Mortgage Myth 7: Paying Cash for a Home Is Always Preferable to Obtaining a Mortgage

Why take out a loan if you can afford to buy your home outright?

And isn’t it always better to put as much money toward the down payment as possible?

Nick Zwiebel and John Major address these questions in the last installment of the Mortgage Myth Busting series by Aksarben Mortgage.   

Paying for a home in full is always better than assuming a mortgage. MYTH

It is responsible to funnel all your cash toward a hefty down payment. MYTH

 

It is true that there are benefits to paying cash for your home. Cash purchases eliminate interest rates and closing costs related to mortgage financing. Cash purchases also tend to close faster or motivate sellers to sell faster or negotiate more.

However, there are ample benefits to assuming a mortgage even if you have ample money for a down payment or  purchase a home outright:

• Maintaining a diverse investment strategy. The mantra of most financial advisors is diversify, diversify, diversify. Why? Because diversification shields you from severe financial loss. If one area of your investment strategy underperforms, the other areas will (hopefully) compensate. You can’t diversify if all your capital is tied up into one type of asset – real estate (your home.)

• Protecting liquidity. Liquidity, or being able to take cash out of an investment, is important. It is difficult to access cash quickly if all your wealth is tied up in your home. Real estate, while a solid investment, is nonetheless one of the most illiquid assets. You can liquidate your bank accounts, as well as stocks, mutual funds, and bonds, much more quickly in the event of an emergency. 

• Maximize returns. Real estate appreciates, true. But it still lags behind other investments, such as the stock market. A preferable investment strategy may be to assume a mortgage and channel the remaining cash toward higher-yielding options. 

• Building a nest egg. It’s wise to have a “rainy day” fund, especially when you are a homeowner. Maintenance is constant and rarely convenient. Consider the air conditioner that fails in the middle of July or the furnace that sputters to a stop with the first frost. If you are a first-time homebuyer, you’ll likely need to buy such items as lawnmowers, grills, appliances, and additional furniture. 

With interest rates at historic lows, it may be more prudent to use some of the money originally earmarked for a large down payment or cash purchase in other ways. You can bolster your retirement fund; pay down higher-interest debt, like credit cards or student loans; start a college savings account for your children, or simply diversify your portfolio with stock and bond investments. 

Wondering what is best for your unique situation? Ask the professionals at Aksarben Mortgage what your options are. There are numerous paths to experiencing your good life!

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.