When purchasing a home or investment property most homebuyers provide a down payment and rely on financing for the rest. But did you know that some 20% of home purchases in the United States are made with cash? Some finance gurus even urge folks to avoid debt as much as possible. So, it may be logical to think that, if your coffers allow, paying cash for a home or putting down as much as you can is the sound approach. But there is a lot to consider before deciding to finance a home or paying cash. Let us take a look at the pros and cons of buying a home or investment property with cash versus mortgage.
Pros of buying a house or investment property with cash:
- No interest – the cost of interest on a 30-year loan can be many thousands of dollars.
- No closing costs – you will avoid loan origination fees, appraisal fees, and other fees.
- More attractive to sellers – private sellers may be keener to accept cash offers over financed offers as they do not have to worry about buyers backing out due to financing issues.
- Faster closing – by skipping the mortgage process, closings are generally much faster.
- It’s your home – You will own the home outright, which will make it easier to sell.
Cons of buying a house or investment property with cash:
- Loss of liquidity – Tying up a lot of money in a house can be risky. Cash tied in real estate is not easily accessed in case of financial misfortunes.
- Loss of leverage – Most people eschew debt or work to pay it off quickly. However, being leveraged in real estate presents an upside to debt. If your mortgage is locked in and you have a low interest rate, you may make money having a mortgage due to the effects of inflation. Paying cash would give up that leverage.
- Cheap financing – Mortgages are typically the cheapest source of financing.
- ROI – You may miss out on other investments that could yield high return.
Pros of buying a house or investment property with a mortgage:
- Affordability – Spreading payments over many years translates to manageable payments.
- Flexibility – Tying up less of your money in the house purchase, you can put more money into a reserve account or invest it elsewhere.
- Low rates – Mortgage rates are low compared to other types of loans.
- Tax Benefits – You can deduct mortgage interest.
Cons of buying a house or investment property with a mortgage:
- Interest – The total you pay back is much more than the cost of the home.
- Process – You must qualify for a mortgage and the mortgage process can be lengthy.
- PMI – If you put less than 20% down, you will have to pay a mortgage insurance premium, which increases your monthly payment.
- Debt – A mortgage is the highest form of debt most folks will ever have.
This is just a broad overview of the pros and cons between using cash to buy a home or investment property versus working with a lender to secure financing. The best place to start is by running the numbers. Contact the professionals at RLG today who are ready to work with you to see what best fits your needs in home and investment property purchasing.