While many families aren’t in the position to pay cash for their new home, it’s 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 aren’t abiding by the lender’s guidelines and time frame. You’re also cutting out all of the time it takes to find a lender and compare offers.
No need to worry about getting approved – The stress of being approved (and getting a low rate!) is eliminated. Your credit score is not a factor with a cash purchase.
You’ll save on fees that are required with a mortgage – By paying cash, you eliminate the lender fees, some of the closing costs, homeowner’s insurance (which will be an optional purchase and certainly worth considering) 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 know if there are any problems with the home.
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 use your savings, you won’t have cash on hand for emergencies. You might find yourself scrambling if a problem should arise with your house, or if someone should get sick.
Not necessarily the best investment – As an investment, a home purchase is not always the most stable. Remember, a home has the potential to lose value, depending on the real estate market,
Tax repercussions – You’re unable to use mortgage interest as a yearly tax deduction.
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 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/maintain your credit score.
Prepayment options – With a mortgage, you have the option to make additional payments at any time. 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’s 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 – With a mortgage, you have additional costs such as lender fees, appraisal fees, closing costs, etc.
And of course… If you fall behind on your mortgage payments, there’s always the risk of foreclosure.
If you have the ability to pay cash for your home, do take the time to consider the pros and cons of the cash vs mortgage options. You also want to be sure to have money for your monthly expenses and have money aside for emergencies. If you’re planning on getting a mortgage, don’t get in over your head by buying more home than you need. And of course, be prepared for the longer home buying process that’s involved, including the approval process. It might be wise to consult a financial advisor to discuss which option makes most sense for your particular situation.