There are two main ways to finance a house: take a mortgage or pay cash up front. Both approaches have their pros and cons, but only one is right for you. Learn why to pay cash for a house vs. get mortgage pre-approval to make the right choice for your needs in the long term.
Why Pay Cash for a House?
By paying cash for a house, you get all of the advantages of home ownership without going into debt. This is the chief advantage of paying cash: you own your home outright and can start to save what you would have spent on monthly mortgage payments. Over the 15- or 30-year lifetime of a mortgage, you will save tens of thousands of dollars in interest payments alone.
There's also a mindset benefit to paying cash: When you aren't indebted to the bank, you are secure in the fact that no one can take your house from you. You can take pride in knowing you are able to leave your property to your heirs as a legacy.
Individuals who are selling a large home and buying something smaller will be able to reinvest a portion of their payment in another property, then save the rest. Thrifty individuals who've managed to save all their money for a home can likewise avoid taking out a mortgage.
In a tight real estate market where there are bidding wars over properties, paying cash for a home can offer you an advantage over buyers who must get mortgage pre-approval. Since you can move forward quickly, a motivated seller may select your offer over others.
If you're in the business of flipping houses, paying cash can make sense. You will be able to purchase and renovate properties quickly, sell a home, then take the proceeds and buy your next fixer-upper.
Why Take a Mortgage?
For many people, mortgage financing is their only path to home ownership. By paying a small amount upfront and getting a mortgage for the rest of the asking price, individuals can become homeowners and start building equity.
Yet even if you have enough money saved up to pay cash for a house, it may not be the smartest use of your money. When interest rates are low, it may be best to put your money in the market--so you can make more of it--and take out a mortgage.
It's financially risky to tie up a large portion of your liquid assets (i.e. cash) in something like a house. If you need to borrow to cover something like a medical emergency because you don't have a sizable emergency fund, it's wise to take a mortgage and save your money for the unexpected.
Mortgages also come with tax breaks, such as the option to deduct real estate taxes. If you've paid cash for your house, you're not able to realize these tax breaks.
Mortgages have one more benefit, assuming your property increases in value. When it's time to sell your home, the return on investment is larger when you've financed your home than when you've paid in cash.
No matter how you finance it, home ownership is the ultimate dream for many people — and there's no 'one size fits all' approach to it. Knowing why to pay cash for a home vs. take out a mortgage, you can determine what makes sense for you—and then start saving for your down payment or your all-cash purchase.
We are happy to help and share our insight and experience to help you with the real estate investing process. Schedule an appointment today. Call 888-670-6791.