- Trying to save to purchase a home with cash takes much longer
- Mortgages free up cash for repairs and renovations
- There is such a thing as good debt
Financing a Home Purchase with a Mortgage isn’t as Scary as you Think
When first-time homebuyers hear the word “mortgage,” they immediately think about the debt that comes with it. And since smart money says today’s first-time homebuyer is probably carrying substantial debt already (credit cards, student loans, car loan, etc.), adding more to the pile isn’t that appealing.
Naturally, purchasing a home outright with cash, or at least plunking down a huge down payment to avoid as much mortgage debt as possible, can seem like the best choice.
However, there’s a lot more to think about when deciding to purchase a home with cash versus a mortgage loan. And while it would feel really good to own the home outright, there are some long-term detriments to not seeking mortgage financing.
It takes less time to save for a mortgage payment
Simply put, trying to save enough cash to purchase a home can take a very long time. When you think about all the other expenses you have, how quickly can you save enough cash to buy a home? Now, compare that to how long it takes to save enough money to make a mortgage payment.
Think of it this way. Let’s say you need to save $10,000 for a home. (And we realize there are no homes for $10,000. Hang in there with us.) How long do you think that would take? If you manage to save $200 a month, it would take more than four years to reach your $10,000 goal.
Now, consider a loan with a fixed rate and a 30-year term. Your monthly payments would be about $50 to $70 per month for a $10,000 loan. If you’re working full time, how long does it take you to earn that $50?
And the best part is you’re living in the home while paying it off. If you’re paying with cash, you’re either living a cramped apartment lifestyle, or bunking with mom and dad until you have enough to buy a home. Which sounds better to you?
A mortgage gives you more flexibility
So, let’s say you save up all the cash to buy your home. You love it, because you don’t have to pay any mortgage origination fees, appraisal fees, or other lender fees. The seller loves it, because they don’t have to worry about you backing out due to financing being denied.
And who doesn’t want that Hollywood moment of opening a briefcase full of neatly stacked and wrapped bills?
But this isn’t Hollywood. If you’re a cash buyer who doesn’t have ample liquidity, you could be tying your hands if you have any issues down the road. For starters, you won’t have cash on-hand to purchase new furniture or appliances if you need them. An empty house that you own is still an empty house.
If the house needs any major repairs or renovations, you must either wait until you’ve saved enough cash (again), or you’ll have to take on some consumer debt, which typically has a much higher interest payment than a mortgage. And the creditor isn’t going to give you 30 years to pay it off.
You could apply for a home equity line of credit to finance the renovations. But qualifying depends on multiple things, such as your credit score, the current property condition and how much the home is worth at the time of application. Banking rules are also at play once you pay cash for a home. A term called property seasoning (aka title seasoning) will limit financing options post-closing on the cash transaction.
Unless you have a crystal ball and can see into the future, betting on those unknown factors being favorable could be a gamble. And using mortgage money wisely is likely a smart move.
A mortgage isn’t necessarily bad debt
There are positive tax implications to buying a home with a mortgage rather than cash. Most mortgage interest payments are tax deductible, whether you’re building, purchasing, or making improvements. In many cases, home mortgage interest is the single itemized deduction that allows taxpayers to itemize in the first place. Without it, your remaining itemized deductions possibly won’t exceed the standard deduction.
Depending on the health of the stock market, a mortgage could earn you a better return-on-investment than the cash you spent outright. Further, you also remain liquid…cash reserves are king.
If you’re looking to buy a home and have questions about whether to use cash or a loan, first consult with your real estate agent about the best course of action. It cannot be overstated how important an investment buying a home is, and a seasoned pro is your best source of reliable information throughout the process. A realtor has resources and can refer the proper folks. Getting advice from the right people is going to get you the biggest bang for your buck.
Be smart. Buy right. Welcome home.