Is it better to buy with cash or finance with a mortgage?

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While the majority of homebuyers use a mortgage, there are those fortunate enough to be in a position to pay all-cash for a house. But is it the best financial decision? If you’re weighing the pros and cons of getting a mortgage compared to buying a property with cash, here are the key points you need to consider.

When buying with cash might prove wise

If you have the funds, paying all-cash for a home definitely saves you money, since you won’t have to pay any of the costs associated with a mortgage. The origination fee, appraisal fee and other closing costs can add up to several thousand dollars. With no loan, you also won’t be shelling out money every month in interest costs, which pile up over the typical 30-year mortgage.

“You don’t have a mortgage payment, and paying cash gives you the effective opportunity cost of the mortgage,” says Leon LaBrecque, chief growth officer and certified financial planner at Sequoia Financial Group in Troy, Michigan. “Not having a 2.875 percent mortgage is like making 2.875 percent.”

Paying with cash also simplifies the home purchase process. There’s no loan application, underwriting or approval, and sellers are likely to favor a cash offer, since they’ll be able to close the sale more quickly and won’t risk the deal falling apart if the mortgage approval doesn’t come through as expected.

For these reasons, a seller might even choose a slightly lower purchase offer if it’s all-cash compared to higher offers that are contingent on obtaining financing.

Lastly, if you’re retired or close to it, a cash purchase can contribute to the peace of mind that comes from being debt-free on your home.

When a home loan makes more sense 

Getting a mortgage has financial benefits too, so it could be the better strategy even if you do have cash available.

If you normally itemize deductions on your tax return, getting a mortgage can reduce what you owe, since mortgage interest payments are tax-deductible. This can be very important for high earners who typically itemize and want to maximize their deductions, but it won’t matter as much for those who usually take the standard deduction, which is currently $12,400 for individuals and $24,800 for those married filing jointly.

“It really depends if the buyer is already itemizing their deductions,” says Chris Cortese, a senior financial advisor at Wescott Financial Advisory Group in Philadelphia. “Since the standard deduction is higher than it was prior to 2018, many individuals may receive very little or no benefit because they are just exceeding the threshold.”

Another compelling reason to consider getting a mortgage is historically low interest rates, which are currently in the neighborhood of 3 percent. Locking in a low rate with a 30-year, fixed-rate mortgage helps you free up cash for other purposes, such as an emergency fund, investments or funding your retirement accounts.

Considerations to make

Say you’d like to purchase a $360,000 home, putting down a 20 percent payment of $72,000 for a 30-year mortgage for the remaining $288,000, with a fixed interest rate of 3 percent. Closing costs typically amount to 2 percent to 4 percent of the loan principal, so in this case, that works out to between $5,760 and $11,520.

Using Bankrate’s mortgage calculator, by the end of the loan term, you can estimate you’ll pay a total of about $149,167 in interest. Adding your total interest to your closing costs, you’d end up paying an additional $154,927 to $160,687 over a 30-year period.

This cost might be offset to some degree if you’re a taxpayer who itemizes deductions on your return. You may get some tax savings each year if you’re able to deduct your mortgage interest payments. Considering the current standard deduction is higher than it has been in the past, however, many households will not see significant, if any, benefit from this deduction.

That said, “mortgage debt is good debt, since it is for an appreciating asset — not a depreciating asset like a car or boat,” says Allan Moskowitz, a certified financial planner with Transformative Wealth Management in El Cerrito, California.

If you lock in a mortgage at today’s low rates, you can leverage the lender’s money for your home purchase while freeing up your own cash. That could then be invested, potentially for a return that outpaces the interest you’ll pay.

Bottom line

In the end, whether to use a mortgage or purchase a home with cash is a decision that should be made with your overall financial picture in mind.

Buying in cash to save on mortgage interest might not be the best choice if you otherwise would be able to invest the money, in the stock market or elsewhere, for a higher return.

Getting a mortgage can provide a lot of financial flexibility by keeping more of your money liquid to tap for emergencies, but for retirees or those who desire to be debt-free, buying in cash can provide certainty and security that is difficult to put a price on.  

If you decide to buy your home with a mortgage, you can easily compare mortgage offers to find the best deal on Bankrate. Whether you’re seeking a 15-year or 30-year mortgage, you can easily compare rates from lenders in your area, as well as estimated closing costs so that you’ll know the true cost of financing your home.

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