An example of why buying a home with cash may not be in a Buyer’s best financial interest. Assume a Buyer has $250,000 to invest.
Option A: She buys a home for $250,000 and lives in it. Her $250,000 house is her only investment vehicle.
Option B: She puts 20% down on a $250,000 house, costing her $50,000 initially in a down payment. As with Option A, she will still own and live in the same $250,000 house, which is still the identical investment vehicle. BUT, she now has $200,000 to invest elsewhere in addition to the investment in her home. Thus, instead of having just a $250,000 investment working for her, she instead has $450,000 – a $250,000 home + $200,000 to invest in the stock market (for example) – invested and working for her.
Why is Option B may be more financially prudent?
It allows much more money to be invested – $450,000 instead of just $250,000.
The return rate on the investments could easily beat the cost of the mortgage – 8% investment return minus a 4.5% mortgage rate provides a return of 3.5% greater than just owning the home, and that’s not yet including the mortgage interest deduction which will decrease her mortgage cost further and thus increase her investment return during the mortgage term.
She will have far more potential for higher investment return – more money invested means more potential return.
She will have a much better hedge against market fluctuations due to being diversified – one could go down (housing), while the other up (stock market), instead of having all her eggs in just one (housing) basket.
She will get to use the mortgage interest deduction – not available if her house is paid off.
Mortgage debt is considered “good debt” – it doesn’t fluctuate and isn’t predatory like consumer credit card debt, which is NOT good debt.
She will own and live in the same home either way.
She will have liquidity in case of life emergencies – homes are difficult to sell and close quickly.
She retains the option of paying her home off more quickly down the road by making additional payments to principal, without refinancing.
This post was written by David B. Roney, a REALTOR® and Designated/State Broker for Fathom Realty – Arizona. David was formerly a stock broker for Merrill Lynch, and also studied to become a Certified Financial Planner before changing his mind and getting into real estate.
For more information, visit David’s website www.DavidRoney.com
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