Should you buy a home in cash or finance it?

If you’re looking to buy a house and you have the economic means to do so, you might be considering whether it makes sense to buy the house in cash and be mortgage free or take out mortgage loan. At the end of the day, it boils down to personal preference, However, before you make it decision to buy it in cash or finance it, the following factors may play into your situation…

 Real estate as a hedge against inflation – during inflationary periods real estate acts as a hedge against inflation as demand for housing, typically remains high, and rents often increase during this period making this vehicle, an attractive vehicle for investment purposes. Rising rents mean if you were to buy a rental property, for example, these typically spell better mathematically for better cash flows and better returns which drive real estate. Another factor to consider is that when inflation rears its ugly head, real estate is also a flight to safety. There is a long-standing stance woven into American culture that a housing is stable and safe versus the markets. Traditionally, the financial markets do well over time. However, during inflationary periods the risk of losing money, arguably might be more prevalent or greater during difficult economic times when investing in the markets, then it would be for buying a home.

 Tax deduction when you buy a home whether it’s a primary home, rental home or a secondary residence, you get to write off the mortgage interest. Depending on your income, this could play host to being a significant factor and here’s why. If we revert to the fact that you have the cash to buy a house in the first place more than likely your income is probably on the higher side, and if your income is on the higher side, you’re probably going to need every tax deduction you can possibly get unless you’re the one exception that likes paying unnecessary taxes? Jokingly, deductions are vitally important. If it’s a primary home, you get to write those things off as well as any expenses which add the cost basis of the home. On a rental property, you get to take those expenses on an annual basis, including depreciation, which further augments your tax deductibility.

 Liquidity is also a function of net worth. How much cash you have in the bank, cumulative of all assets, checking, savings, stocks, bonds, IRA 401(k) investments plus equity in your real estate is your net worth. If you spend all the money you have on a house you affectively are shutting off a vehicle, and all your eggs are in one basket i.e., the house, so if the house remains stable in value, or maybe claims a little bit, your net worth is directly tied to that. However, if the house goes up in value and or rises a little bit, you have the money you put as a down payment to buy the house in the first place push your cash in the bank thereby potentially increasing your net worth. Also, cash in the bank looks good as it relates to other sources of financing vehicles. When you have cash in the bank, you are more stable, which makes you look good on paper. Having excellent credit and a good income is good, but also having money in the bank helps significantly particularly if it’s a bank statement loan, rental loan or jumbo loan.

 Personal finance if your situation is such that your income is high, the idea of having a mortgage doesn’t bode well with you and you rather have zero or a lot less cash in the bank with no mortgage that’s all fine and dandy however, what about your overall financial picture? You would still need to have enough cash in the bank in order to have good stable financial ground, put another way what happens when your car breaks down or an unexpected, random expense comes up? By having cash in the bank, you could use that cash to pay off the obligation and then replenish the obligation with income versus falling prey to using credit cards which presently contain rates between 18% to 30% interest.

Negotiation It is true an all-cash offer is going to make you look stronger on paper all day long, then a house with financing that’s an absolute. However, you can always buy the house in cash and then turn around and put a mortgage on the property immediately via what’s called Delayed Financing not every lender offers it however, it allows you to turn around and cash out refinance the house immediately. So, for example, let’s say there’s a home on your radar you’re really interested in. There’s three or four other offers and your realtor told you if you bought the house in cash the chances of you getting it would go up exponentially. Well, you close escrow on the house then turn around 10 days later for example, after you close escrow and do a delayed financing cash out refinancing to 75% of the loan to value giving you your money back, allowing you to become liquid again and giving you all the other ancillary financial benefits as described above.

 If your financial situation is such you could buy the house in cash and still have enough cash left over for all your other investments, and your net worth is so high that your financial situation is not adversely impacted by buying the house in cash that might be something to consider. However, the fact remains that even if you are financially ahead, you are still susceptible if you have money in the markets to inflation and the erosion of the value of your financial investments, in any kind of an asset bearing account. Regardless of what you may or may not do, the factor means your money is at risk to some degree in the markets, perhaps more so than it would be in the house at which point you could always pay off the mortgage and put the money back in the investment vehicle instead when the inflationary times, we are presently in subside.

 

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