Mortgage Vs Cash To Buy a House

You hear about how horrible it is to carry debt everywhere you go. So it stands to reason that investing as much money as you can into your property to avoid the enormous debt that comes with a mortgage is the best move for your financial wellbeing.

When deciding whether to finance a property purchase or make an outright one, there are several factors to take into account. Here are some of the key distinctions between paying cash and obtaining a mortgage when purchasing a home.

If you don't know how to choose a mortgage for the first time, take the time first of reading an article with the factors for a first time mortgage.

Advantages of money

When buying a house with cash, there are no closing expenses or interest payments to make. According to Robert Semrad, JD, senior partner and founder of the DebtStoppers Bankruptcy Law Firm, with offices in Chicago, "there are no mortgage origination costs, appraisal fees, or other expenses levied by lenders to assess buyers."

Cash payments are typically more desirable to sellers as well. According to Peter Grabel, managing director of MLO Luxury Mortgage Corp. in Stamford, Connecticut, "in a competitive market, a seller is likely to prefer a cash offer over other offers because they don't have to worry about a buyer dropping out due to financing being denied." Additionally, a cash house purchase offers the option of closing more quickly (if wanted) than one involving loans, which may appeal to a seller.

These advantages for the seller shouldn't be free. A cash buyer could be able to get the home for less money and get something of a "cash discount," according to Grabel. A buyer who pays cash may also decide to perform a cash-out refinance after the deal has already closed on the house they want to buy. This gives customers the chance to enjoy the best of both worlds: a quick and simple property purchase in a competitive housing market with numerous competing offers, as well as the long-term financial advantages of obtaining a low-interest mortgage while making an investment.

A Mortgage: Is It Better?

On the other side, getting funding provides a lot of advantages. "It might make sense to not tie up a lot of capital to buy real estate," adds Grabel, even if a buyer has the financial means to pay cash for a home. By doing this, you might have less options later on if you need anything else.

For instance, if it turns out that the house needs significant repairs or renovations, it might be difficult to get a mortgage or home equity loan because you don't know how your credit will look in the future, how much the house will be worth then, or other criteria used to determine whether or not you'll be approved for financing. While it's important to keep this as an option in mind, the more equity you have in your house, the simpler it is to qualify for a home equity loan or home equity line of credit (HELOC).

If the owners have to borrow a lot of money to buy the house, selling it could be difficult. "Cash buyers need to make sure they will have sufficient cash reserves to put down as a deposit on the next house," advises Grabel if they decide it's time to sell.

In other words, Grabel emphasizes that "cash buyers need to be sure to allow themselves plenty of liquidity." You can give yourself greater financial flexibility by selecting a mortgage. A mortgage calculator can be a useful tool for planning some of the expenses.

For homeowners who itemize their deductions rather than claiming the standard deduction, paying a mortgage might also result in tax advantages. Additionally, while getting a mortgage only for the tax benefit is not recommended, it never hurts to have a lower tax bill.

Mortgage interest payments are typically tax deductible, according to Semrad. However, the roughly doubled standard deductions under the 2017 Tax Cuts and Jobs Act (TCJA) made itemizing redundant for many taxpayers, resulting in their complete abandonment of the mortgage interest tax deduction.

Mortgage vs. investment

Of course, a mortgage results in higher overall costs because interest charges accumulate over time. But Semrad also points out that paying cash to avoid paying mortgage interest could not be a wise financial decision depending on the health of the stock market. If you took out a mortgage and invested the money you didn't spend on your home, you might be saving less than what that money could have earned.

You may save considerably more on taxes than you would with a mortgage interest deduction, in addition to the stock market making far more than you will pay in interest. You may be able to save more on taxes than you would have by itemizing your mortgage interest if you use the extra money to invest in the stock market directly or to live on while contributing to tax-advantaged accounts like a traditional IRA, Health Savings Account (HSA), 401(k), or other workplace plans.