It seems logical to pay for a home with cash if you already have it. After all, carrying around debt is not something that most people are proud to do.
However, it may surprise you that while a loan is known to have its obvious disadvantages, paying cash for a home has them too. Here are some things to consider if you’re deciding between cash or a mortgage when buying a house.
- The Cons of Paying Cash Failure to diversify
When you buy a home, you don’t typically entertain the thought of selling and earning a profit. Essentially, you’re not looking at it as an investment opportunity because you plan to live in it a long time.
However, life is unpredictable, and a home purchase should always be viewed as an investment to some extent. If the cost of your home represents the majority of your savings, this means that you’ll tie up most of your cash into one investment. This may limit your options in the future. And when it comes to asset allocation, one of the first rules is diversification.
Difficult to secure a home-equity loan
What if your home turns out to need renovations or major repairs? And if all your cash went to buying the house, you’ll need to take out a loan.
Obtaining a home-equity loan could be tough. Having a fully paid-off mortgage is an advantage because it demonstrates responsibility for a high-value obligation. However, a paid-off mortgage and paying for your house with cash are two different things. Paying cash doesn’t establish your capacity to repay a loan as there’s no credit score involved.
- The Pros of Paying Cash Peace of mind
Owning your house gives you a sense of pride and security. When you have a mortgage, your home will never feel yours entirely until that last payment has been made. And because most mortgages are between 15 or 30 years, you may not get that peace of mind until you’re well into retirement age.
Paying in cash makes you the more attractive buyer. You’ll likely be offered the better deal for it as the seller will want to receive their money sooner. Paying cash also means that there’s no need to pay interest on a loan, mortgage origination fees, appraisal fees, and all the other fees that lenders charge to assess buyers.
No mortgage payments to worry about
Life in unpredictable. People lose jobs every day when they least expect it. Double-income households can turn into a single-income one, affecting their capacity to pay their mortgage on time. This is scary especially for people with families who will then fear losing houses and moving their kids out of the home they grew up in.
Ultimately, the decision to pay in cash or mortgage is entirely up to you. There are disadvantages and advantages to both. Whichever you choose, make sure you’re prepared for all the additional fees and expenses that come with both options. Ask yourself which gives you more peace of mind and security – cash in the bank for emergencies or a fully-paid home?