Home & Real Estate Reader's Digest

Buying a Home: The Difference Between Cash vs. Mortgage

You hear it all the time about how difficult it is to have debt. It’s natural to believe that buying a house with cash, or putting as much money as you can into your home to avoid massive mortgage debt, is the best choice for your financial well-being.

There are many things to think about when you’re considering buying a home either outright or financing. These are the main differences between buying a home with cash and using a mortgage.

Benefits of cash
Cash payment eliminates the need for interest and closing costs. Robert Semrad JD, founder, and senior partner of DebtStoppers Bankruptcy Law Firm Robert J. Semrad & Associates LLC, based in Chicago, states that there are no appraisal fees or mortgage origination fees.

Sellers are more likely to pay cash than they are to buy. Peter Grabel, MLO Luxury Mortgage Corp, Stamford, Connecticut, says that a seller will often accept a cash offer in a highly competitive market. They don’t worry about a buyer withdrawing due to denial of financing. Cash home purchases can also close faster (if needed), than loans. This could make them more attractive to sellers.

These benefits should not come at the expense of the seller. Grabel says that a cash buyer may be able to purchase the property at a lower price, and get a ‘cash discount’.

Is a mortgage better?
However, financing can also have significant benefits. Grabel says that even if a buyer can pay cash for a house, it may be a good idea not to tie up too much cash to buy real estate. This could make it difficult to find financing if you have other financial needs. It could be difficult to get a mortgage or home equity loan if your home needs major repairs. You don’t know how your credit will look in the future or what the value of the home will be.

If the owners have stretched their finances to purchase the home, selling it with cash can also prove difficult. Grabel says that cash buyers should ensure they have enough cash reserves to pay a deposit for the new home if they decide to sell.

Grabel says that cash buyers must make sure they have enough liquidity. You can have more financial flexibility by choosing to get a mortgage. A mortgage calculator can help you budget for some of the costs.

A mortgage can provide tax benefits to homeowners who itemize deductions rather than taking the standard deduction. A mortgage is not a good way to save money, but it can help you reduce your tax obligations.

Semrad says that mortgage interest payments can be tax-deductible in most cases. However, the Tax Cuts and Jobs Act of 2017 (TCJA), nearly doubled standard deductions. This made it unnecessary for many taxpayers not to itemize and omitted the mortgage interest tax deduction.

You will pay more for a mortgage overall because you have to pay interest over time. Semrad notes that paying cash to pay mortgage interest might not be financially wise depending on how the stock market is doing. If you take out a mortgage, you could save less money than you would have if you invested the cash in your home.

Take Note
A mortgage may be able to protect you against certain creditors in some cases. Most states offer some protection to homeowners from creditors. Certain states, like Florida, exempt the home from creditors.

Other states have limits that range from $5,000 to as high as $550,000. Semrad says that regardless of the property’s value, creditors can not force the sale of the house to satisfy their claims. This is called a homestead exemption. However, it doesn’t stop or prevent a bank from foreclosing on a homeowner’s mortgage.

This is how it works: If your house is worth $500,000, and your mortgage is $400,000; your homestead exemption can prevent you from having to sell your home to pay creditors $100,000. However, the exemption must be at least $100,000 in your state. A bankruptcy trustee can still order the sale of your house to pay creditors if your state’s exemption falls below $100,000.

However, a mortgage will not completely protect your funds. Semrad says that a mortgage won’t protect your money completely. “If a homeowner leaves the funds in the bank and finances the house, a judgment creditor can lien the bank account and use most of the funds to satisfy its claims.”

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