When buying a residential property for personal or business use, mortgages are the go-to solution for families and entrepreneurs. The reasons for obtaining a mortgage are fairly obvious: it lets you purchase a home without having the entire amount of money on hand, and it allows investors to capitalize on a property without spending the full amount up-front.
There are even more reasons to buy a home with a mortgage, but there’s a growing trend among homebuyers in the United States to buy using cash. Which is the better option? It depends on your circumstances.
Mortgages versus Cash Purchases
All-cash home purchase rates have skyrocketed in the U.S. over the last couple of years. According to data compiled by RealtyTrac, 38.1 percent of residential properties in the United States in November of 2015 were paid in all cash. That’s up almost 30.9 percent from March 2013.
RealtyTrac believes the intense shift from mortgage purchases to cash purchases is due to updates in mortgage law, as well as unstable foreign markets. There are many other factors at work here, and many reasons to pay cash or stick with a mortgage.
Advantages of Buying a Home with a Mortgage
Home mortgages in the U.S. have been in use since the 1930s, and today the average mortgage payment ranges from $461 to $1,686. Consumers who prefer mortgages over cash purchases cite the following advantages:
1. Home Ownership for Low-Income People
Not everyone can afford to buy a house outright, at least not without saving for several decades first. Mortgage agreements allow individuals and families to essentially “own” a home far before ownership becomes financially possible.
2. Low-Interest Borrowing
Mortgages are generally a low-interest form of borrowing since the loan is based on the collateral of the home itself.
3. Flexible Repayment Plans
Depending on your income and your lender, you can choose fixed-interest or adjustable-rate mortgages, choose a repayment term of 15, 20, 30 or more years, and negotiate with the lender until your monthly repayments are affordable and reasonable.
Advantages of Buying a Home with Cash
Though not everyone can consider this option, you may want to run the numbers and see if it is possible. Saving for a few extra years and putting off home ownership for now could benefit you in the long run. Buying a house with cash has the following advantages:
1. Facilitates a Quick Sale
Obtaining a mortgage can take a lot of time. You need to apply, speak with lenders, prove your income and credit rating, and wait to be approved. If you aren’t ultimately approved, you’ll have to start the process over again. Vendors don’t want to wait, therefore having cash on hand makes you an ideal buyer.
2. You Can Save $100,000s in Interest
If you obtain a $250,000 mortgage and pay it back over a 15-year period with a 5 percent interest rate, you can expect to pay nearly $106,000 in total interest. The higher the interest rate, the more you’ll be paying for the privilege of borrowing that money. Paying in cash means you pay no more than the actual cost of the home and any closing or legal fees.
3. Quick Turnaround for Property Investors
Home flipping has become a popular method of investment over the last 20 years, with this category of home sales accounting for 5.5 percent of all residential properties sold in the US in 2015. That’s 179,778 U.S. single-family homes and condos in 2015.
If investors want to make money on these homes, they need to complete the purchase, make renovations and repairs, and sell quickly. Cash makes the process much speedier.
4. No Credit History Is Needed to Purchase
Do you have poor credit or no credit history at all? It doesn’t matter in the slightest if you choose to pay in cash, because you won’t have to borrow anything from the bank.
5. You Have Bargaining Power
Cash makes you an ideal buyer in the eyes of home sellers, because you can pay immediately. In some cases, sellers are willing to negotiate a lower price just so they can have cash and not have to wait for the buyer to get bank approval.
It’s All about Your Savings
Paying for a property in cash is best for people who are willing to save up before buying or for those who already have the money. Though paying the full cost up-front can greatly reduce your available, liquid assets, it saves you from adding a mortgage payment to your monthly budget.
If you can buy a house outright and still maintain an adequate cash cushion, it may be a great financial move. If you’ll be short on cash or savings, a mortgage is still the only way to go.