Now that we’ve covered the pros and cons of buying a house in cash, next we’ll go over buying a house with a mortgage. The majority of people either don’t have enough money to buy a house in cash outright, or simply choose not to. Getting a mortgage can have many advantages, however, the cons may outweigh the pros, depending on your individual financial situation.
6 Pros of Getting a Mortgage
Pro #1- Less Money Upfront
Getting mortgage financing only requires buyers to put a percentage of the loan amount down. That means you are tying up less money in one asset and leaving enough money in the bank to cover repairs or expenses now or down the road.
Pro #2- More Flexibility
With additional cash reserves, the homebuyer has more flexibility to put their money somewhere else, or still have a nice sized nest egg in the bank in case of emergencies or other opportunities. As mentioned above, you can invest invest your money elsewhere, make yourself more liquid than if you paid in cash and have more flexibility.
Pro #3- Tax Benefits
If homeowners itemize their tax deductions, they can typically deduct mortgage interest on the first $750,000 on first and second homes. This is especially helpful for retired people who no longer have many options to reduce taxable income (i.e. 401(k) contributions). Remember to keep in mind that tax laws can change at any time.
Pro #4- Mortgage Rates are Low Compared to Other Types of Loans
Traditional mortgage loans are the most common for homebuyers. However, there are circumstances where a buyer may select an adjustable rate mortgage or ARM. An adjustable rate mortgage is a mortgage that does not have a fixed interest rate. It’s typical for an ARM to have a fixed rate the first few years of the loan, then changes periodically. Homeowners choosing an adjustable rate mortgage are usually planning to live in the house for the initial fixed interest period. This would be the biggest advantage to using an ARM. Interest rates will likely change after the initial fixed period based on market conditions and fluctuations. This fluctuation makes it difficult for investors to estimate their budget and potential return on investment.
Pro #5- A Mortgage Can Improve Your Credit Score
This is assuming that you make your mortgage payments on time, every month.
Pro #6- Inflation Should Make Future Monthly Payments “Cheaper”
7 Cons of Getting a Mortgage
Con #1- Mortgage Interest
Whenever you borrow money, you can always expect to pay interest. After all, that’s how lenders and banks make their money. For example, total interest over 30 years on a $200,000 loan with interest at 4.5% is $165,000 – almost double what you paid for the home.
Con #2- You Have to Qualify For a Mortgage
Mortgages aren’t passed out like free candy like they used to be before the market crash of 2008. Banks and lenders have learned they can’t lend money to just anybody. As such, qualifying for a mortgage has become harder to do.
Con #3- You May Have to Pay Mortgage Insurance Premiums
Putting a small amount of money down on a property, usually less than 20 percent, comes with a price. A mortgage insurance premium will increase your monthly mortgage payment, depending on how much you put down. This is to protect lenders in the event you are unable to pay your mortgage.
Con #4- Debt
Most financial experts will say over and over again to stay out of debt. Getting a mortgage is the highest form of debt for most homeowners. It can also be difficult to wrap your head around signing up for 30 years of monthly payments.
Con #5- Complex Mortgage Process
The process of getting a mortgage can be lengthy, time-consuming and sometimes frustrating. Lenders ask for pretty much any financial document available. They require qualifiers like, credit score within a certain range, proof of income, money in the bank, and low debt-to-income ratio. If you fall short in any of these categories, chances are you won’t qualify for the loan.
Con #6- Lender Fees and Closing Costs
Working with a lender to get a mortgage comes with many extra fees and costs. Buyers should expect to pay mortgage origination fees, appraisal fees, lender fees, and closing costs. All of these costs add up to usually a few thousand dollars.
Con #7- You Don’t Actually Own Your Home
When you finance a home, your lender basically owns the property while you make payments to them. They will hold the property title until the loan is paid off in full. Although you will be building equity in the home over time, if you fail to meet your end of the deal, you have a risk of losing it to the bank or lender through foreclosure.
CAN I PAY CASH AND GET A MORTGAGE?
Most buyers put cash down and take out a mortgage. While it’s possible to only put 5 percent down on a conventional loan, 20 percent is recommended. This eliminates mortgage insurance and lowers your mortgage interest rate. A few more reasons to pay cash and get a mortgage:
- Equity investment
- You can pay off early, with no prepayment penalties
- You can always pull equity with a cash out refinance