Buy cash or get a mortgage?

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Many homebuyers use a mortgage to buy a home, but there are those who are fortunate enough to be able to pay in cash – and in today’s booming real estate market, cash buyers have a lot more leverage. Is buying a house with cash the best financial decision? If you weigh the pros and cons of buying a home for cash versus getting a mortgage, here are the main points to consider.

When should you consider paying cash for a house?

A single cash offer could be profitable in several ways. Here are a few reasons to consider making one:

To beat other buyers

In today’s market, sellers favor cash offers because they will be able to close the sale faster and without the risk of seeing the deal collapse if a mortgage approval does not go through as planned.

To speed up the process

Paying cash can also simplify the home buying process. There’s no loan application, underwriting, or approval, so you’ll save yourself the potential headaches and stress of dealing with a lender, and you might not have to wait that long. to conclude.

To ignore the upfront fees

If you have the funds, paying cash for a house definitely saves you money, since you won’t have to pay the costs associated with a mortgage. Origination fees, evaluation fees and others closing costs can total several thousand dollars.

To reduce your costs in the long run

Without a loan, you also won’t be spending money each month on interest charges, which add up to the typical 30-year mortgage.

“You don’t have a mortgage payment and paying cash gives you the actual opportunity cost of the mortgage,” says Leon LaBrecque, director of growth and certified financial planner at Sequoia Financial Group in Troy, Michigan. “Not having a 2.875% mortgage is like earning 2.875%.”

When should you consider getting a mortgage?

The question is not simply “Can you buy a house with cash?” ” although. It’s important to ask yourself if you should be spending all that money up front. Here are some of the benefits of borrowing a mortgage instead of using your own funds to buy a home:

To earn more than what you save

A compelling reason to consider getting a mortgage is historically low interest rate. Currently, the benchmark 30-year fixed-rate mortgage is 3,000%, according to Bankrate’s survey of domestic lenders. Locking in a low fixed rate on a 30-year mortgage helps you free up money for other purposes, like a mortgage. emergency fund, investments or the financing of your retirement accounts.

To reduce your tax bill

If you normally itemize deductions on your tax return, getting a mortgage can reduce what you owe because mortgage interest is tax deductible. This can be very important for high earners who typically retail and want to maximize their deductions.

To build credit

Having debt is not necessarily a bad thing. Have a mortgage gives you the chance to make those regular payments that make you look great in the eyes of the major credit reporting agencies. In the long run, managing your mortgage debt on a regular basis can help improve your credit score.

“Mortgage debt is good debt because it is about an asset that appreciates, not an asset that depreciates like a car or a boat,” says Allan Moskowitz, a certified financial planner at Transformative Wealth Management in El Cerrito, in California.

Considerations to Consider When Deciding to Buy a Home with Cash or a Mortgage

When considering buying a home with cash, ask yourself these questions to help guide your thinking:

1. What is the state of the housing market?

If you really want to secure this home, keep in mind that another buyer might feel the same way. If so, an all-cash offer can make all the difference. A recent report Real Estate Brokerage Redfin has found that making an all-cash offer improves the odds of winning a auction war by 290 percent.

2. How much more will you pay with a mortgage?

Suppose you want to buy a house for $ 360,000, making a 20% payment of $ 72,000 for a 30-year mortgage for the remaining $ 288,000, with a fixed interest rate of 3%. The closing costs are typically 2% to 4% of the loan principal, so in this case, that’s between $ 5,760 and $ 11,520.

Using Bankrate Mortgage Calculator, at the end of the loan term, you can estimate that you will pay a total of approximately $ 149,167 in interest. By adding your total interest to your closing costs, you will end up paying an additional $ 154,927 to $ 160,687 over a 30-year period.

This cost could be offset to some extent if you are a taxpayer who itemizes deductions on your return. You could get tax savings every year if you are able to deduct your mortgage interest payments. If you are married, you can deduct interest up to $ 750,000 from qualifying home loans. If you are married and file separately, this limit is halved to $ 375,000. If you are planning to buy a house with cash or take out a mortgage, you can use Bankrate’s mortgage interest tax deduction calculator to understand how a mortgage will impact what you owe.

3. How much money will you have left if you pay cash?

If you are paying cash for a house, you might feel good knowing that you won’t have bills for your mortgage, but make sure you don’t stretch your finances too much to achieve this. You will still need to have an emergency fund in place, and you will need enough money to cover home maintenance and repairs. You’ll also want to make sure that your cash purchase doesn’t impact saving for retirement or other overall expenses.

At the end of the line

Ultimately, the competition between buying a home with cash and a mortgage depends on your overall financial situation, not just the home itself.

Buying cash to save on mortgage interest might not be the best choice if you would otherwise be able to invest the money, in the stock market or elsewhere, for a higher return. If you can lock in a mortgage at today’s low rates, you can take advantage of the lender’s money to purchase your home.

Getting a mortgage can offer great financial flexibility by keeping more of your cash to use in an emergency – but, for retirees or those who want to be debt-free, buying cash can offer certainty. and security difficult to implement. price on. Whatever your age or financial situation, paying with cash gives you the peace of mind that you are not in debt on your most important asset: your home.

If you decide to buy your home with a mortgage, you can easily compare mortgage lenders and offers on Bankrate. Whether you’re looking for a 15-year or 30-year mortgage, you can compare rates from lenders in your area, along with estimated closing costs, to find out the true cost of financing your home.

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