Updated: Jan 6
It is completely logical to think that purchasing a home with cash is more financially sound than taking out a mortgage loan, but there are a lot of things you should consider about both options. So, let’s take a look at the ins and outs of buying a home either with cash or by taking out a mortgage loan.
Cash Lowers Costs
When you pay cash for a home, you avoid paying interest on a loan and other closing costs. Paying with cash is often more attractive to sellers too and may help you land the home you want without having to deal with a bidding war. A cash home purchase also has the ability to close quicker than one that involves obtaining a loan. You may also be able to purchase the property for a lower price and receive a “cash discount.”
Mortgages Can Also Make Sense
Even if you do have the cash to purchase a home, obtaining a loan may have benefits as well. It might not make the most sense to tie up a lot of cash to buy real estate as this could limit your options if you other needs come up down the road. An example of this is if the home needs a lot of major rehabbing or renovations, it may be hard to obtain a home-equity loan or mortgage since you don’t know what your credit score will be down the road, what the home’s value will be or other factors that will determine approval for financing.
Issues with Paying Cash
Selling a home that was purchased with cash could pose an issue if the owners stretched a lot financially to buy the home. If a cash buyer decides it is time to sell, they will need to ensure that they have plenty of cash reserves to put down as a deposit on a new home. Cash buyers will need to have plenty of liquidity. Mortgages can offer more flexibility in regard to this.
Paying with cash can also have tax implications and in many cases, mortgage interest payments are tax-deductible. You shouldn’t take out a mortgage loan simply for a tax benefit, but a reduced tax obligation is a benefit.
The Bottom Line
With a mortgage, you will end up paying more over time due to the interest on the loan. Depending on the stock market, taking out a loan may be a better option since you could be saving less than the cash may have earned had you taken out a mortgage and invested the cash you didn’t spend on a home in stock. You really need to determine which option will be the most financially smart for your situation. Ask yourself which option will help you get the most return on your investment.
If you do decide to purchase a home with a loan, make sure you can afford the principal and interest payments every month. If you purchase with cash, make sure you still have money to cover ongoing costs like homeowners insurance, HOA fees, and property taxes.
Getting ready to buy a new home? Don’t hesitate to reach out! I’d love to hear from you.