Is It Bad to Pay off a House Up Front vs. a Mortgage?

 

If you are in the process of selling one home to purchase another, you may be considering paying all cash for the new abode.  However, there are some things to consider before making that move.

Emergencies

Should something unforeseen happen and you need cash immediately, it is significantly faster to sell investments than to sell your house.  If the need is urgent, it can take weeks or months to sell your house together with a lengthy closing date.  In a soft housing market, you could lose a lot of equity.  During an emergency, emotions are at a high and compounding that with losing your home will only add to the stress.

Yes, it might be possible to get a loan on your house, but in the case of a job loss or serious illness, lenders may be reluctant to offer you the full amount, if any.

pay off mortgage denver  300x173 - Is It Bad to Pay off a House Up Front vs. a Mortgage?Tax Deductions

If you fail to secure a mortgage at the time of your purchase (or within 90 days), you won’t be able to deduct the interest on your annual income tax return.  By using a portion of the sale of your old home to put down a 20% down payment and investing the balance of the sale proceeds, you could offset the amount of interest by the dividends paid on the investments.  In the long run, you would be making more money.

Debt can be good

A mortgage is one of the most advantageous types of debt.  Interest rates are low and when you consider the tax breaks on both the federal and state level, you are making a good investment.  This allows you to use cash to make other investments creating a diversified portfolio.  If you are interested in leveraging all of your equity at some point, lenders like to see a diversified portfolio that includes the real estate secured by your mortgage.  In the event of an emergency you can apply for a second mortgage or sell some other asset.  With appropriate financial planning, the mortgage becomes an asset to strengthen your overall value.

So basically the disadvantages of paying all cash include:

  • Tying a significant amount of cash into a single asset.
  • Liquidating real estate can be a lengthy process.  In times of emergencies, it is quicker to sell stock, bonds, a CD or other asset for immediate cash.

None of this is to say that paying cash is bad.  It makes you a more attractive buyer than others and offers leverage with prices.  It relieves you of the pressure of monthly payments but you get none of the tax benefits from the interest payments.

Every home buyer’s circumstances are different.  If you would like to discuss the details of your plans, contact Dave Kevelighan.  He has decades of experience with mortgages and refinancing.  He will provide you with dependable advice.  Should you decide to proceed with a mortgage, he has access to some of the best priced wholesale mortgage lenders.  His education and experience will help you make the best decision for you and your family.