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All Cash Or Small Home Loan, Pros And Cons Of Each

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Home Mortgage BasicsWhen you have the funds to pay cash for your home, do you apply for a mortgage a loan or do you pay cash? It is a luxurious dilemma. If you are considering a home purchase and you have the financial resources to pay cash, without the expense and stress of borrowing from a bank or mortgage finance company, why would you ever want to use financing? It turns out that there is some benefit to having a home loan, even if you do not need the help.

If you have the capital for the full amount why not use part of the cash and get some of the benefits of working with a lender on favorable terms? Depending on your state, loans include impound or escrow accounts for miscellaneous items like property tax. Deducting these expenses automatically saves the worry of dealing with issues like insurance and property taxes.

Waving Cash At The Sellers

Offering cash at closing to seal the exchange is a powerful incentive to induce sellers to agree to terms that are favorable for you. Closing with cash is a faster process because of the time and cost savings that come from not having an appraisal or inspections required for a loan; if it is advantageous for you to pay cash at closing, you can still recover your money by financing after the fact.

The next question is how much do you want to take out of the property when you finance? The logical upper limit is the maximum you can borrow against the property without requiring private mortgage insurance, eighty percent. However, if buying for cash secured an exceptionally rewarding discount on the purchase price you may wish to extract all that you can; for a conventional mortgage, it is up to 95 percent of the appraised value, as long as you take out PMI for the loan.

Get The Best Of Both With A Large Down Payment

An alternative might be to put down half the value of the home. Offering a large down payment of forty to fifty percent will have the same impact on negotiating your purchase price and make loan funding easier also. Large down payment will get you in and out of closing nearly as quickly as cash and on similar terms.

A large deposit is like an investment at the rate that you would be paying on the loan for that amount and with less risk than if you invest it stocks or mutual funds. Big deposits avoid the extra cost of non-conforming jumbo loans. Loans have costs, and the capital will be trapped in the asset until you sell, refinance or use a home equity loan on top of your existing mortgage.

You will pay interest, which you can use to offset your tax bill, but that is not going to save taxes for everyone. You will need to talk to your accountant or financial advisor to establish the best tax strategy for your personal finances.

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Trace Richardson has written 638 articles on BankChirp.com

I'm Trace Richardson and am the founder of LeadPress. I’m a licensed California Real Estate broker and a former equities trader previously holding the Series 7, 63, 55 and 24 securities licenses.

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