There are a lot of factors to consider when deciding how to pay for your mortgage. It’s not a decision you should rush into without considering what’s the most affordable option.
Which is the best option for you? Here’s a look at the pros and cons of both methods:
Financing a Mortgage – The Good, The Bad, and The Ugly
Financing your mortgage is a way to pay for your home over time. Fixed-rate mortgages range from 15 to 30 years with equal payments.
You’ll also have the option of a variable rate mortgage which has floating interest payments. A mortgage is the only route to homeownership for most people, so choosing the right kind is essential.
Pros of Financing Mortgage
- Lower upfront cost – You reduce the amount of capital you need to secure a home. Depending on the loan product you could expect to pay a 0%-25% down payment in addition to closing costs. Which is significantly less than paying for the home fully in cash.
- It helps to improve your credit score – by paying the mortgage over time, you’re demonstrating that you can handle debt responsibly.
- Keep your cash as liquidity for future growth or investment instead of having it tied up in real estate. Historically, earnings on stock investments outperform over the long run over a locked-in mortgage interest rate
- Potentially take advantage of the interest being a tax write-off. For buyers who itemize their tax deductions, you can take advantage of mortgage interest deductions for the first $750,000.
Cons of Financing Mortgage
- There will be costs associated with getting a mortgage that would not be there if you paid cash for a property. This includes mortgage intangible tax, lender servicing fees, additional required inspections or verifications, and obviously monthly interest.
- If you are negotiating on a new home purchase, offering cash could be more attractive and get the deal closed quicker.
Paying in Full
Paying cash for your mortgage means making one payment upfront when you and the seller agree to the terms of sale. This can be a good option if you have the cash on hand and don’t want to wait for approval from a bank.
For many people, paying in full is out of reach, but for those that can afford it, they’ll never have to worry about rent or mortgage payments again. Some benefits to paying in full include:
- You save money – When you pay the mortgage in full, you save money by avoiding interest payments and fees charged by the bank.
- Keep the profit – If you decide to sell the property, you keep 100% of the profits, less any estate agent fees. If you take a mortgage, this would need to be paid back to the bank when it sells.
- Better negotiating power – Cash buyers are highly attractive to sellers because there are fewer chances of the deal falling through.
Which is Better For You?
If you have the cash on hand, it’s cheaper to pay for your property in full. However, you should consider if it’s the best investment for your money. Taking out a mortgage means you can use your cash if a better opportunity exists.
Financing a mortgage is usually more expensive than paying cash, but it’s a good option for people who can’t afford the asking price upfront or want to spread the cost over 15-30 years.
Paying for a house in full or financing a mortgage are both viable options. You should evaluate your options with your financial advisor to see what makes the most sense for your situation.