Regardless of whether you recently received a large inheritance or have been saving for years, many people aim to purchase a home without taking out a mortgage loan. Cash For House
Of course, when making a decision of this magnitude, it is important that you do not restrict yourself to financial considerations only.
For some individuals, emotional factors such as the security of not having loan repayments are worth more than a loss of investment opportunities.
To make the decision easier, this article will provide information on the various benefits and drawbacks of paying cash for house.
What Are The Benefits Of Paying Cash For House?
1. No Mortgage Loan
The most obvious benefit to paying cash for house is the absence of any mortgage loan.
This means that you will not need to worry about making a mortgage repayment each month.
Moreover, you do not need to worry about paying interest on the debt which can be high in certain states.
It should also be noted that certain US states have a homestead protection factor that can be used if you need to declare bankruptcy.
For example, if the home is mortgage-free you can keep the property despite needing to declare bankruptcy; thereby, protecting you and your family from creditors.
2. Avoiding Mortgage Fees
The mortgage interest is not the only additional cost you take on when acquiring a mortgage loan.
It is also necessary to pay upfront closing costs for taking out the loan, as well as any pre-payment penalties if you attempt to pay the loan early.
It doesn’t make sense, but that is the way almost all loan repayment schedules operate.
According to a survey by Bankrate.com, the average closing costs for a $200,000 mortgage loan range from $4,000 to $6,000.
3. Easier For Inheritance Purposes
When buying a house for cash, you will have full ownership of the property without any bank involvement.
This is beneficial because it is easier to gift the property to children or place it in a trust if you wish to do so.
If a mortgage loan is in place, this is not possible or there are several complications that need to be dealt with before any passing on of the property can be conducted.
What Are The Drawbacks To Paying Cash For A House
Are adjustable rate mortgages a better option than paying cash for a house?
For some, the possibility of saving money upfront is what attracts borrowers to adjustable rate mortgages. However, it’s important to weigh the risks. While cash can offer security and peace of mind, an adjustable rate mortgage may be enticing for those willing to take a chance on lower initial payments.
1. Reduced Level Of Liquidity
Even if you are able to obtain a small, cost-effective home, it will not come at a cheap price in today’s real estate market.
After purchasing the house, you more than likely won’t be able to access the cash regardless of expenses that arise; therefore, need to borrow money at a higher interest rate.
For example, if you place all of your savings in the home and your car breaks down, you will not have the money to pay for car repair costs.
This means that you may need to take out a loan to repair the vehicle which could have a higher interest rate than any mortgage loan rate.
2. Losing Out On Investment Opportunities
When choosing to pay cash for house, you will be losing out on various investment opportunities.
When determining if cash payment is right for you, you should consider how you would utilize the money if you opt for a mortgage loan to purchase a home.
If money were accessible, you may be paying more interest on the loan; however, you could be earning a higher interest rate on money sitting in a low-interest account.
This means that you can earn a higher return rate by investing the money instead of spending all of the cash on a single asset.
Moreover, mortgage rate interest is tax-deductible in several US states.