Buying a House in Cash vs. Mortgage- which one is better?

Buying a House with Cash vs. Mortgage: When buying a home or investing in a home, you are faced with the important decision of financing the purchase. Many buyers opt for a mortgage, but there is also an option of paying off the home in an all-cash deal.

Many financial experts say to always avoid debt. This, of course, makes us believe that our best option is to put as much money as possible into the property or to buy it outright.

According to Zillow's 2018 Consumer Housing Trends Report, only 23% of US buyers pay cash for their homes.

There are so many things to consider when deciding between buying a home with cash and getting a mortgage. In this article, we're going to break down the pros and cons of each item and help you determine the best strategy for you.

Read on to learn how to buy a home with cash and why it is an attractive option for some buyers.

Buying With Cash vs. Using a Mortgage (Overview)

There are tons of creative ways to finance a home purchase, but the two easiest ways are either to buy cash or take out a mortgage. Buying a home with cash means you have access to a flat fee that allows you to buy a home directly from the seller.

Using a mortgage is the most popular option for home buyers because so few people have enough money to buy a home in full. (If you do, you're in luck!) A mortgage is a technical term for a home loan where you pay a down payment - called a down payment - and fund the remainder of the purchase price from a bank. The mortgage involves interest payments and closing costs. Mortgages allow buyers to buy homes that are worth much more than the money they currently have access to.

Should I Buy a House With Cash?

When you are in the market to buy a home, you may be wondering whether buying a home with cash is more beneficial than using a mortgage. Personal and national debt is a hot topic these days, and we keep talking about how the insurmountable amount of debt is crippling our economy. With ideas like these spinning in your minds, you might not help but wonder if you should just try buying a home with cash and not going into debt. Well, the answer is not so clear here. As with most of the major financial decisions you make in life, there are both pros and cons that you need to weigh carefully. Here is an overview of the pros and cons.

Pros of Buying a House in Cash

• No interest payments: If you pay with cash instead of taking out a mortgage, you won't have to pay any interest on top of your monthly payments. It can save you a lot of money in the long run. The interest cost on a 30-year loan will likely cost you tens of thousands of dollars. Especially when you use the full 30 years to repay the loan. Even with today's low-interest rates, a 30-year mortgage of $ 100,000 at 4% is over $ 70,000 in interest
• No Closing Costs: By paying in cash, you can avoid the closing costs associated with mortgages. You don't pay any mortgage origination fees, valuation fees, or other lender fees. However, it is always a good idea to get an appraisal of any property you have bought to make sure you are not overpaying.
• Attract Sellers: Sellers are always afraid to say “yes” to an offer, but the buyer pulls out because they couldn't get funding approval. You can make yourself more attractive to sellers by making a cash offer, as they will feel more confident that the deal will not fail. Private sellers generally prefer cash offers. In some cases, sellers will accept a lower cash offer than a buyer who needs to take out a loan. Paying in cash also reduces the risk of a buyer being denied funding or the loan failing for several reasons. This is often referred to as a cash discount for buyers.
• You Can Usually Close Faster: If you've ever tried taking out a mortgage, you know that it can be quite complicated. To get a mortgage, you will need to provide documents such as proof of income, bank statements, credit reports, debt-to-income ratio, etc. If you pay cash, you skip the entire mortgage process and can usually expedite the closing of the deal faster.
• You Own the House Outright: Since your home is not mortgage-backed, it's easier to sell. Even if you have to sell it at a loss, if you own the building it becomes a lot easier to sell regardless of market conditions.
• Your Credit Score Doesn’t Matter: A credit score is an important indicator that lenders should consider when accepting or declining a loan. If your credit score is not as high as it should be, you no longer need to do a credit check by paying cash as you are no longer taking out a loan. You don't have to prove that you can keep up with mortgage payments.

Cons of Buying a House in Cash

• You Tie Up a Lot of Money in One Asset: One thing to be aware of is not to tie up your money entirely. By investing all of your money in the buying process, you can expose yourself to financial risk in an emergency or when the home needs unscheduled repairs and you cannot afford them. For example, investing more than $ 100,000 in a single real estate investment can be risky. Tying a large amount of money into an asset will make your investment portfolio less diversified, which increases the risk of losing money.
• You Decrease Your Liquidity: Unlike other types of investments such as stocks or bonds, real estate is an illiquid asset. That said, it's not quick, easy, or free to sell. When you put most of your money in a house, access to cash is restricted.
• You Give Up Leverage: Nobody likes to be in debt. However, using real estate actually has a debt benefit. Assuming your mortgage is tied and you can get a low-interest rate, the effects of inflation may make you money by taking out a mortgage. If you paid cash, you forego this leverage.
• You Miss Out on Tax Benefits: In most cases, you can deduct mortgage interest from your itemized taxes up to a certain amount. This can potentially wipe out much of the money paid on interest and put money back in your pocket. If you use cash, you are missing out on great tax breaks.
• Mortgage Rates Are a Cheap Source of Financing: When it comes to loan types, mortgages are usually the cheapest source of finance. Mortgages come with low-interest rates, especially when compared to other types of loans.
• Your return on investment may be lower than other options: Just because you can buy a home with cash doesn't mean you should always do it. It is important to determine whether your money is better used for other investments. Run the numbers for other investment options and decide whether another part of your money can get higher returns than a home elsewhere.
• House rich and poor in money: Buying a home with cash and then leaving little cash for savings is not the best position. What if there are unforeseen costs or major repairs that you can't afford? Emptying your savings to buy a home for cash is risky and could haunt you.

 Steps to Buying a House With Cash

Once you've decided that buying a home with cash is the right decision for you, you are probably wondering how exactly are you supposed to do it. Here are the surprisingly simple steps to buying a home with cash:

Set a budget

First of all, you need to set a budget. You can look at property listing websites and search for the type of list price currently on the market in your area. When setting a budget, you have to be realistic. Since you are going to be paying all the money, you need to choose a destination that balances the number of homes you can afford, the size of your income, and the time it will take to buy them. You may need to first commit to buying a home that you want to sell in order to later achieve your dream home

Start Saving

The easiest way to start saving is to break a big financial goal down into smaller, more achievable goals. For example, calculate backward how many years you would like to buy the house and how much you will then have to save each month to achieve this goal. You can even come up with a creative plan, such as: starting small as you pay off your debt and then increase your savings rate as your cash flow improves and your income grows. You may even have to make some sacrifices to achieve this goal, such as drastically reduce your expenses or even creatively increase your income.

Make offers!

While buying a home with cash can be broken down into three easy steps, the steps are definitely not straightforward. Saving enough money for a home can certainly be the hardest, especially since it can take years. When you finally have your target amount saved, it's time to compliment yourself on your hard work because it will soon pay off! Then hire a real estate agent and let them know you plan on making cash deals! Your agent can use this as leverage to potentially make you an even better deal than you ever imagined.

Now, we have discussed how to buy a home with cash as well as its benefits and shot comings, what does it take to buy a house with a mortgage? what are its pros and cons?

Pros and Cons of Getting a Mortgage

The majority of people don't have enough money to buy a home with cash or simply decide not to buy it. Getting a mortgage can have many advantages, but the disadvantages can outweigh the advantages, depending on your individual financial situation.

Pros of Getting a Mortgage

• Less money in advance: To get mortgage financing, buyers only need to reduce the percentage of the loan amount. This means you are investing less money in an asset and leaving enough money in the bank to cover repairs or expenses now or later.
• More flexibility: With additional cash reserves, the buyer has more flexibility to put their money elsewhere, or still has a sizable nest egg in the bank for emergencies or other occasions. As mentioned above, you can invest your money elsewhere, make yourself more liquid than paying with cash, and be more flexible.
• Tax benefits: Typically, when homeowners report their tax deductions, they can deduct mortgage interest on the first $ 750,000 of the first and second homes. This is especially useful for retirees who no longer have many options to reduce taxable income (i.e. 401 (k) contributions). Remember that tax laws can change at any time.
• Mortgage rates are low compared to other types of loans: Traditional mortgages are most common for home buyers. However, there are circumstances in which a buyer can choose a variable rate mortgage or an ARM. A variable-rate mortgage is a fixed-rate mortgage. It is typical for an ARM to have a fixed rate for the first few years of the loan and then change regularly. Homeowners who opt for a variable rate mortgage usually plan to live in the home for the initial fixed-rate period. This would be the biggest benefit of using an ARM. Interest rates are likely to change after the initial fixed period depending on market conditions and fluctuations. This fluctuation makes it difficult for investors to estimate their budget and the potential return on investment.

• A mortgage can improve your credit score: This assumes that you make your mortgage payments on time each month.
• Inflation should make future monthly payments "cheaper".

Cons of Getting a Mortgage

• Mortgage Interest: Whenever you borrow money, you can always expect to pay interest. Because that's how lenders and banks earn their money. For example, the total 30-year interest on a $ 200,000 loan with a 4.5% interest is $ 165,000, almost double what you paid for the house.
• You need to qualify for a mortgage: Mortgages no longer swarm like free candy as they did before the 2008 stock market crash. Banks and lenders have learned that they cannot lend money to anyone. As a result, it has become more difficult to qualify for a mortgage.
• You may need to pay the mortgage loan premiums: There is a cost associated with raising a small amount of money, usually less than 20%, on a property. A mortgage loan insurance premium increases your monthly mortgage payment based on how much you invest. This is to protect the lender in the event that you cannot pay your mortgage.
• Debt: Most financial professionals will keep saying don't get into debt. Getting a mortgage is the highest form of debt for most homeowners. It can also be tricky figuring out how to sign up for 30 years of monthly payments.
• Complex mortgage process: The process of getting a mortgage can be tedious, and at times frustrating. Lenders ask for almost all financial documents available. They require qualifications such as credit score within a certain range, proof of income, money in the bank, and a low debt-to-income ratio. If you don't fall into one of these categories, there is a good chance that you will not be eligible for the loan.
• Lender Fees and Closing Costs: There are many additional fees and costs associated with working with a lender to secure a mortgage. Buyers should expect to pay mortgage fees, valuation fees, lender fees, and closing costs. All of these costs typically add up to a few thousand dollars.

Can I Pay Cash and Get a Mortgage?

Most buyers deposit cash and take out a mortgage. While it is possible to put only 5% less on a traditional loan, 20% is recommended. This eliminates mortgage insurance and lowers your mortgage rate. Some other reasons to pay cash and get a mortgage:

• Equity investment
• You can pay off early, with no prepayment penalties
• You can always pull equity with a cash-out refinance

Why Do Rich People Still Take Out Mortgage Loans?

This question is asked all the time. People with a lot of money still take out mortgages for a couple of reasons.

1) They know home loans are cheap, and

2) you can yield better returns relative to other investments.

“Paying cash for the full purchase price of a house is similar to investing in a bond that pays the same interest rate you’d pay with a mortgage,” says James Bregenzer, owner of Bregenzer Group LLC, a private equity and capital management company. “For example, opting to not pay a 30-year mortgage with a 5.5 percent interest rate is basically the same as getting a 5.5 percent return on the investment price,” explains Bregenzer.

Getting the Best Mortgage for Your Goals

Your choice of financing your investment property can determine the profitability of your return. If you have the cash to buy a property in cash, you can skip the financing entirely. However, the use of leverage can significantly increase your returns.

Kathy Fettke, Co-Founder and Co-CEO of RealWealth, explains in her book Retire Rich with Rentals why funding can be the best route for investors.  “Which scenario makes more sense and puts you in a better position 10 years from now? Tying up your capital with one $100,000 home? Or putting down 20% and owning five homes?”

Fettke adds: “The returns tend to increase with the leverage. A $ 100,000 property rented for $ 1,000 a month is likely to generate a net annual return of 9-10%. If the same property is financed, it can generate an 18% return as the investor has used less of his own money. ""

CONCLUSION

Take a deep breath everyone! After you've weighed the pros and cons of buying a home with cash versus a mortgage, you should have a clear idea of your next steps. Whether you are offering a cash offer on a home or considering your financing options for an investment property. You are on the right track to use and invest your money wisely and, hopefully, put yourself in the best financial position possible. For example, some buyers might strategically go with the all-cash route to make sure they can pounce on a deal in an extremely competitive market. A different type of buyer might go with a mortgage if they plan to live in the house for a long time and want to be able to purchase more house than they could have if they had paid all cash. If you do go with the cash option, however, be sure to set aside a nest egg in case of emergencies or unexpected expenses. You never want to tie up absolutely all of your cash.