You’re buying a house and you think you have enough to pay for it in cash. That way, you don’t have to apply for a housing loan and be in massive debt. However, you are afraid to put all your cash into a house and be left with inadequate savings for retirement and emergencies. Should you apply for a housing loan instead, so you can keep the bulk of your money and invest it on something that could earn interest? That could help you pay the monthly repayments. But what if something happens in the future that would prevent you from making monthly repayments? A bad investment, for example, or sickness in a family member that would necessitate long treatment and hospitalization? You could lose the house!
There is really a lot to consider when contemplating purchasing a home outright versus financing it.
Buying a house in cash gives you an enormous sense of satisfaction that comes with owning your home outright. Cash buyers also have the upper hand in bidding for a house against a competitor who depends on a loan to buy the house.
Paying cash for a home eliminates the need to pay interest on a housing loan and many closing costs. There are no mortgage origination fees, appraisal fees or other fees that are charged by lenders to assess buyers. It also saves time that would have been spent shopping for a loan.
Paying with cash is usually more attractive to home sellers, too. In a competitive market, sellers are 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 cash home purchase also has the flexibility of closing faster than one involving loans, which could be attractive to a seller. The resulting benefit to the buyer would be the ability to negotiate for a lower price and receive a discount.
A house paid in cash is not leveraged, which allows the homeowner to sell the house more easily – even at a loss – regardless of market conditions.
However, selling a home bought with cash could also be a problem if the owners stretched a lot financially to buy it. If cash buyers decide it’s time to sell, they need to make sure they will have sufficient cash reserves to put down as a deposit on the new home. In short, cash buyers need to be sure to leave themselves plenty of liquidity. By opting to go with a mortgage, you give yourself some more flexibility.
Even if a buyer has the ability to pay cash for a home, it might make sense to not tie up a lot of cash to purchase the home. Doing so could limit your options if other needs arise in the future.
Paying in cash, while commendable, isn’t a good idea if it means committing too much of your savings to an asset that is inherently not easily convertible to cash. You don’t want to get into a situation where you are forced to sell the house or other investments at the worst time possible.
Buying a house through home financing also has significant benefits. The two big reasons to take out a mortgage, even if you can afford to pay cash, are maintaining liquidity and maximizing returns.
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 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.
There is a middle ground and, for many buyers, this may be the best option of all. Take out a mortgage and take advantage of today’s low interest rates, but make more than the minimum payment whenever you can. Or better still, if you think it will be useful, seek the advice of a home financing firm, like Melfinance, to better understand your options.