When it comes to buying a house, paying cash makes you an extremely attractive buyer. This also means that you won’t have to apply for a home loan, as well as keep up with the monthly payments and other associated costs. Furthermore, cash gives you an edge over other buyers and puts you in a great place to negotiate or get a better deal.
Paying cash does make sense mainly because it is what most sellers prefer. The idea of not having to apply for a mortgage is also an attractive one, as you won’t have to go through the process of securing a loan and choosing the right one that best suits you. This comes with the benefit of avoiding the burden of loan obligations that can last for 15 years, 30 years, or more.
There is no denying about the benefits of buying a home using cash, but you shouldn’t just ditch the idea of getting a mortgage. It is important to know that getting a loan offer financial benefits that you can never have when you pay in cash. Mortgage companies in Seattle note that it is not always ideal to tie up a lot of money to a home purchase even if you have the ability to do so.
The deal with sacrificing liquidity
Do take note that when you pay in full cash, you’ll sacrifice liquidity (the rate or the degree of which assets can be converted to cash if you need it). Bank and savings accounts are liquid assets, which mean that you take out cash almost immediately when you need money. This is not the same with a home, however, as you need a few months (or longer) to sell it and then get the cash you need.
There is the option of getting home equity loan and reverse mortgage if you need cash, but this has a number of risks and drawbacks. This is why it only makes sense to pay cash if you have a lot of money or if it won’t drain your savings.
Effects on savings and diversification of investment
If the cash needed to pay the house in full will eat up all or most of your savings, it can affect your financial situation in the future. This is especially true in emergency cases like a medical problem, natural calamity, or job loss. There is also the issue of tying most of your money in one asset class, which means that there is no diversification of investments.
This is why it makes sense to get a mortgage, so you can invest some of your money and diversify your investment portfolio. This is because your home is not necessarily an asset or an investment and you cannot expect to act like one.
Missing out on the financial leverage of a loan
You should also know that paying in full cash comes with tax implications. One consequence is not being able to qualify for tax deductions, which is applicable for most mortgage-interest payments. Not having a mortgage can also negate homestead exemption (a legal provision that protects the equity in your home) in case you face a serious debt in the future.
There may be some downsides to getting a mortgage because of interests, but there are also upsides that are hard to ignore. A talk with a reliable lender can help you learn more about the benefits of financing your purchase with a loan.
You will always have the final say on how you want to finance a home purchase. Both make sense, but if paying cash means draining your savings, it is best to get a home loan. You can decide to make a sizeable down payment (20% or more), so you’ll have lower monthly payments.