Not many of us are fortunate enough to have sufficient cash to even consider purchasing a home in well, cash. And yet if we are faced with that choice now, which would be a wiser move towards home ownership – a cash purchase or taking out a mortgage?
It is a common notion for many people that debt of any kind is not good for their financial health. Even in these times of crisis, much has been said about how one should work to pay off debt rather than taking on more. The reality however, is that not all types of debt are necessarily unhealthy. And if there’s a particular debt that can be considered as “good,” it is mortgage. Mortgage allows you obtain an asset, which, while still is a loan, has the potential to rise in value in the future.
Of course, there are also certain advantages to buying a home in cash. For those who are able to do so, these are the benefits of doing an all-cash purchase on a home:
- Complete ownership of one’s home. Without monthly payments and the risk of foreclosure to worry about, you would have complete peace of mind, knowing that you will always have a home to reside in.
- Eliminate mortgage interest. A property’s purchase price can double, perhaps even triple from that of the actual cost, when you take into account the mortgage interest paid for the duration of a home loan.
- Greater purchasing power.Because buying in cash almost always ends up in faster negotiations and with less of the complications and costs that financing can bring, cash buyers often have the leverage to haggle for a discount on the price of the property.
- Property can be used as security for a loan. The home can later be used as collateral for a loan in case the homeowner has a need for cash.
On the other hand, even if you do have the money to pay for a house upfront, it would still be wise to consider the benefits of a home loan. Depending on your particular financial situation and your future plans, a home mortgage may actually benefit you more in the long run. Financing a home purchase would allow the homeowner or borrower to:
- Take full advantage of the valuable tax benefits of a mortgage. The country’s tax rates are favorable for homeowners and that is why a home mortgage can serve as an ideal tax shelter.
- Mortgage interest – is the biggest factor of your mortgage payment and can be fully deducted from your federal tax return and in some areas, from the state tax return as well.
- Real estate property taxes – on a first home and a vacation home can also be applied as tax deductions for income tax purposes.
- Local property Tax – is deductible from your federal income tax return.
- Capital gains exclusion – of up to $250,000 in profit for an individual or $500,000 for a married couple, is applicable when you sell your home provided you have lived there for two of the past five years.
- Build up and use equity. Borrowing against the value of one’s home is possible not only for those who completely own their homes but also for mortgage holders. The difference is that for mortgage borrowers, you can only loan against your home equity (the amount you have already paid against the actual value of your home). The longer you have been able to pay on your mortgage, the higher you should have paid on the principal of your loan, and the greater your home equity.
Home equity loans and HELOCs (Home Equity Line of Credit) are some of the most common types of home loans that allow homeowners to borrow money at lower interest rates compared to credit cards and other personal loans.
- Diversify portfolio. By deciding to pay cash for a home upfront, you could also be missing out on other investment opportunities that are open to you. True, a home is also considered a valued asset and a major investment. But then again even if you have less debt (or none at all), you would be tying up a big chunk of your funds in real estate which would be difficult to sell or turn to cash should emergency needs or opportunities for a higher return on your money come up.
Home ownership may be one of the most major financial steps that you may take in a lifetime. When weighing the benefits of buying in cash versus taking out a mortgage, consider all aspects of both options before making that giant leap.