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You Can Afford To Buy Your Home In Cash–But Should You?
December 10th, 2013
There are some life experiences that nearly everyone can relate to – nervousness before a first date or excitement at getting a promotion, for example. Some of the stuff we humans go through really is universal!
On the other hand, there are some experiences that very few of us will have to grapple with in our lifetimes. For example, not very many people will be in the financial position to pay for a home in cash. After all, the vast majority of us rely on mortgages to buy our homes because it’s simply too daunting to save up that much money. This means that we probably won’t have to make a choice between using cash or a mortgage to pay for our houses – the decision is made for us.
Despite the fact that the cash versus mortgage question is uncommon, it’s still a serious consideration for some people, and deserves to be explored. To mortgage or not to mortgage? Read on to decide.
Consider The Risks
One of the most important things to think about when you’re deciding whether or not to take on a mortgage is risk. If you use a loan to buy your home (with a substantial down payment, of course) you and your lender are sharing some of the risk in the purchase of your asset. If you buy a home outright and it drops in value, you’re shouldering the brunt of the loss. On the other hand, if it goes up in value, you’ll get a huge bump to your net worth without having to pay any interest. All this means that considering your risk tolerance is key.
Missed Opportunities
Another factor to think about is the opportunity cost of sinking so much cash into one investment – in other words, if you use all of your money to buy a home, that means you can’t use it to invest in other things, like stocks. This means that you could potentially miss out on huge returns if the market does well.
Even if you don’t plan to invest the money you’re not spending on your home, you’ll be doing something with that cash, even if that means it’s just sitting in a savings account. Do you want to hold onto a fat emergency fund? Or maybe you’ll want to use the money for a child’s college education? Again, be sure to think about what you’re giving up by not borrowing money to pay for your home.
No Mortgage, No Worries
Although there’s the potential for loss of both invested dollars and financial opportunities if you decide to pay for your house in cash, the prospect of owning a home outright brings a sense of security to some people that can’t be measured in dollars and cents. This means that for many of us, bypassing the bank is the right choice, simply because of the psychological benefits they’ll reap.
Although having enough cash to buy a home outright isn’t a situation many of us will find ourselves in, it never hurts to be prepared!
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