In today's housing market, many families are purchasing their dream home by direct hard cash payment. Buying a big home in cash is quite a bold step couples are willing to take now, after seeing the mortgage industry's current fall. Recent stats reveal that in last two years (2012-2013), California has witnessed 7500 cash home purchases. Significantly, only 10% of them have refinanced their property. According to RealtyTrac , 39 to 40 % of US homes were purchased in cash till the 2nd qtr of 2014.
Spending money from your pocket instead of using mortgage loan might give you hassle free home-ownership & also save your time. But using your cash in this fashion can't be called a wise financial move. It may get you into trouble when you really need cash for any sudden requirements. So, let us enlighten the factors which every new-homebuyer should keep in mind before opting a cash deal purchase:
a) By obtaining home financing or mortgage, you will be eligible for the “Home mortgage interest deduction” benefits. It is provided by the IRS (Internal Revenue Service) of US federal government. A borrower can save his interest amount, paid in towards 1st & 2nd homes respectively. You can get this tax benefit up to 1 million dollars mortgage debt. It is considered as subsidy from US Government. In the above mentioned program, if you have a 30-year fixed mortgage rate plan on the amount of $3,00,000 with 4.25% interest, eventually you can save up to $4000 in the initial year. If 25% income tax will be applied to you, your tax savings will reduce your effective mortgage interest rate at least to 3%.
b) Another important benefit of obtaining a mortgage instead of cash purchase is called - “Real estate leverage”. Whether you have chosen any one of the 2 given options for financing your purchase, you will surely be entitled for the fluctuated or increased value of the same property every year. Suppose you have invested cash $400,000 for the property & your friend also bought a home in your neighborhood by paying only $80,000 as downpayment & the rest through mortgage. The market return value of the property in your neighborhood is 3% of the total value per year. So, at the end of the year the value of both properties has increased where you'll be getting $12,000 (by investing $400,000), & your friend is getting $12,000 (By investing $80,000). So, it is clearly seen the the rate of return over investment is quite high for your friend compared to you despite of you both had the same valued property at the beginning.
This leverage is specially beneficial for the new-homebuyers as it will give you much more return than any other kind of investments.
c) Evaluate your returns which you might get by using the cash. If you use the money as alternate investments rather than spending it for buying home, there is a greater chance of gaining handsome returns on your investment. An expert financial advisor can guide you the way you can invest your cash in different investment options to earn much more returns than getting it engaged in cash purchase. It may be stocks or bonds or any other method rather than real estate buying.
d) There are some other benefits too which you'll find interesting. A mortgage won't prevent you from generating equity in the house. Every homebuyer wants to build equity as it is the main financial reason for buying a home. The generated equity can be helpful for you to finance your personal expenses like wedding, college & after of course retirement.
e) Mortgage is the most easy money which you can avail at a cheap cost. You will get the loan as soon as you can convince the lender that you have the ability to repay it properly. You might ask - “what about the interest?” The more confidently you can prove the lender about your payment capabilities, your interest rate will be that much lower. If you offer your home as a collateral, you will get much lower rate than the other parties. There are many federal backed loan programs like HUD, HARP, HAMP, VA loans etc which offers little downpayment with big borrowing facilities.
So, you should consider the above given aspects of mortgage rather than opting a cash deal purchase of your home. Home mortgage interest deduction, real estate leverage & availability of liquid cash is the main points which will be most crucial for your future financial state. Consulting an expert will not only save your money but it will also help you to channel your money in right direction to gain more.