Cash and mortgage are the two most popular ways of paying for a house or other properties. Different buyers opt for either after considering their benefits and drawbacks. However, it can be challenging to determine your best option, especially if you’re a first-time house buyer or still new to the market.
Paying for a house in cash or mortgage negatively and positively impacts the buyer. Having understood them well, you can confidently decide which option suits your financial goals, strengths, and preferences. Even better, you can engage a financial advisor or real estate agent to assist you in making better decisions.
Here is a breakdown of each option with unique advantages and disadvantages to help you decide.
Cash vs Mortgage Payments
Before proceeding to the main differences, it’d be best to understand how each option works. Paying for a house in cash simply means offering real-time money in exchange for the property. You make a financial transaction with cash house buyers based on a price you both agree upon.
On the other hand, mortgage payment refers to acquiring a house through a loan to be paid across a stipulated period. Buying a house is a significant milestone, regardless of the method used, but you should understand their differences.
Advantages of Paying for a House in Cash
There are numerous advantages of paying for a house in cash.
Pro: You Can Negotiate
One main reason many people pay for a house in cash is because it allows them to bargain. Cash payments are often more attractive to the seller, making it easier to negotiate and adjust on behalf of the buyer. While there are other factors to consider during negotiation, determination, market knowledge, and focus should remain in the frontline.
Pro: No Interest or Debt
Cash payment directly translates to no interest or debt. When you pay for a house in cash, no likely interests are involved, and you will remain debtless as before. This method is ideal for people who wish not to ruin their credit score or have a pending debt.
Pro: Discount Benefits
Many cash-offer properties are often listed alongside possible discounts. Paying for such properties in cash can help you benefit from those discounts that are hardly available in the mortgage offers. Before paying, you should seek to understand discounts linked to a particular property.
Pro: Quick Title Transfer
Houses paid for in cash usually enjoy a quicker title transfer than any other. The title transfer starts after the sale closes, taking approximately a month or two. The closing process is also quite time-saving as it doesn’t involve a follow-up of many documents regarding the buyer and seller.
Disadvantages of Paying for a House in Cash
There are a few disadvantages of paying for a house in cash:
While paying for a house in cash is pretty beneficial, it also boasts a few disadvantages. Paying for a house in cash can be expensive since the market value is often higher. Sometimes, you might be required to acquire a bank loan to support your savings or income from other investments. Other expenses like homeowners association dues and insurance might still apply.
Con: Limited to Other Investments
When you pay for a house fully in cash, you might be pulled back from undertaking other investments. This is because the larger portion of your money goes to the house, leaving you with little or nothing to invest in. Considering this method, you should evaluate your current financial status and goals.
Con: No Tax Benefits and Home Equity
IRS barely allows tax deductions or benefits to those paying for houses in cash. That means buyers incur the entire property taxes upon purchase, unlike mortgage purchases. Additionally, cash-payment houses do not attract home equity (reverse mortgage) even if the property adds value in the future.
Advantages of Mortgages
Buying a house via mortgage payments offer several benefits:
Mortgages are affordable for many people as they allow the buyer to live in a house without paying for the total amount. The upfront cost is also insignificant, hence bearable for many aspiring house buyers. You will likely not fall into financial constraints with this option.
Pro: Improves Credit Score
Acquiring a house through a mortgage could be a great chance to enhance your credit score. When you consistently and actively honour your mortgage payment, your credit score improves in the long run. That way, you’ll likely become more eligible for other loans upon application.
Pro: Tax Deductions
According to the Canada Revenue Agency, mortgages are subject to various tax deductions. These deductions include mortgage interest payments, helping reduce your tax bill. These deductions can be a great chance to save on taxes and use the money elsewhere.
Pro: Supports Investment
Acquiring a house through a mortgage allows you to invest in other business ideas. The money that could be used to pay for the property in cash can be applied in other investment areas, thus yielding more profits. This also makes the mortgage payments more affordable.
Disadvantages of Mortgages
There are numerous disadvantages of using mortgages to buy houses:
Con: High-Interest Rates
The interest rates linked to mortgages are significantly higher than standard loans. That makes this option more expensive in the long run than paying for a house in cash. Unfortunately, the first years of mortgage payments are the most costly and might attract financial frustrations if you don’t plan strategically.
Con: Chances of Ruining Your Credit Score Are High
Mortgages can also ruin your credit score, especially if you keep delaying your payments or going without paying for an extended period. Such scenarios often increase the risk of foreclosure, making it more challenging to apply and qualify for mortgages or other loans in the future. Additional expenses like mortgage and property insurance can push into further borrowings.