“The ache for home lives in all of us, the safe place where we can go as we are and not be questioned.”
The above quote by Maya Angelou proves how significant a role our home plays in our lives, and hence, we need to be very careful while making any decision in buying a house.
Should it be cash or a mortgage?
This question often confounds people.
If you plan to buy a house and you’re unsure which option to choose, this article can be of great help to you.
Nowadays, it is a well-known fact about how lousy carrying debt is. Thus, it is natural these days to invest as much cash as possible in buying a home. It avoids the enormous amount of debt that is associated with a mortgage. It is the smartest decision you can make regarding your own financial good.
Many aspects need to be taken care of when talking about purchasing a house via cash or financing it. Here, we will have a look at some of the critical differences among both:
- Buying houses for cash gives you an additional advantage of not paying the interest on a loan and not closing costs.
- Tax benefits are more in the case of a mortgage when compared to the cash option.
- House buyers for cash usually end up getting a deal from those desperate to sell houses.
Whenever you think about which option you should select, always remember to analyze the value you are getting for your money, i.e., it is more significant in cash savings or in taxation in the mortgage method.
Benefits of Cash
Whenever you choose a mortgage method for buying a house, you know that there is a lot more you pay and might not have asked for. You might have to pay the mortgage origination fees, appraisal fees and the accrued interest over the loan term.
Separately, you must pay the closing costs as well. This is not the case with cash home buyers as there are no such extra fees that you must pay while buying a new house.
Paying with cash is generally more alluring for the sellers as well as they get the money for their house directly without waiting for a longer duration and, they don’t have to get in the hassle of any sort of paperwork as well.
As said by Peter Grabel, managing director, MLO Luxury Mortgage Corp in Stanford, Connecticut, “In a competitive market, a seller is likely to take a cash offer over other offers because they don’t have to worry about a buyer backing out due to financing being denied.”
A seller might also be interested in selling their house faster and closing away with the deal. Cash might be the better option as it will help close out the deal quicker than the one involving loans.
It would be harsh to say that all these benefits are only for the seller as after making the payment in cash, the buyer also gets a discount and acquires the house at a price below the fair market value.
It won’t be fair to say that buying a house only in cash has benefits. Significant advantages are present when you are purchasing a home using a mortgage. Even if the buyer could pay in cash, sometimes it is a wise decision to still pay using the financing method as a lot of money is tied up to purchase real estate. Hence, using OPM, other people’s money, at lower interest rates than what you could earn by investing yours at higher interest rates can be the way to go.
After paying for your house using your cash, if you need any other capital for repairs and renovations, you might be out of luck.
For Example: If your newly bough house requires all the vinyl windows replaced or would need an urgent major renovation or roof repair, then it might be tough to obtain a home equity line of credit (HELOC), as you might not even be aware of your credit score or other factors required to approve your financing.
If cash buyers decide that it is time to sell the house, then they must keep down enough cash reserves as a deposit for the new home. Cash buyers need to leave themselves a lot of liquidity, and by going with a mortgage, you can have a lot of flexibility financially.
Another well-known benefit of a mortgage is the tax saving for homeowners as they end up saving a lot of money when paying tax. Talk to a good accountant about this.
With a mortgage, you will pay more over time due to the interest it carries. But, investing your funds in a good mutual fund or a basket of fortune 500 companies can return a much better yield for you.
If you have to buy a house and you cannot decide whether you should go for cash or mortgage, then you should ask yourself only one question which is “which method would give you more value for your money.” Also ask yourself which method would give you a greater return on your investment in the future.
If you decide to go for a loan while buying a house, then make sure that you can easily afford the principal and interest payments for each month as well as the property taxes.
If you are going for cash payment, make sure that you still have enough money for the property taxes, homeowner’s insurance, homeowner association and other repairs. Be wise and look at all the alternatives before making any decisions.