Is it smart to pay
cash for a home?
I'm planning to buy a new home, but can't decide if it would be
better to finance it or pay cash. I have the cash to cover it, but
I'm wondering if that's a wise move. Is there a formula for determining
the best way to proceed?
-- Flush with Cash
There are formulas out there, but life circumstances
vary so greatly that pat answers may not serve you well.
look over a few of the basic arguments, starting with the upside of paying cash.
In a home purchase, cash always streamlines the process. You might be able to
negotiate a better sale price, especially if the seller is motivated to exit the
property quickly. It will certainly take the buyer-qualification worry out of
the equation. There also will be fewer administrative headaches and fees at closing
time. And obviously, you won't have that fat house payment looming every month.
From an investment perspective, all-cash is not a
bad move either, at least in theory. With relatively low yields
on CDs and other savings vehicles at present, and the way homes
have been appreciating in recent years in most parts of the country,
your money would seem well placed. Of course, market conditions
on both fronts can change significantly as the years pass.
Here's another way to look at it. If you would have
been paying 6-percent interest on a 30-year mortgage, then your
all-cash position in your home is tantamount to earning that 6 percent
on your investment -- not counting the home's appreciation. (But
don't forget that lost tax-deduction for interest paid in the all-cash
There's also that liquidity aspect to consider. Unless
you would have substantial cash reserves even after you paid for
the house, a life-changing episode, such as an illness, infirmity,
accident, lawsuit or natural disaster, could leave you wishing you
had some of those greenbacks in your pocket. Certainly, if you should
need cash for any reason (are the kids going off to college, by
the way?), you could always take out a home equity loan, and would
have lenders lining up to give it to you, presuming you are employed
or at least have an alternative income stream. But if you're a retiree
with limited income and no other significant collateral, you'd have
a tougher time.
Experts recommend that you have at least a three-month
buffer -- preferably six months -- in the form of liquid assets
for contingencies. You should also be sure to leave enough room
for home, life, health and disability insurance coverage in the
But to some people, and this may include you, the
best mortgage is no mortgage. What is the price for peace of mind,
after all? But I strongly suggest you consult with your financial
planner or accountant first and run the variables together before
making a decision.
Best of luck.