If you and your mate have saved enough cash to pay for a house in full, you have the option to avoid a mortgage. A mortgage can add to the overall cost of your home, but also keeps your cash free to make other purchases. Understand some of the advantages and disadvantages of buying a house with cash that could affect your potential to grow long-term wealth.
Paying for a house in cash has a savings advantage over using a mortgage. The money a homeowner would pay in interest over the life of a mortgage loan is significant and could be used for other purposes, such as financing a child’s education. For example, if a $200,000 30-year mortgage has $250,000 in interest charges over the life of the loan, you could buy the house with cash and spend $250,000 over 30 years on other items.
Avoid Monthly Payments
The absence of a monthly mortgage payment is an advantage of paying for a house in cash. A mortgage payment can be a major monthly expense that can eat into your budget. Also, if you have a mortgage and are unable to make your payments, you might lose your house to foreclosure. When you pay cash, as long as you pay your property taxes, you virtually eliminate the possibility of anyone taking your home.
Give Up Other Opportunities
The cash you use to buy a house cannot be used for other purposes. This is a disadvantage if you don’t have other cash or liquid assets for emergencies or if you could invest the money at a higher annual return than the mortgage’s interest rate. For example, assume that instead of buying a house with cash, you use a mortgage with a 5-percent interest rate. If you invest your cash at a 9-percent annual return, you would earn more from your investments annually than the mortgage’s interest charges.
Surrender Tax Breaks
When you pay for a house in cash, you miss out on certain tax breaks that you might get with a mortgage. The interest you pay on a mortgage loan and some fees you pay to get the loan are tax deductible, which means they lower the amount of income on which you are taxed. Depending on your situation, you might be better off using your cash for other purposes and getting a mortgage to take advantage of these tax breaks.