Should you Take out a Mortgage or Buy Your Home with Cash?

When it comes to deciding between buying a home with cash and taking out a mortgage, the first option always seems smart. But can you sink that kind of cash just to avoid carrying the debt of a mortgage?

Here are a few things you may want to consider before deciding how to buy your home:

Buying Home with Cash

Paying cash for your home would mean no interest payments and no closing costs. You don’t have to worry about appraisal fees, mortgage origination fees, or any other fees that are usually charged by the lenders. Also, sellers will prioritize your offer over others, as they don’t have to worry about financing being denied and buyer backing out.

As a cash buyer you get to close the deal early as the formalities are fewer. Also, you can expect to get your dream home at a lower price because of the ‘cash discount’ offered by the seller. It will also become easier for you to sell the house whenever you want to, irrespective of the condition the market is in. If need be, you can always take out a cash-out refinance after you have closed the purchase.

Taking Out a Mortgage

Buying a home with cash may be a smarter option; but taking out a mortgage also has its own set of benefits. Firstly, you won’t be tying up so much cash to buy your property. Secondly, if the home is in need of any repairs or renovation, any time in future, you can always get a home equity loan or a second mortgage, since you will already be approved for a mortgage.

You do have to make monthly mortgage payments through the term of the mortgage. Nevertheless, you can claim tax benefits on your mortgage interest payments.

One thing you may know about taking out a mortgage is that you will end up paying more than what you took, since you have to pay interest. Still, it makes more sense to take out a mortgage than paying cash for your home since you can invest the cash that you didn’t spend on your home. Along with your stock market earnings, you can save more on your taxes.

Taking out a mortgage can offer you some amount of protection from certain creditors. In certain states you can expect to enjoy a certain level of protection from your creditors, as long as you don’t default on your mortgage. Your creditors will not be able to force you to sell your home, in order to satisfy their claims. Nevertheless, there is a certain set limit here called homestead exemption.

A homestead exemption is a legal provision that is offered to shield your home from certain creditors, in case of a declaration of bankruptcy, or the death of the homeowner’s spouse. Not only does it provide you financial protection, it also offers you your physical shelter, by stopping the forced sale of your primary residence. Nevertheless, a homestead exemption may not be able to stop or prevent a bank foreclosure in case you default on your mortgage payments.

Homestead exemptions can vary depending upon the state you are living in. In Texas and Florida, you can get unlimited financial protection for your home, against your unsecured creditors. However, in other states, the limit for protection will be between $5,000 and $500,000. One thing you need to understand here is that these protection limits are for your home’s equity and not for the value of your home.

For instance, if you have a mortgage of $400,000 on your home and your home’s value is $500,000, you won’t be forced to sell your property, provided the homestead exemption limit in your state is at least $100,000. If it is less than $100,000, your creditors can force you to sell your house. Nevertheless, you may get some portion of the sale proceeds.

You cannot expect to get this protection if you have taken out a mortgage from a secured creditor, such as a bank.

If you are going to pay cash for your home, instead of taking out a mortgage, you don’t get to enjoy this homestead exemption protection, if at any point of time, you get into some serious debt.

Paying your property taxes, federal taxes, and state taxes regularly is a must if you have taken out a mortgage. If you default on these things, your home can get foreclosed through a tax lien.

The Easier Option

Paying cash to buy your home is easier than taking out a mortgage, provided you can afford to sink that kind of cash. There are no worries about waiting for inspection, or appraisal, or even underwriting. However, it is always wiser to get your home inspected just to avoid any expensive surprise repairs, in the near future. Also, there won’t be any lending timelines that the sellers have to deal with, which is why they may even favor you and accept your cash offer even if it is low.

Is Buying Home with Cash the Only Option if you have Bad Credit?

No. Federal Housing Administration (FHA) loans are available for home buyers with bad credit. Nevertheless, you will have to make a down payment of at least 10 percent and your credit score has to be more than 500. Contact a few FHA-approved lenders through FHA livetransfer leads and see if you qualify for an FHA loan. If not, you can take out a conventional mortgage by improving your credit score.

The Bottom Line

Paying cash for your home might seem tempting if you are sitting with a chunk of cash. However, you might still be better off if you invest this money elsewhere than use it for purchasing your home. If you do your math right, you can expect to enjoy a higher net worth, 30 years from now. That said, if not having to make those monthly mortgage payments gives you a great feeling of freedom, you should go ahead and use that cash to purchase your home.