So you’ve saved well and are thinking of paying cash for your next home. Most other home buyers are pulling together a down payment and hunting for the lender who will give them the best mortgage rates. However, just because you have the cash, you might wonder, should you spend such a large amount of it on a home? The answer is not always as obvious as it seems. It’s worth weighing the pros and cons before taking the leap.
Pros
∙ You’ll save 15 to 30 years’ interest charges on a mortgage. That can add up to tens of thousands of dollars. For example, say you took out a $100,000 loan at 4.20% fixed interest for 30 years. The actual amount paid at the end of the term is $176,046 (not including points paid or closing costs). By paying cash, you save over $76,000!
∙ You’ll have an edge over most buyers. Sellers like buyers with cash because there’s no lender financing to fall through late in the process, and the closing can happen sooner.
∙ You might get a better deal if a seller is highly motivated and you present her with a cash offer.
∙ You’ll own your home outright. Some folks like the feeling of having immediate, full ownership of their residence. There’s comfort in not having to pay off a loan every month.
∙ You’ll avoid the often slow and arduous loan process as well as closing costs and signing a thick folder of paperwork.
Cons
∙ You sacrifice liquidity, so ensure the amount you’d pay in cash doesn’t deplete what you need for emergency funds, living expenses, and retirement plans.
∙ A lot of your money is tied up in one asset instead of being invested in other opportunities. Historically stocks and bonds have a greater return than real estate, so you could be losing out if other investments would have outperformed the interest on a mortgage.
∙ You won’t qualify for the annual tax deduction of mortgage interest when itemizing taxes.
∙ People with no other source of income, such as retirees, might have trouble getting other types of loans (such as a home equity loan) because they aren’t leveraged with a mortgage.
How you handle the payment of your home is a personal decision. Paying in cash generally makes sense as long as you have strong liquidity or the interest paid on a mortgage is higher than potential earnings on other investments. Assess your financial situation carefully to make certain the benefits outweigh the drawbacks.