses after purchasing a home, including applicable homeowners association fees, homeowners insurance, property taxes and maintenance costs, etc., but you’re eliminating mortgage payments which will typically cut down the largest monthly expense of most households.
Saving more money on interest
Did you know that you can save thousands in interest expense by paying your home on a cash basis– which can represent a huge amount over 15 or 30 years? Home loans are generally expensive due to the sheer size of mortgage loans, so if you’re able to avoid over $120,000 of interest expense, it should put you in a comfortable financial position. In any case, it’s always worth evaluating whether you’d be better off paying for your home in cash or taking out a mortgage and investing your savings in a well-diversified investment portfolio.
Faster closings and lower costs
Paying cash for a home may also mean less spent on closing costs and faster closings! It also translates to less headache, better handling of your transaction, and not needing to worry about the lender’s rules.
Buyers paying in cash can also avoid several fees associated with a loan, such as origination fees, underwriting, mortgage insurance premiums, and credit report fees, which result in thousands of dollars of added expenses.
Oh, and don’t forget, when making an offer, the words “all cash” have a lot of power!
A bigger chance against competing buyers
For obvious reasons, sellers prefer all-cash buyers, and honestly, no one can blame them. Cash transactions mean faster closings, with only due diligence on the buyer’s part and picking a mutually agreeable closing date to deal with.
In a competitive market where sellers have plenty of interested buyers, the speed and ease of a cash offer make you more attractive than traditional homebuyers. Rather than waiting for the buyer to be given the loan — which isn’t always guaranteed even with a preapproval sellers know they can have cash in hand without much hassle if they take your offer.
ADVANTAGES OF GETTING A MORTGAGE
An opportunity to earn more elsewhere
Of course, even if you have enough cash to fun a home purchase, going all out isn’t always the best option.
If current mortgage rates are lower than the average rate of return on the stock market, it will make more sense to invest your money rather than lock it up in a large purchase. Taking out a mortgage to buy a home is often compared to carrying a negative interest rate on your home loan. Conversely, by purchasing a house using 100% cash, you essentially lock in a rate of return equivalent to whatever current mortgage rate you could have taken out.
Leverage on your debt
Buying a house straight out means using all of your money for your home purchase and nothing more. Your money will be inaccessible unless you decide to refinance your property or take out a home equity loan. Therefore, the growth potential will be directly linked to your property’s ability to appreciate. If you live in a flat or declining real estate market, this could lead to a negative return on your home purchase.
Taking out a mortgage for at least a portion of your home purchase will leave you with significant cash savings you could invest elsewhere for a return while taking advantage of the relatively low-interest rates on mortgage loans.
Improving your credit score
While taking out a mortgage is the quickest way to build credit, having one and making timely payments will help your credit score over the long haul. Credit reporting agencies prefer a greater diversity of debt, and home loans are generally treated as a productive form of debt that improves a borrower’s credit profile. Home mortgages may only be a few points in the short run, but not having a mortgage could mean a lost opportunity to boost your credit status.
Another factor to consider getting a mortgage is that mortgage debt has the advantage of being tax-deductible. Although the write-off isn’t as lucrative as the previous years after tax reform in 2018, it still represents a benefit for a portion of homeowners with outstanding mortgages.
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