Most of the people who buy houses cannot afford to buy them outright. Rather, they have to be a mortgage and pay off their homes over time.
However, some buyers may be able to purchase a home for cash. If you have cash from an inheritance, the sale of a previous home, or even a significant amount of savings, you may be able to pay for your home in cash and not have to apply for a mortgage. But even if you can buy a house directly, financing with a mortgage makes sense.
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1. You will not tie up too much money in an illiquid asset
Liquid funds can easily be exchanged for cash. Stocks, for example, are pretty liquid. You can choose to sell one, and bam – You get instant cash in exchange for the shares you offload.
Apartments, on the other hand, are less liquid. You can’t sell a house overnight. It can take weeks or months to find a buyer and complete this transaction, which is not good if you need that money right away.
That is why it makes sense to take out a mortgage. You may now be able to afford a $ 300,000 cash home. But what if all of a sudden you need $ 50,000 and you don’t have it because it’s tied up at your home?
Imagine paying instead of $ 300,000 for your house, but instead paying $ 100,000 deposit and finance the remaining $ 200,000 with a mortgage. That means you have a $ 200,000 pillow to work with.
To be clear, most people don’t need to hold $ 200,000 in cash. The point, however, is that with a mortgage on a home you have more financial flexibility.
2. You could make more money investing
The disadvantage of taking out a mortgage is that you have to pay interest on the loan amount. You could spend a lot of money over time.
But if Mortgage rates are low, which is the case today, home financing makes sense as you can potentially invest your money and generate a higher return. At this point in time, the average 30-year mortgage rate is just over 3%. The average of the stock markets over the past 30 years has now been around 10%. Paying 3% interest on a mortgage can make very good financial sense if you invest the money freed up and it pays a 10% return over time.
3. You can enjoy a tax break
By reporting this on your tax return, you can deduct the interest you pay on your mortgage. Combined with other deductions, this can result in a lower tax bracket resulting in significant savings.
Paying cash for a home has its advantages. First, you don’t have to deal with the cumbersome mortgage application process. And in today’s housing market, the likelihood is higher accept an offer for a house if you come as a cash buyer. Nevertheless, there are advantages to taking out a mortgage, even if you can pay in cash. Before spending a ton of money to buy a home outright, consider whether it is funding instead.