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Should You Pay Cash or Get a Mortgage to Buy Your Next Home?

When the real estate market is tight, money talks. You may have even heard the old saying that “cash is king” a few times – suggesting, of course, that a cash offer is the way to go for your next home purchase.
Except that may not exactly be right for you. It is true that, lately, roughly 30% of home purchases were made with cash, but the vast majority of people are still financing their new homes. While there are definitely some benefits to a cash purchase, there are also some significant drawbacks that you should consider before you commit.

What’s the Appeal of a Cash Purchase?

The biggest lure of a cash purchase is that the whole sales process goes exceptionally fast. There’s no final review by the bank and no troublesome inspections that must be done before the mortgage is funded, for example. That’s equally attractive to both sellers and buyers, so a cash offer can help you beat out competing buyers in a bidding war.

Buyers, of course, reap some additional benefits from a cash purchase: Buying with cash can save you tons of money that would be paid in interest over the years, and the only monthly payments you have to worry about are homes’ property taxes and insurance.

As much as all that may appeal to you, however, it’s not all that simple. There are actually some excellent reasons to consider financing your home – even when you can afford to do otherwise.

Why Could Getting a Mortgage Make a Lot More Sense?

No matter how much money you have saved up for your next home, you should still consider getting a mortgage. Here’s why:

1. You Could Leverage Your Debt Into a Better Investment

Instead of pouring all of that money into your home, it may be wiser to invest the bulk of what you have in the stock market – as long as interest rates on mortgages stay below the average stock market returns.

Mortgage rates have risen a little since last year, but they’re still remarkably low. You can get a 15-year fixed-rate mortgage at an interest rate of 2.556%. Historically, 10-year stock market returns have averaged about 9.2%, with even better average returns (13.6%) on S&P 500 investments over the last 10 years. 

Even once you subtract what you’re paying in interest on your mortgage, investing your money in the stock market instead of your property could yield bigger gains. Plus, that automatically helps diversify your portfolio: You can enjoy both the growing equity in your home and the higher returns on your other investments.

2. You Retain More Liquid Funds to Use for Other Needs

Life can pull a lot of surprises on you. You could come across a fabulous business opportunity tomorrow or lose your job. Your child may get the educational opportunity of a lifetime or your home may need sudden repairs. 

Whatever the issue, it may call for a ready supply of cash – and your home is not exactly a liquid asset. Unlike stocks, bonds or even a simple savings account, you can’t quickly convert the equity in your home into cash. If you wipe out your savings on a house today, that could limit your ability to respond to either a financial crisis or a golden opportunity tomorrow.

3. You Retain the Ability to Use Your Mortgage as a Tax Deduction

This is no small issue – particularly if you’re an entrepreneur or you just itemize your deductions. A great deal of the interest that you pay on your home can end up being deducted straight from your taxes. That alone can make up for the interest that you’re paying on the mortgage.

If you’re not sure if you would see any benefit from a mortgage on your taxes, it may be worth your while to speak with a tax consultant and run the numbers before you decide.

4. You Take Much of the Risk Out of the Transaction

It can be risky to deal in cash. Money can be lost, stolen and misdirected very easily – and you could be left without any real way to recover your losses. Going through the steps required by a bank and a title company to process your loan may seem tedious, but they also offer you some significant financial protections. 

You should also consider this: If you choose to take a mortgage out now, you can make certain that you obtain a loan without any pre-payment penalties. That way, if you decide that you want to pay the loan off later, you can. That gives you more flexibility than doing things the other way around.

5. You Can Put Your Money Toward Other Financial Goals

If you’re buying a home to set down roots and build a future, it’s wise to think about other future goals you may have, like a college savings plan for your children or a nest egg for your retirement. 

The money you might otherwise put directly into your home can be used to get these other funds started.

A cash offer on a home can definitely get a seller’s attention, but it’s still not always the right choice for every homebuyer. Before you decide on cash payment for your next home, it’s worth exploring your mortgage options