Buying a Home: Getting a Mortgage or Paying Cash »RealtyBizNews: Real Estate News
Buying a home is a big decision. But the decisions don’t end there.
Once you’ve decided to take the plunge, you end up with another big decision to make: dump your life savings or call yourself a Mortgage broker?
If you’re one of the lucky 12% who can choose how you want to finance your home purchase, read on to find out the pros and cons of each.
Benefits of getting a mortgage
Paying cash for a house is not 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 benefit from tax benefits.
It doesn’t tie up your money
By getting a mortgage to finance your real estate purchase, you can keep your cash cash and invest your cash reserves elsewhere.
If the average rate of return in the stock market is higher than current mortgage rates, it may make more financial sense to invest your nest egg to maintain more flexibility.
Since getting a mortgage only requires a small percentage of the original loan, you don’t tie a lump sum to a single asset, leaving you free to cover repairs and other unforeseen expenses that might arise later. . You can also save your money to fund proper maintenance, or use it however you see fit.
You can improve your credit score
Since home loans are generally considered “performing debt” by credit reporting agencies, get a mortgage and make monthly payments on time improve your credit profile long-term.
While it might not be the fastest way to build your credit score, forgoing the opportunity to improve your credit with a multi-year home loan is a missed opportunity.
You can leverage your debt
Once you’ve paid cash for your house, you can’t use it anywhere else. Because that money is stuck in the asset, it is made inaccessible until you refinance your home, get a home equity loan, or sell it. Because your money is tied up, its growth depends entirely on the appreciation of the asset.
If the real estate market does not improve or if it declines, getting a negative return on investment is a very real possibility. Taking out a mortgage for some or all of the amount in your home will ensure you have cash reserves while taking advantage of the low mortgage interest rates.
It’s tax deductible
Another advantage of financing the purchase of a home with a mortgage is that it is tax deductible. Typically, couples can deduct up to $ 375,000 in mortgage interest on their tax returns if they file their taxes separately.
Benefits of paying in cash
The main advantage of buying your home for cash is that you own it. You won’t have to worry about lenders, possible foreclosure, or bad credit due to your mortgage default.
Another major benefit of owning your own home is that you have the option of taking out a 100% equity loan against the equity in your home if the need arises.
You will have lower monthly payments
In most households, the monthly mortgage payment is the biggest expense. By paying cash for your home, you’ll eliminate mortgage payments, leaving you with a lot of cash flow from your income for other expenses.
Keep in mind, however, that the the cost of owning a house does not stop after you buy it. Other day-to-day expenses can include property taxes, utilities, maintenance, repairs, and homeowners association fees – and you’ll have to pay them even if you don’t have a mortgage.
You will save on interest
Most mortgages have a period of 15 to 30 years – and the cumulative cost of interest can range from thousands to hundreds of thousands of dollars. To put it in perspective, taking out a mortgage loan of $ 160,000 at an interest rate of 4.375% can cost as much as $ 120,000 when paid off over 30 years.
Nonetheless, mortgage debt remains the cheapest form of debt in terms of annual percentage rate – so it’s worth considering whether you want to tie up your cash in an asset or focus on an investment portfolio elsewhere to keep your cash flow. liquid.
Close faster and pay less closing costs
Buying a home with cash gives you the edge when it comes to closing faster and spending less on closing costs.
By buying cash, you can avoid all of the costs associated with a loan, such as credit file fees, underwriting, arranging, and mortgage insurance payments. These additional fees add up quickly, so you could avoid spending thousands of dollars.
Cash offers also tend to close faster – and they can even outweigh a higher offer that is dependent on a mortgage. You also don’t have to worry about going through a lender or your credit score.
Get an advantage over other buyers
Sellers prefer cash offers because they eliminate the third party – which is the lender. This means that the deal can be closed faster and does not have to follow the lender’s schedule. The appraisal and underwriting planning process is eliminated with a cash purchase. In this way, the buyer and the seller can conclude the deal within a mutually agreed timeframe.
In a buyer’s market, making a cash offer is one way to make yourself more attractive to sellers because no loan has to be approved. If you have the cash on hand, chances are the seller will accept your offer rather than other buyers, even if they are pre-approved.
When deciding whether to pay for a home with cash or take out a mortgage, it’s essential to consider your financial goals. If you are considering saving for retirement or opening a college fund for your children, it may be wise to avoid locking your money into just one asset.
If you don’t have enough money to deal with financial changes and emergencies, consider taking out a mortgage to finance the purchase of your home.
If you have a nest egg big enough to buy a home and have enough left over for other expenses and monthly fees, you may want to consider buying your property with cash.