Most people don’t have a choice when buying a home; they have to take out a mortgage because they don’t have the money to pay for it in full. Others, however, have sufficient capital to pay cash for their home, and opt out of the mortgage arena because they want to own their house outright. Both scenarios present potential problems that prospective home owners need to consider.
The biggest argument against paying cash for your home is liquidity. If you take out a mortgage with a 20% or 30% down payment, the rest of your assets are available for stocks, bonds, municipal funds and other high-yield investments. Since the real estate market can change according to the season (or even the day), having liquid assets available can be beneficial.
Although most people can take out a reverse mortgage in times of trouble when they need to tap the equity in their home, this often comes with high interest rates and exorbitant tax penalties. If you think that you might need access to cash quickly, a mortgage is probably your best option.
This is especially true for young families who might have to relocate in three years for a job in another part of the country. For example, let’s say that you pay cash for your home, then find out that you have to move. You don’t have the liquid assets you would have kept in the bank had you taken out a mortgage, and you might not be in a financial position to move until you sell your house. If the market is in a downswing, it could take several months (or even several years) to sell your house, putting you in a bind with your job.
On the other hand, established individuals with high job security and retirees might actually benefit from paying cash for their home rather than taking out the mortgage. When you live on a fixed income, making mortgage payments can be difficult and many older families plan to stay in their homes forever. If you don’t think you’ll be moving any time soon and you aren’t worried about tying up your assets in a house, paying cash might be better for you.
Obviously, when you pay cash for your home, mortgage payments aren’t an issue and you don’t have to worry about paying interest on the principle of the loan. You immediately acquire the deed to an enormous asset, and you can always turn to the aforementioned reverse mortgage if you find yourself in a bind. Furthermore, the security of owning your home outright can help you to sleep at night.
Unfortunately, the question of whether to pay cash for your home or take out a mortgage and invest the capital cannot be answered definitively for every individual. Your credit history, your income level, your risk tolerance and several other factors will make the decision different for you than for the family next door. It is important to weigh all of your options against what might occur in the future.