Can you buy a house with cash? The short answer is yes, but do you want to? Just because you can pay for a house in cash upfront does not mean that you should. Here are the major pros and cons of mortgages so that you can make an informed financial decision.
What are the pros of getting a mortgage?
The main advantage of taking on a mortgage instead of buying a house cash is to save money in the short term in order to invest in other opportunities. Many people with the cash to pay for a house in full may take a mortgage in order to save money for the furniture in the house or to start a business. Families with children will also take mortgages instead of buying a house cash in order to divert money towards educational costs or extracurricular activities for the children. Cash buyers may become “house poor,” meaning that all of the money a person has ends up in the real estate. A lack of liquidity means less flexibility in the short term.
Taking a mortgage may reduce your taxable income; the interest that a borrower pays on a mortgage is tax deductible in most cases. This can be a great advantage if your income is on the border line of entering a higher tax bracket. Although you should never lose money just to save on taxes, the few situations in which you can save money should be utilized. Run the numbers with a reputable financial professional in order to see if you can save with the mortgage interest tax benefit.
You may be able to afford a larger house with more amenities with a mortgage. A $250,000 cash payment may barely buy you a condo in Los Angeles, but a $250,000 down payment that represents a 20 percent investment on a $1.25 million loan may get you a beachfront house in Santa Monica.
Finally, lenders are usually the best arbiters of property value; after all, this is what they do 24 hours a day. Many of the requirbents they put borrowers through in order to receive a loan may actually save that buyer from taking a bad deal. Most appraisals and home inspections are insisted upon by the lender.
What are the cons of getting a mortgage?
You will pay thousands more over the life of a loan if you get a mortgage. No matter how low the interest rate is in the market, the compounding nature of that interest over the normal term of a loan adds to it very quickly. Current rates are below four percent, an historic low. However, even this rate may nearly triple the money that you pay on a house during a conventional, 30 year mortgage.
When you take on a mortgage, you assume the risk that your life may change. Lenders will check for your ability to maintain a consistent income, giving you a loan on the hopes that you can. However, there is no guarantee that you will have a steady life. People suffer medical bergencies, unexpected expenses, changing interest rates, and changing tastes.
The loan process will go much more quickly if you do not create a mortgage. You will not have the choice of skipping the various inspections and appraisals that the lender will require in order to underwrite the loan. Paying cash for a house means that you have the opportunity to save on many costs including escrow costs, origination costs, closing costs, and costs from attorneys, agents, and accountants that lenders would require and roll into your cost.
If you take a mortgage, then you defer true ownership of the home to the bank until the loan is completely paid off. If you default on the loan, the bank can kick you out of the home. You will lose any of the previous equity that you had in the home, which can be a huge financial loss. Foreclosure and other procedures initiated by a lender to evict you are not a risk if you pay for the house in cash. They are a threat if you use a mortgage.
Should I pay for my house in cash?
Your home is one of the biggest investments that you will ever make. You must consider all of your other financial responsibilities alongside your mortgage in order to make the right decision. If you have other business and personal interests that will improve your total quality of life, then you may want to consider a mortgage even if you have the cash to pay off the house. Assuming that the monthly payment is well within your budget, you may be able to leverage your existing cash flow in order to improve your income beyond the interest payments on the mortgage.
If you do not have a better investment, then you may want to consider using your cash for the property. There are methods of extracting cash from the equity in a home if you find an investment for the cash after paying for it. A home equity line of credit (HELOC) is one great way to utilize the value that is in a home that is fully paid off without taking on too much extra risk.
2 Point Highlight
Paying cash for a house means that you have the opportunity to save on many costs including escrow costs, origination costs, closing costs, and costs from attorneys, agents, and accountants that lenders would require and roll into your cost.
Assuming that the monthly payment is well within your budget, you may be able to leverage your existing cash flow in order to improve your income beyond the interest payments on the mortgage.
