FAQ: All Cash Home Purchase vs. Mortgage
Many of my clients (especially Baby Boomers who are downsizing or relocating) ask me if they should pay cash for their next house or finance it with a new loan. While the idea of owning a home free-and-clear is certainly appealing, I always present them with a series of questions to help them clarify the big picture. Perhaps you or someone you know may benefit from these as well
How much will you be left with after an all-cash purchase? Maintaining a safety net of three to six monthsʼ worth of living expenses can be a real comfort after youʼve done well on the sale of your home. How comfortable will you be if an all-cash purchase brings you near zero?
Are you retiring soon? This goes to two issues: First, whether or not the absence of a mortgage will significantly improve your monthly position, keeping in mind youʼll still need to make insurance, tax payments, and maintenance. Second, if youʼre thinking about applying for a loan. It can be a challenge to qualify for a loan after youʼve retired, so if you think youʼll need a loan, it may be better to get it in advance.
Whatʼs your tax and income situation look like? For some people, the mortgage interest deduction on income taxes has a significant impact on their annual tax bill and overall cash flow picture. Itʼs always a good idea to consult with a financial professional before you “write off” the write off.
Might you need to help someone out in the near future? Sometimes having the liquidity to help family members or close friends in need is important. Are you planning to help someone else with a down payment on a home? Is it likely youʼll have to help a close friend or relative through a tough time? Having cash on hand can be a comfort.
How important is “free and clear” to your mind? For some, thereʼs nothing that compares to the idea of owning a home free and clear. Sometimes the feeling of “no debt” simply canʼt be overpowered by tax or liquidity benefits. Itʼs important to be honest with yourself, and if youʼve always dreamed of dodging a house payment, it could be the right emotional move.
For all of these reasons and more youʼll want to choose wisely before you go in for an all-cash purchase of your next home. Naturally, if you need any help selling your current home or looking for the next one, Iʼd be happy to help!