While most home buyers seek out mortgage financing to buy their homes, a few homebuyers have the cash to buy their homes outright. But is this always a wise choice?
As with complex decisions, there are pluses and minuses to buying a house outright with cash versus paying a mortgage loan. There is also no one size fits all answer for everyone.
On the positive side of paying cash for a property, you relieve yourself of future mortgage payments and the interest attached to a mortgage. Most customers paying a mortgage loan don’t fully understand the amount of interest they pay on a house over 30 years. This can often be several multiples of the loan amount.
On the negative side of paying cash upfront for a property, there is an opportunity cost of the interest you may have been able to obtain from investing the money in another investment. So for example, if you can get 10% in CD interest and your 30 year mortgage rate is 4%, you should invest in the CDs instead of buying the house outright.
However, if savings interest rates are low compared to mortgage rates, then it may make more sense to buy with cash, if you have it. So if all you can get are 2% on CDs or other investments and mortgage rates are 6%, pay cash.
Of course, there are other considerations, such as the tax deductibility of mortgages, but even here, watch out. Given the USA’s deficits, this might be an area where the government reduces tax deductibility in the near future.
Another consideration is mortgage insurance, which is typically an additional charge if your equity in the home is below 20%.
Use our mortgage calculator to determine how much your mortgage will cost you.