If you are able to buy a home with cash, you probably think that’s what you should do. While it does seem like a good idea, it may not be for everyone. Before you jump in and pay cash for a home, consider the following situations to see how they pertain to you.
What Will you Make?
It’s no secret that paying cash for a house means tying up a large amount of money for a long time. Once you pay cash for the house, the money becomes illiquid. In other words, you can’t just go to a bank and withdraw the funds.
Sure, you could apply for a home equity line of credit and access your cash that way, but that costs money. Now you are losing money on your investment. Before you throw all of your cash into the home, figure out what you will make on it. Of course, you won’t know for sure because no one knows what values will do moving forward, but you can give it a good guess.
Another way to look at it is do you have money invested elsewhere? If you are investing in the house and don’t have money in other more liquid investments, you could be making a mistake. You want to diversify your portfolio as much as possible. Putting all of your money into your home isn’t diversifying and it could leave you with a much lower return on your investment than you wanted.
Do You Need the Tax Break?
If you pay cash for your house, you lose one major tax break – the mortgage interest that you would pay. Now, you do still get to write off your real estate taxes when you pay them, but you lose the interest deduction.
This shouldn’t be the only reason that you take a mortgage, but it’s something to consider. Some homeowners benefit from taking the tax deduction and investing their money elsewhere. Putting your cash into a home isn’t the only place to invest it. The sky is the limit when it comes to investments – if you need the tax deduction, you may want to take the mortgage.
Do You Have an Emergency Fund?
Before you even think about paying cash for a home or making any other type of investment, you need to consider your emergency fund. Do you have one? Does it cover you enough should an emergency arise? You should have between 6 – 12 months of income on hand in the event that something goes wrong.
If you invest all of your cash into your home and disaster strikes, you don’t have the luxury of pulling the money out of your home. Yes, like we said above, you can get a mortgage, but that takes time. It could take between 4 – 6 weeks to get a loan from application to the closing table. If you don’t have that kind of time, you could find yourself in a real sticky situation. It pays to make sure that you have an emergency fund before you pay cash for a home.
Whether or not you should buy a home with cash is a personal decision. Answer the questions above and then weigh the pros and cons of the situation. It’s also a good idea to see what type of mortgage you qualify to receive. The interest and fees for the mortgage might be low enough that it makes sense to take the mortgage and invest your money elsewhere.