Need Mortgage Help?
1-800-705-1216
Fast Mortgage Rate Quotes

Cash or Mortgage: Is a Mortgage Better than Buying Outright

Comments Off on Cash or Mortgage: Is a Mortgage Better than Buying Outright
Bookmark and Share

Cash vs Mortgage BasicsCash or mortgage: which is best? Is a mortgage better than buying your home outright? On the face of it there is no question. Surely paying cash for your home, meaning buying it outright, beats taking a loan every time. You have no interest to pay and no monthly payments to make. So does the question end there or is there more?

Of course there is more. Before you can make any financial decision you must cost out the various options. Never make assumptions, even where the answer appears obvious. Many people have come unstuck by doing that in any walk of life. So let’s examine the options carefully, and be prepared to be surprised.

Cash or Mortgage: What Are the Savings?

First what is your return on investment (ROI) for paying cash to purchase your home outright? It is the interest you would have paid over the life of your mortgage, and that you have now avoided paying.

You cannot include your home as an asset or saving, because you would also have had that with a mortgage. You cannot include the principal sum paid for your home, because you would have paid that in any case, even if over 15 or 30 years. Your saving is the interest. Calculating exactly how much better off you would be by paying cash for your home or taking a mortgage is complex so we shan’t go through all the calculations.

Mortgage Interest Paid

Let’s say you took a mortgage of $250,000 over 30 years at a fixed rate of 3.5%, you would pay a total of $154,149.60 interest. That is the savings you must make to break even. But how do you calculate your potential savings, and what figures do you take into consideration in your calculations? When making the cash or mortgage decision, we are assuming that you have the $250,000 available to either invest or use to purchase your home.  Fundamentally, we are comparing investing this cash in bonds, securities, stocks and so on with investing it in your real estate.

First, by paying a mortgage, you will have your $250,000 cash in hand, plus you will be paying $1,122.61 monthly. To compare cash or mortgage using these figures, you would have to invest your $250,000 over 30 years of the mortgage. For cash, the $250,000 will be spent so you would only have the $1,122.61 to invest: that’s the sum you save on mortgage payments every month for the same 30 years. We then compare your net worth at 30 years when the mortgage is paid off using various investment interest rates.

When is it Best to Pay Cash for Your Home?

What the ultimate calculations show is that the lower the return on your investments, the more likely it is better to pay cash. The break even point is when the investment rate return equals the mortgage interest rate. The lower the investment rate, the more profitable it is to pay cash rather than take a mortgage.

So, cash or mortgage? Cash if the investment rate is low, but mortgage if the investment rate is higher than the mortgage rate. That is because in the one case (mortgage) you are being paid interest on $250,000 invested at the investment rate, while in the other (cash) you are saving interest on the $250,000 loan at the mortgage interest rate.

However, paying cash gives you immediate 100% liquidity, which may be useful in the event of an emergency. Also, your home is your own and cannot be repossessed. For some, these benefits themselves are worth paying cash irrespective of the relative financial comparisons.

Tags: , , , ,

Related Information:
  1. 13 Hacks To Lift Your Credit Score Before You Buy A Home
  2. 15 Year Fixed Mortgage Rate History in Charts
  3. 3 Must Do Fall Lawn Maintenance Tasks
  4. 3 Steps When the Appraisal Comes in Low
  5. 3 Ways Homeowners Can Get A Lower Mortgage Payment

0 Responses to “Cash or Mortgage: Is a Mortgage Better than Buying Outright”


Comments are currently closed.
Mortgage Rates