Despite conventional wisdom, getting a mortgage may actually pay off – even if you can pay cash. Let’s look at some of the top reasons why: investments, low-interest rates, tax advantages, and liquidity.
Paying cash vs getting a mortgage: the obvious choice is to avoid getting a loan, right? It’s not that simple. A mortgage is actually some of the cheapest debt you can borrow. As odd as it may sound, there may be financial advantages of getting a mortgage instead of paying for a house in full right away.
If you’re able to pay off a home without a mortgage, you’re in good shape. Kudos. Keep in mind that we’re comparing two different luxuries here. Avoiding a mortgage by paying cash isn’t a bad thing. So, why get a mortgage?
Put your cash to use in investments
Instead of getting in a hurry to pay off your mortgage (which is a very low-interest debt – especially in our current rate environment), consider investing the extra money instead.
- Max out your 401k
- Max out your IRA (if you’re eligible for one)
- Keep a healthy rainy day fund – 6 months of expenses
- Consider investing in lower-risk ETFs, mutual funds, and index funds. The stock market produces an average 12% return each year.
If your investment portfolio produced an average 12% annual return during your would-be mortgage period, paying off your mortgage would have prevented you from earning those capital gains.
The decision between paying cash vs getting a mortgage shouldn’t be taken lightly. Consult with a mortgage loan officer and/or financial advisor. They’ll help you understand which option presents the best advantages for your unique goals.
You won’t waste much on mortgage interest
We’re speaking in comparative terms here. Personal loans, credit cards, and average stock market returns are all higher than current mortgage interest rates. A home loan’s interest rate sat in the high 2’s in 2020. In 2021, experts don’t expect it to creep much higher.
How much interest does a 15-year mortgage save? Here’s an example: you buy a $350,000 in Williamson County, Texas, and put 5% down on a 30-year mortgage. That will rack up around $172,000 in interest over those thirty years. In comparison, a 15-year would only accumulate $80,000 in interest.
Plus, nearly every lender will allow you to make extra payments with no penalty. The Wood Group of Fairway never tacks on prepayment penalties for our borrowers.
Mortgage interest is also tax-deductible. Unless your mortgage is exceptionally high, you’ll be able to take advantage of these tax savings. That’s just one more reason it may pay off to get a mortgage vs paying cash.
To find out if you’re able to deduct your mortgage interest, points, and even mortgage insurance premiums, take the IRS’s interactive tax assessment for mortgage-related deductions!
Stash cash as a safety net
Our final case for the advantage of getting a mortgage vs paying cash is simple: financial liquidity. If you’d have to nearly empty your savings in order to pay cash for a house, think twice.
Having sufficient savings is essential, especially as we get older. Your kids or grandkids may need help buying their first home. Medical bills may stack up. You may want to get involved in an expensive hobby during retirement (like restoring classic cars)!
We’re here to answer your mortgage-related questions. We’ll break down your options in easy-to-understand terms. Getting started on your pre-approval is completely free. Take the first step now.