NJ Buyers: Should you buy a home with a home loan or cash?
Here’s a surprising question I often get from prospective home buyers: Should I buy a home with a home loan or cash? Say what? That’s right this is a common question because gone are the days that the cash buyer isn’t out there. The truth is they are out there!
So what’s the answer? It depends is the short answer to a loaded question. It really depends on what your true financial picture, goals, risk tolerance and personal situation is. There isn’t one correct answer. Enter scenarios or what I like to call The Pros, The Cons of either and what scenario do you fall under?
SCENARIO 1: The Uber Rich, Counting $100s for Fun
Listen if you’re uber rich it won’t completely matter if it’s your “first home”, trade up home, vacation home, or investment home SORT OF, because you simply can buy in cash because you have it. You’ve found alternative means of saving and stashed away the cash. So why is it that the Uber Rich opt to buy their home in 100% outright cash besides the usual response, “They Can?”
Well some die-hard Dave Ramsey followers are dedicated to this concept of not having a mortgage. On www.daveramsey.com he explains why one should pay off the mortgage (or basically buy a home in cash) by illustrating basic math and tax deductions for homeowners.
EXAMPLE:
$200,000 mortgage at 4% interest equates to an $8000 tax deduction. Now let’s say you make $80k/annually, rather then paying taxes on $80,000, you really pay $80,000-(deduct the $8000) or $72,000. So in essence yes you pay taxes on $72,000 vs the $80,000.
However, let’s say you didn’t have the mortgage which would mean no “mortgage interest deduction”, then you’d pay taxes on $80,000 or 25% income tax bracket. So that $8000 a year (if you had paid interest) would be taxed at 25% or $2000. Dave’s theory is yes you have to pay the $2000 on taxes but gained $8000 because that $8000 isn’t interest going to your mortgagor’s bank. Get it? Explained another way, if you had a www.wellsfargo.com loan and needed to pay $8000 worth of interest it goes to Wells Fargo home loans vs. shelling out $2000 to Uncle Sam or the IRS. Hmmm interesting concept to forgo the buy a home with a home loan theory right?
If you’re looking for mortgage rate comparisons check out www.bankrate.com
SCENARIO #2 Real World, Moderate Income with children that have high after school (FILL IN THE BLANK) expenses
Okay listen, let’s get back to the real world called moderate income, kids, high extracurricular expenses and what ever else real world situation describes you. It’s nice to be able to say sure I’ve got $200,000 socked away but you might not. Then again maybe you’ve squirreled away close to & throw a figure out) $800,000 or $1mm? Either way, you had hoped the $200k you so carefully socked away into a retirement fund was reserved for that only–retirement and long walks on the beach whilst vacationing in Hawaii.
Then that scenario screams GET A HOME LOAN!! The question which we’ll cover another time is types of home loans that would suit you. But for now, some benefits of getting a home loan.
1) Tax deduction–you get to deduct your mortgage interest which means lower your tax burden. Private mortgage insurance, hazard home insurance can also provide tax deductions if you qualify.
2) Save your cash and invest it elsewhere–some financial experts say go get that mortgage since rates are amazing low just under 5% these days, so why not use that extra cash and invest it into stocks/mutual funds.
3) Home equity–if you’ve got equity in your home, you can tap those funds (cautiously) to use for emergencies such as home repairs or pay for medical bills or college tuition. Guess what Home Equity lines of credit (HELOCS) are also a tax benefit. If you’re tapping a HELOC, consider the Pros vs Cons and stay disciplined with your payments. Carefully keep an eye on the payment terms and watch out for resets.
4) Improve your credit score–sure you can certainly improve your credit score based on your mortgage payment history and it might open up other lines of credit. Not a fan of credit, but sometimes credit can be your friend if use wisely to rack up travel/bonus miles and pay the bill off in its entirely every month.
So do you want to buy a home with a home loan or cash? It’s your decision alone after obtaining counsel from your accountant and financial advisor. Do you advise yourself? Then make sound choices but don’t compare your scenario/situation to someone else’s because at the end of the day it’s your financial decision.
photo credit: http://photopin.com via http://creativecommons.org
