Homebuyers constantly face a dilemma whether to wait until they can buy all-cash realty or opt for a mortgage. Although most homebuyers would also end up with the second option, it won’t be wrong to say that the first option is also pretty good.
On the one hand, a mortgage actually increases your debt, but on the other, it also frees your personal finances.
In contrast, buying an all-cash property may allow homebuyers to save on interest and additional financial costs.
Yes, it’s not that easy to decide.
But isn’t buying a home itself an overwhelming decision?
Nonetheless, this article should help you clear your thoughts and decide which finance option best suits your needs.
So, without any further ado, let’s explore.
All-Cash Purchase Benefits
As already mentioned, cash purchases eliminate the need to pay interest and any other closing costs. To be more precise, there are no origination fees, appraisal, or inspection fees involved for the buyer.
Usually, it is a more attractive option for homebuyers, especially in competitive markets. More so, it is generally sought for investments and not for personal use. In fact, sellers also prefer to accept an all-cash offer because it eliminates the loan contingency once and for all.
As a result, an all-cash real estate transaction is also likely to close faster. This is also why all-cash deals usually close at a lower offer price than on involving loans or mortgages.
How Can Mortgage Be Better?
Taking out a mortgage to buy a home certainly has many significant benefits. After all, it is the preferred choice of most homebuyers.
Indeed, several market studies reveal that many prospective buyers do not prefer to tie up too much cash to purchase real estate. And that’s when they have enough money to back up their purchase.
The reason being, tieing up too much cash limits access to it for other needs and desires. Of course, it also leaves buyers stranded during emergency situations, leading them to seek finance for such conditions.
Besides, not taking a home loan may also make it challenging to obtain a home-equity loan if the need comes up. It is quite possible, perhaps, that you may need to take out a loan for a significant repair or renovation project down the road.
More so, it leaves your credit score in the haze as all-cash purchases don’t really make up for a good factor in your credit score evaluations.
Not to mention, it is usually not easy to sell a home bought with cash, especially if the buyer stretched his personal money a lot to buy it. Usually, the homeowners need to put up a “sale of property contingency” to buy their next home. Unless, of course, they have extensive cash reserves, which is usually not the case.
In addition to all the liquidity benefits, mortgages can also offer many tax benefits to the homebuyers, as already mentioned.
Typically, mortgage interest payments are tax-deductible.
Long story short, the mortgage is usually a preferred mode of payment for a home purchase and offers several benefits against all-cash assets. Although it also ends up increasing your liability, given the benefits, it may seem worth paying extra money.
Other Considerations
It is noteworthy that having a mortgage can protect homebuyers from some creditors in some cases. Most states grant a certain level of protection to consumers from creditors.
For example, there are provisions to protect consumers from creditor harassment and asset freezing in case of defaults in California. On the other hand, the Florida state government offers complete protection to homebuyers against certain creditors.
The provision is usually referred to as homestead exemption. However, it is also noteworthy that these exemptions do not protect buyers from foreclosure.
So, having some liquid cash in your bank account may also protect you from such troubles if you find yourself in some serious debt down the line. The bank or creditors may use the money in your bank account to recover most of the dues. And it would still leave you enough space to breathe till you can arrange for the remaining dues.
So, What To Choose – Cash Vs. Mortgage?
Clearly, both the payment choices are good, given you have what it needs to support your purchase decision.
Cash-bought real estate can be great for investors seeking to earn extra income. It not only allows a quick rental setup but also guarantees quick returns.
On the other hand, the mortgage is typically more popular with consumers. It does not tie up their finances to an immovable asset and offers more flexibility in property choices.
Both the options have their pros and cons. So, it really boils down to what suits your needs the best.
If you are looking forward to making an investment, you should probably benefit more from all-cash purchases. In contrast, if you buy a home to live in, you might want to go for a mortgage instead.
The Takeaway
You need to ask yourself what you need and which option can provide you a sustainable return on your investment. Whether purchasing a home for your personal needs or for commercial reasons, it makes sense to explore your financial status and conditions.
Paying in total cash for purchasing a house is comparable to investing in a bond. And in most cases, your returns would be equitable to the interest you would otherwise pay with a mortgage.
In contrast, taking out a mortgage leaves you more room for exploring more investment options and multiply your returns. You have the options like refinancing and debt consolidation to improve your chances of earning higher returns.
In the end, it all boils down to what you can afford and what you should afford.
It would be best to discuss your needs and current financial status with a realtor or a real estate investor. The experts would be able to guide you better and help you with your decision.
But, keep in mind what you’ve learned in this article.
We hope we answered your questions.
Please leave your thoughts in the comments section below.