Depending upon who you talk to, people seem to have quite the polarizing view on whether it’s smarter to purchase real estate with cash or with a mortgage. Much of this may be due to someone looking at the return on the money they invest into the property versus where they could invest that otherwise, but more simply could be attributed to the fact that we live in an ever-so future is now culture whereas saving for a property takes time. The time that would extend the ability to buy a home, especially the one you would ideally want.
So what is the argument for each?
Three benefits of buying with a mortgage:
Benefit #1 is a down payment. Getting a mortgage on a home using a conforming or non-conforming loan type would allow you to purchase a home much sooner. Saving the minimum of 0% down for a VA Loan (if you qualify), 3.5% down for an FHA, or continuing to save, say 20% for a conventional loan, is much more palatable for most folks than the 100% down plan. Depending upon your school of thought, some would argue it’s better to put a larger amount down today to lower your risks associated with that monthly mortgage amount being too large. Others may try to mortgage as much as possible due to locking in a percentage rate and paying with future dollars that are expected to be worth less.
No matter what, the down payment route is definitely a perk!
Benefit #2 is tax benefits. Although you won’t see a significant benefit compared to what you pay, having a tax benefit to offset the mortgage interest you pay is still a benefit to encourage people to be homeowners. This benefit applies to whichever loan product you decide to go with. Your specific eligibility will depend upon the tax year in question, whether you are filing with a Standard Deduction Or Itemized Deduction, which can all be explained by a tax professional.
Benefit #3 is principal paydown. Another benefit is the ability to pay yourself along the way in the form of both equity and debt paydown in the form of principal. A mortgage is typically made up of a principal portion or the amount actually going against paying down the balance of the home and interest, which is paying the bank or financial institution that holds and services your mortgage. In addition, you will typically have mortgage insurance or PMI (unless your down payment exceeds 20% or you have satisfied the PMI removal on your loan); you will also have taxes and insurance that you pay into an escrow account. This principal paydown allows you to pay yourself instead of renting and paying someone else’s mortgage.
Benefits of buying with cash:
Benefit #1 is purchasing at today’s values. The benefits of buying with cash are evident in the ability to pay for the property up-front, significantly reducing your risk over the life of owning the property. This locks in the current home price and protects you against future value increases that would work against your buying power. Now, of course, this risk still exists if you plan to move and purchase another property–but the growth in value with the market will allow you to take that additional equity and put it into the new property.
The value in buying with today’s cash value is that it’s a hedge against price increases that someone renting would experience annually.
Benefit #2 is limiting your household expenses. Limiting your costs to just utilities, taxes, insurance, and possibly homeowners-associated fees will allow you to still afford the home in the event of an economic downturn, job loss, health issues, and the like. Removing the largest monthly payment that most people have will prevent undue risk to you and your family, building in monthly margin between what comes in and what goes back out.
Benefit #3 is peace of mind. Oftentimes people don’t consider or factor in the level of peace of mind that a home can provide or even remove. I believe this is probably the biggest benefit to paying cash for a home; the lack of volatility affecting you, the potential for undue risk, and the ability then to rest in having your shelter component covered. This peace of mind is so essential, and in fact, so many people are searching for how to achieve this peace.
Now, buying a home in cash will force you to think through what it is you value most in a property and limit your search through that criteria only to buy what it is that you really need and nothing more–at least initially.
Which is right for you? Can you delay gratification and save up to buy a home in cash, or do the benefits of expediting the process outweigh it?
CTA:
My call to action is to really think through what your life would look like without a mortgage or rent payment and whether that motivates you enough to forego signing for that mortgage in order to save for the 100% down plan.
