You’ve found the perfect home and you’re ready to make it yours. And if you’re settled and established in life, or selling your original starter home, you may even have the ability to purchase your new home with a cash payment. This raises an important question: Should you use the newly acquired cash? Or will it make more sense to set up a mortgage?
The Appeals and Drawbacks of Purchasing Your Home with Cash
A cash purchase can sound appealing if you have major doubts and fears about mortgages. Plus, many financial advisors now recommend avoiding debt wherever possible. With this information in mind, it’s natural to consider becoming an instant homeowner by putting cash toward a property.
Other common reasons people consider putting cash towards a home are:
- Not needing to worry about interest accruing as a result of taking out the mortgage.
- Avoiding the closing costs associated with mortgage loans.
- Potentially closing the deal on a new home faster. This can happen since cash buyers are more appealing to home sellers. Additionally, the mortgage approval process can take time and energy to get through.
At first glance, all of these seem like good reasons to use cash when buying a home. But there is always an exception to a rule. In this case, just because you can buy a home in cash doesn’t necessarily mean you should.
In reality, using cash to purchase your new home can quickly become a major headache, because:
Your cash becomes tied up in a single asset.
There is a real risk in investing thousands of dollars at once in a single purchase. If you tie up a large amount of money in one asset, your investment portfolio becomes less diversified. That, in turn, increases your risk of losing money long-term. You may also miss out on investment options that could yield higher returns than a house.
You decrease your liquidity.
Real estate may be a good financial investment, but it’s also a very unique investment. Unlike stocks or bonds, real estate is an illiquid asset. That means it’s not quick, easy, or free to sell. By investing your cash in this type of asset, you reduce your access to beneficial liquid assets.
You lose leverage.
When you hold a mortgage, you have the ability to get a low interest rate and to get a locked-in contract on your financial obligations. This gives you the ability to budget, negotiate, and more to help you best manage your home finances. But if you paid cash, you give up these possibilities and benefits.
You drop some tax benefits.
Often, a certain amount of mortgage interest rates can be deducted from your taxes. These deductions, in turn, can potentially put money back in your pocket and even help to cover the interest paid on the mortgage. No mortgage? No tax benefits.
You lose financial stability at home.
Homeownership inevitably includes unexpected expenses. If you spend your cash at once on a home, you may not have enough money in your savings to cover a major repair. A set mortgage rate will allow you to budget, save, and prepare for these emergencies.
You’re at risk of falling victim to a billing issue.
Cash can easily be stolen, lost, or miscounted. Paying with it increases the risk of experiencing a problem and not having any recourse available. Not only will this keep you from moving into your new home, but you may lose out on some of your money entirely in this scenario.
A Home Mortgage is a Better Investment
Our team at Howard Hanna has seen the impact a mortgage has on a household. In our experience, shopping for a mortgage is a more sound choice than a cash purchase. That’s because:
You spend less money upfront.
Mortgage financing only requires buyers to put a percentage of the loan amount down. This ties up less of your money in an upfront payment. This in turn provides flexibility to take advantage of many financial assets and opportunities. You also make it easier to budget and set aside money for homeownership repairs and emergencies.
You give yourself financial flexibility.
When you have cash reserves to spare, you give yourself financial breathing room. For example, you can invest your money in other assets. You can also build up a nice sized nest egg in the bank in case of emergencies or other opportunities.
You open the doors to tax benefits.
Through itemized tax deductions, homeowners can typically deduct part of their mortgage interest on first or second home indebtedness from their overall balance. This is especially helpful for retired people who no longer have many options to reduce taxable income (i.e. 401(k) contributions). Tax laws are subject to change, however, so the specific benefits associated with them are subject to change as well.
You may improve your credit score.
With regular and on-time monthly payments, your mortgage will translate into a better credit score. This is then likely to open the door to other opportunities that require good credit!
Get Ready to Buy Your Home
Our experts at Howard Hanna highly recommend mortgages because they offer an assurance of money and benefits from your real estate purchase. That said, you will ultimately need to make the purchasing choice that’s best for you and which meets the seller expectations in your area and local market.
By researching your options, and understanding the Dos and Don’ts of the mortgage process, you will find yourself creating a helpful, personalized homeownership plan. Still, whether you are buying your first property or your fourth, we understand it can be a big and daunting decision. That’s why we currently offer assistance through a variety of groups and services.
We offer a variety of mortgage loan programs through our Howard Hanna Mortgage Services that each aim to help you become a homeowner. Established in 1983, Howard Hanna Mortgage Services has been recognized repeatedly for its ability to provide goal-oriented, quality mortgage products to each and every borrower. Our efficient process expedites home sales and helps buyers find mortgage products more easily, whether you’re a first-time or an experienced homebuyer.
In New York state we oversee 1st Priority Mortgage, Inc., a Licensed Mortgage Banker, New York State Department of Financial Services. Established in 1986, 1st Priority Mortgage, Inc. has spent over 30 years mastering the mortgage arena, designing alternatives that are most important to you. We are committed to delivering a unique process that identifies the best mortgage solution tailored to your individual needs.
In Virginia and North Carolina we oversee Towne Mortgage, a division of TowneBank dedicated to providing the personal experience expected from a hometown lender. Here, the most advanced technology is available to offer affordable loans, quick processing, and exceptional service. The team’s top priorities include local operations, unparalleled customer service, and on-time closings.