Everywhere you turn, you hear how bad it is to carry around debt. So naturally, it’s logical to think that buying a home with cash – or sinking as much cash as possible into your home to avoid the massive debt associated with a mortgage – is the smartest choice for your financial health.
But there’s a lot to consider when contemplating purchasing a home outright versus financing it.
Cash Cuts Costs – And Wins Bidding Wars
Paying cash for a home eliminates the need to pay interest on the loan and many closing costs. Paying with cash is usually more attractive to sellers, too
Also, a cash buyer’s home is not leveraged, which allows a homeowner to sell the house more easily – even at a loss – regardless of market conditions.
Mortgages Can Also Make Sense
On the other hand, obtaining financing also has significant benefits. Doing so could limit your options if other needs arise down the road. For example, if the home turns out to need major repairs or renovations, it may be tough to obtain a home-equity loan or mortgage as you don’t know what your credit score will look like in the future, how much the home will then be worth or other factors that determine approval for financing.
Selling a home bought with cash could also be a problem if the owners stretched a lot financially to buy it. Paying cash also has tax implications. In most cases, mortgage interest payments are tax-deductible. And while you shouldn’t opt for a mortgage just to get a deduction, a reduced tax obligation never hurts.
Of course, with a mortgage, you end up paying more overall, since it comes with interest payments that do add up over time. But, depending on the state of the stock market. Saving on mortgage interest by paying cash might not be financially prudent. You could be saving less than that money might have earned had you taken out a mortgage and invested the cash you didn’t spend on your house in stocks.
The Bottom Line
The best advice when considering whether cash or mortgage makes the most sense is to opt for the choice that gives you the bigger bang for your buck. Also, ask yourself which will provide the greater return on your investment.
If you decide to purchase a house with a loan, make sure you can easily afford the principal and interest payments each month. If you decide to go with cash, make sure you’ll still have enough to cover ongoing costs like property taxes, homeowners insurance, homeowner association and other fees each month
Source: Investopedia Gina Roberts-Grey