There are plenty of things to consider when buying a house. The location, type of property, and its market value are just a few of them. But none of these can affect your long-term finances than the source of funding for the purchase. You need to decide what would be the better option, buying a house with cash or mortgage?
Few people have enough savings to purchase a property outright, so it’s almost always home financing that wins. But if you can afford it and you have the patience to save, a cash purchase can also be a good option when buying a house.
To help you make an informed decision, here are the key differences between a house purchase with cash and mortgage, as well as the benefits of each to your financial health.
Buying a house with cash has many benefits including the preference you’ll get from sellers. Having enough cash at hand gives you the capability to close the deal faster, which is attractive to the sellers. Because of this, you’ll get more bargaining power and will be able to ask for cash discounts. If there are other buyers showing interest at the same property, you’ll have an upper hand and get the best chance to seal the deal.
Cash payment will also make your home purchase simpler. The seller agrees to your offer then both parties sign the deeds of sale and you’re done. This is another benefit of buying a house with cash. There’s no need to talk to a bank or lender and you don’t have to worry if your credit score is good enough.
There’s also a big saving in home insurance if you buy a house with cash. All property buyers are required to pay an insurance premium, homeowners association dues, and property tax. If you pay with cash, you can opt not to get insured since you’ll own the property outright.
Although there are advantages in full cash payment for a property purchase, it will also be a huge blow to your savings and that is its biggest downside. It will deplete your cash reserves significantly, which is not ideal when unexpected household expenses arise and the cost of living is continuously rising. This loss of liquidity may backfire against you in the future.
Paying by cash is also not a sound financial decision from a business perspective. There are many investment opportunities that can yield high profits if you put your cash on them instead of spending it all at once. These profits can be a lot bigger than what you’ll pay for mortgage interest and fees. If you buy a house in cash, you’ll lose the chance to grow your money.
A more popular way of buying a house is through a mortgage. The majority of home buyers around the world choose to buy a house with a mortgage instead of cash payment because it makes homeownership more affordable.
Essentially, a mortgage is a loan given by a bank or lender to a home buyer/borrower, where the house or property acts as the collateral. The total amount borrowed, called the principal, will be paid back by the home buyer with interest in monthly installments over a fixed period of time, called loan term (usually 15 to 30 years).
Once the loan paid off completely, the full ownership of the property will be transferred to the home buyer/borrower.
Home financing is a great way to buy a house and it’s true even for those capable of buying with cash. It makes a property purchase more affordable and manageable since the monthly repayments are much smaller and spread throughout a set time period.
By getting a mortgage, you also get more flexible financially because you have big cash at hand. You’ll be ready in cases of emergencies or any unexpected expense and have better cash flow at home. It will also enable you to dedicate the cash on other important household expenses or even to new investments.
Buying a house with a mortgage will keep your savings intact. If after some time you find that the property requires several repairs or you want to resell it for some reason, you’ll have the cash for another home deposit. You could also have additional savings because mortgage interest payments are tax-deductible.
Because mortgages are taken against the property, the bank or lender has a sense of security if you are unable to pay back the loan. Hence, they are keener to give lower interest rates, which will make your monthly repayments cheaper and more manageable.
If you have bad credit, getting a mortgage and strictly following the repayment schedule will help improve your credit rating. This will be very helpful in all your succeeding loan applications. Moreover, you can claim tax deductions for the interest payment of the mortgage, which will lessen the weight of the interest payment you’ll make.
When choosing between mortgage and cash purchase, you can find out which is the better option based on your financial situation. It would be helpful to ask for advice from other people but only you can determine which is the right option for you and your family.
Don’t make a decision in haste. Evaluate the features of each option then see if they fit your financial profile. If you’re thinking of buying a house with cash, ask yourself this: will you have enough money left to pay for other ongoing costs such as homeowners association dues, property taxes, and other required government fees? These are all on top of your family’s daily living expenses, which of course, must not take a backseat.
If not, then mortgage is the better option for you. The advantage of having a mortgage in your financial situation is that you’ll have a little problem covering the monthly repayments since you have a good amount of cash available. You can put a big part of your cash to an investment that will yield an extra income, which you can use to pay for the mortgage interest. If you earn more cash during the next few years, you could make advance payments or pay off your mortgage completely to shorten the 30 years loan term.
On the other hand, buying a house with a mortgage also makes more sense if you don’t have big cash at hand but needs a home for your family right away. Many banks and lenders are offering low mortgage rates with flexible loan terms and features. Some even accept smaller down payments and still give great mortgage deals.
So make sure to shop around and find the best deal available. It will be helpful to try and improve your credit score first before sending out applications. This will guarantee you the lowest interest rate possible for your mortgage.
Whether you choose to buy a house with cash or mortgage, the bottom line is that you should make an intelligent decision. Make sure that whichever you go for, it will give you the most value for your money and will provide you with a great return on investment. The information above should help make a sound judgment that will benefit you and your family’s financial health in the long run.