Why should you pay cash for a house instead of getting a mortgage? There are several good reasons to do so. First, cash purchases save you from paying interest and fees on a mortgage that would accrue while you are not living in the house. Second, you are able to purchase real estate at a “fair” value. Third, you are not tied to a piece of property for years upon years as is the case with a mortgage loan.
So why should you pay cash for a house instead of getting a 30-year fixed rate mortgage? For one thing, when you buy a house you have locked yourself into a long-term commitment. When you take out a 30-year fixed rate mortgage you are buying on a time-scale and with a set interest rate. This means that you are not changing your financial circumstances as much as you might be able to with a cash advance or credit card. You don’t have to worry about inflation affecting your house price over the next several decades. Also, if you decide to sell your house before the end of your loan term you are not losing any more money than you would with a mortgage debt consolidation loan.
Another advantage of cash for a home loan is that homebuyers often get lower interest rates than those associated with a conventional mortgage. Many homebuyers try to stretch their dollars as far as possible, sometimes going over budget and getting themselves into financial difficulties. In these cases, a home equity loan may be an ideal option. In these cases, the home buyer decides to borrow the lump sum for one big payment rather than spread the payments out over many years with a conventional home loan. The big payoff here is that borrowers only have one payment, one interest rate, and one fixed term.
If you are considering a cash-for-a-house deal, it is a good idea to do some serious research into both the lender and the loan itself. Cash for a house buyers should look at the annual percentage rate, or APR, for the loan they are considering. APR is the standard way of measuring the cost of a loan; the higher the figure, the more expensive the monthly payment. A person looking for a short-term fix might consider a low annual percentage rate on a loan, in order to lock in a low monthly payment and avoid the long-term commitment to pay extra costs. The APR can be very misleading if a person figures in closing costs. Closing costs are not included in the annual percentage rate, and in fact, they add up significantly over the life of the loan.
It is also important to look at the level of service a cash buyer will receive from the lender. Most cash for a house purchasers are looking for a long-term commitment from the lender, one that will save them money in the long run. The majority of lenders will charge a closing costs penalty for anyone who decides to refinance their mortgage loan. The good news is that this fee can be avoided by shopping around. When people see that their potential lender is charging a high-interest closing costs, it usually tempts them to sign on the dotted line without really examining the real offer.
When people who are considering paying cash for a house find themselves torn between two offers, they should also consider the long-term financial goals. Many homeowners who own their home with the help of a home equity line of credit are aware that these loans offer tremendous flexibility when it comes to budgeting. For example, a borrower who has several credit cards and several mortgages could use the line of credit as collateral for a large purchase such as a car or home, or he could use it to pay down his mortgage and reduce his debt load.
Another reason that people choose to pay cash for a house versus refinancing is that interest rates have been on the rise. Right now, the interest rate for fixed-rate mortgages is close to 4%, which is far below the current market. When someone purchases his first house or takes out a new mortgage, he has to calculate the amount of cash he will need to borrow against his equity. He needs to figure out how long it will take him to pay off his debts, and how much interest he will be paying over the life of the loan. With a cash-for-mortgage plan, the borrower figures his net worth, takes into account the amount of time needed to reach his financial goals, and then calculates his monthly mortgage payments.
Before the recession hit, many homebuyers were opting to pay cash for their home purchase. Although home prices have dropped over the past year, the economy has picked up and many homebuyers are finding it easier to purchase their new home than they were a few years ago. Many homebuyers are choosing to borrow more money from lenders to pay down their existing debt instead of paying interest costs on their new mortgage. This makes perfect sense. With interest rates on the rise, paying cash for a home purchase makes more economic sense today than it did a few years ago.