While the majority of American families are not necessarily in the position to pay cash for their new home, it is still worth looking at the cash versus mortgage options to better understand that there are actually pros and cons of each payment method.
First, we’ll review the cash purchase.
Benefits of paying cash for your home:
Quicker process - When paying cash for your new home, the process is typically much faster as you are not abiding by the lender’s guidelines and time frame. You are also cutting out all of the time it takes to find a lender you want to work with and compare offers.
No need to worry about being approved – The stress of being approved for a mortgage, never mind being approved at a low rate, is eliminated. Your credit score is not a factor with a cash purchase.
You will save on fees that are required with a mortgage – By paying cash, you eliminate the lender fees, some of the closing costs, home owners insurance (which will be an optional purchase) and most importantly, the interest paid on the loan. You can also save on the cost of an inspection; however, this is something you should consider paying for so you can get a clear picture of what to expect with the home. The inspection will indicate if there is anything you should be concerned about, which could cost you more money in the long run.
Drawbacks of paying cash for your home:
Quite simply, a cash purchase is not an option for most people.
Cash not easily available if needed – If you spend your cash and savings on your home and need to come up with cash quickly (medical emergency, etc), you might find yourself scrambling. Even if you decide to sell your home, it’s a lengthy process and could take quite some time to receive your money.
Not necessarily the best investment – As an investment, a home purchase is not always the most stable as it has the potential to lose value, depending on the real estate market.
Tax repercussions – You are unable to use mortgage interest as a yearly tax deduction.
Financially strapped – If all your money is put into the purchase of your home, you run the risk of becoming financially strapped, or house poor, leaving yourself without money for repairs or emergencies.
Now we’ll take a look at using a mortgage to purchase your home.
Benefits of a mortgage:
You keep cash on hand – Even if you have the cash to pay for your home, it might not be wise to do so. If you tie up your cash on such a large purchase that is not easily expendable, you could find yourself having a difficult time paying your day to day bills or life’s unforeseen events.
You only need to come up with a down payment – Even if you have the cash on hand, you can choose to put down a sizable down payment. This frees up your cash for other investment opportunities as well as emergencies, should they arise.
Improve your credit score – Keeping up with your loan payments will help improve your credit score.
Prepayment options – With a mortgage, you have the option to make additional payments at any time, shortening the length of your term. This will help to pay your mortgage sooner and cost you less money overall, saving you on interest.
Drawbacks of having a mortgage:
Possibility of being denied – When applying for a mortgage, there is always the possibility of being denied for the loan, or being approved with a high interest rate. Your credit score is a huge factor in your approval and interest rate.
Interest – You pay thousands and thousands of dollars in interest over the term of your loan.
Additional Fees – When buying a home with a mortgage, you have additional costs such as lender fees, appraisal fees, closing costs, etc.
Easier to overdo – Once you receive your preapproval for a mortgage, its easy to find and purchase a home that is more than what you actually need, therefor spending more than you need or what you would have had you purchased with cash.
And of course… If you fall behind on your mortgage payments, there is always the risk of foreclosure.
If you find yourself with the means to pay all cash for your home, do take the time to consider the pros and cons of the all cash vs mortgage options. If you want to pay cash, be sure to have money for your monthly expenses, including insurance, taxes, home owners associations fees if applicable, utilities, etc. If you're planning on getting a mortgage and investing your money otherwise, be sure you don’t get in over your head buying more home than you actual need, and make sure you are prepared for the longer home buying process that is involved, including the approval process. It might be a wise idea to consult a financial advisor to discuss your financial health and determine the best route for your particular situation.