If you're lucky enough to have the funds to buy your dream home, it's understandable that you might think paying in cash is the smartest move. But, the choice between cash or a mortgage isn't always so black and white.
The end result of the "cash or mortgage" debate really depends on your personal situation. There are lots of things to think about, like how much savings you'll have left after buying, what you'd do with the extra money if you went for a mortgage, and what your main goals are.
Benefits of purchasing with cash
Buying a house outright sure does have its perks. Let's chat about some of the delightful perks that come with skipping the mortgage process.
Interest or fees on a mortgage are not present.
First off, let's chat about something great - you won't be bogged down with interest payments. You know, those pesky little charges that can add up to a pretty penny over a span of 15, 20, or even 30 years. And guess what else? You can wave goodbye to closing costs. These usually include things like appraisal fees, private mortgage insurance premiums, and those annoying miscellaneous "junk fees." Did you know closing costs usually range from 2% to 6% of the total loan amount? Well, with us, that's one less thing to worry about!
Instant home equity and reduced payments
Here's a great perk for you - you'll instantly acquire equity in the house and enjoy lower monthly payments. Do bear in mind that you might still need to cover monthly costs such as property taxes, homeowners insurance, and possibly homeowner's association fees. But here's the upside - you'll be saving hundreds or even thousands of dollars every month on mortgage payments, which gives you the freedom to use that money for other things.
Increased bargaining power for the buyer and possible price reductions
In the end, this could make your proposal more appealing, a key aspect when buying in a competitive market. Sellers often prefer cash buyers because the closing process is usually quicker (there's no need to wait for lengthy loan approvals), and there's less chance of running into problems. These benefits might even encourage them to accept a lower offer.
Drawbacks of purchasing with cash
Even when you've got the needed funds, it's not always the best idea to pay in cash. Let's take a look at some reasons why buying a house entirely in cash might not be the most beneficial choice for you.
Concerns about liquidity and the immobilization of funds
Buying a house upfront might require a significant amount of money, which could impact your savings and emergency fund. It might pose a challenge in handling unexpected expenses. Also, it could be tricky if, down the line, you happen to lose your job or if there are changes to your income.
The potential costs of investing the money in a different place
Also, think about the opportunity cost. The cash you put into your home could turn a profit if its value goes up over time, but remember, there's no surefire guarantee of this happening. It's quite possible that investing that same amount of money in different areas, like the stock market, might end up being a more fruitful endeavor.
Absence of tax deduction on mortgage interest
Just a heads up, by choosing not to take a mortgage, you might be overlooking some potential tax deductions. You see, homeowners with mortgages can actually deduct the interest paid on their loans each year, as well as any points paid during the closing process. It's definitely something worth considering!
Benefits of securing a mortgage
While a mortgage might mean taking on debt and possibly dealing with years of interest expenses, it's important to remember that there are indeed some perks that come along with these loans.
Utilizing Leverage and Possible Returns on Investment
Getting a mortgage isn't the same as tying up a big chunk of your money in just one investment. It means you can use that money in other areas to help you earn even more. If the mortgage interest rates are quite low when you're making your purchase, you could potentially see greater profits by putting some of your money into the stock market, rather than trying to avoid interest payments.
Preserving financial fluidity and monetary flexibility
You're not spending a big chunk of money all at once. In fact, buying with cash might save you a nice sum in the long run. But, if you use most of your on-hand cash to buy the house, you could end up in a tricky spot if an unexpected situation pops up or if your new home needs some fix-ups after you move in. It's always a good idea to keep a little rainy day fund tucked away after buying a house.
Potential tax write-offs
A mortgage can actually give you some cool tax perks! As long as you detail your returns, the interest payments on your mortgage can be taken away from your tax. Sure, the 2017 Tax Cuts and Jobs Act put a cap on how much you can deduct, but it's still something to think about. By 2024, you might be able to reduce the interest on mortgage debt up to $750,000. Even though these deductions might not be as hefty as they used to be, they still count!
Drawbacks of securing a mortgage
Of course, like all things, mortgages have their pros and cons, and they could end up being a bit costly over time. So let's explore the aspects you should consider before getting a mortgage loan.
The costs of interest throughout the duration of the loan
One thing to keep in mind when considering a mortgage is that over time, you'll need to cover a significant amount of interest. For example, let's say you borrow $350,000 at a 6.5% rate for 30 years - by the time you've paid off your loan, you would have contributed over $440,000 just towards the interest. It's a long-term commitment, but with careful planning, it can be a step towards owning your dream home.
Process of Qualification and Closure
You'll also get to walk through the loan approval journey, which relies quite a bit on your credit score, credit history, and any current debts. This might feel like a bit of a challenge depending on your financial standing. The pathway to getting a loan might take a little more time too. According to ICE, as of mid-March, the average purchase loan was wrapping up in about 44 days. This is a tad longer than the quick few weeks it usually takes when dealing with cash.
Possibility of foreclosure
Wrapping up, it's important to remember that a mortgage lender's involvement with your property does come with the potential risk of foreclosure. If you happen to run into some financial bumps and aren't able to make your payments, they may need to step in regarding your home. But remember, this is just a safety measure, and they're here to work with you during your home-owning journey.
Present Financial Status
If you've got enough money tucked away and can still keep a little something for those unexpected life moments and house upkeep, paying for a house upfront could be a smart move. But, if this might empty your piggy bank, or put too much pressure on your wallet, thinking about getting a mortgage could be a friendlier option.
Conditions of the Real Estate Market
The local market's condition matters too! In a bustling market with lots of competition, being able to make a cash purchase could be your lucky charm. It lets you seal the deal quickly, and who knows, sellers might even be persuaded to lower their price a bit. But, if you're in a market where buyers have the upper hand and competition is a bit thin on the ground, you might not need to rush into making an all-cash offer.
Long-term personal and financial objectives
Let's consider your personal and financial goals too. If you're looking to boost your wealth, opting for a mortgage loan might be a smart move. It could free up some cash for you to invest in high-ROI ventures while you're comfortably living in your home. Plus, it could even make you eligible for a big tax break! But, if your heart is set on a consistent, budget-friendly monthly payment for a long time, paying in cash could be your best bet, as long as it won't deplete your savings.
