Buying a Home: Pay Cash or Get a Mortgage?

Posted by Laine Smith on 9/9/15 9:00 AM

Many people are wary of the financial responsibility that comes with financing a home purchase. If you have the cash, it may seem like a no-brainer to purchase your home outright, but this article will show that the bigger the mortgage and the longer you carry it, the more beneficial. 

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One of the biggest benefits of carrying a mortgage is that a home loan is most likely the cheapest money you will ever borrow. By going forward with a mortgage, you can avoid tying up cash that could be used for more profitable ventures and options in case of a financial emergency.

Investing More and Gaining Quickly

Typically, you have no choice but to assume a large mortgage for the purchase of your first home. As your family, income and equity grow, so does your need for a larger house.

Let’s say you profit $100,000 from the sale of your previous home and the price tag on your new home is $300,000. Would it be more beneficial to use all of your cash to make a substantial down payment or put down only 10 percent?

If you made a down payment of $100,000 with a 30 year fixed-rate mortgage at 3.75%, your monthly mortgage payment would be $927. The smaller down payment of 10 percent would raise your monthly payment to $1,251.

Of course the smaller monthly payment is more attractive, but the bigger question is: are you trying to create wealth or eliminate debt. Having a low monthly payment lowers expenses but it also lowers your ability to create wealth through investment. Investing a large lump sump over small monthly installments has the potential to be much more profitable.

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Tax Benefits of Your Mortgage

Placing a large down payment or making a cash purchase also depreciates deductions you take when doing your taxes. Homeowners can deduct up to $1 million in interest payments for a first or second home.

Bottom line: the larger your loan, the larger amount you get to deduct come tax season.

Building Equity

Gaining equity is perhaps the biggest financial advantage of owning a home. Equity can be used to help pay for your children’s weddings and college education, retirement, large medical bills, etc.

Some people are under the impression that the only way equity grows is by putting down a large down payment and paying off the mortgage as quickly as possible. Regardless of down payment, your home is almost certain to grow in value over the life of your mortgage.

If your home grows in value at a rate of one 1 percent per year, it will be worth $366,057 in 20 years, and you will have gained an additional $66,057 in equity. Long-term mortgages allow your equity to grow as your home value grows.

Liquidity and Flexibility

There is nothing wrong with paying off debt in a timely manner. But when it comes to your mortgage, you could be setting yourself up for financial strain.

For example, because you want a lower interest rate and smaller monthly payment you use all of your savings on a large down payment and apply for a 15 year fixed-rate mortgage. You also pay an extra amount each month toward principal. You want your mortgage gone as soon as possible.

It may seem like you are on the correct track to financial freedom, but while you are making more frequent payments, you are also missing out on higher mortgage interest tax deductions and investment opportunity. Also, if you experience a job loss, unplanned medical expenses, etc. you will have already cleaned out your savings for your down payment and have no investments to withdraw from.

What’s Right for You

Obtaining a mortgage for your home purchase over paying cash has several financial advantages but is pertinent to your personal financial situation and goals. Talk to one of our mortgage bankers to see how a mortgage fits into your home purchase plans.

Want more information about purchasing a home? Our Mortgage 101 Handbook is a great resource for first-time homebuyers.

Download: Mortgage 101 Handbook

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