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Buying your home in cash versus applying for a mortgage. Should you buy with cash or use a mortgage?
We all know about the great tax benefits that are the result of financing your home. But, given the choice, should you go into debt for such a large purchase simply to reap tax advantages? Well, it all depends...
You must first decide what your financial goals are and what you want to achieve through home ownership, and another important aspect should be, how long you plan to live there.
If you can answer these questions, you would be better equipped to determine the financing options that are most appropriate for your situation. Below are some pros and cons of paying cash for your home versus applying for a mortgage.
Benefits of an all-cash home purchase include:
Full and complete ownership of your home, with no mortgage payments! This can be especially important to those buyers who are particularly worried about the present market in the USA and have taken note of the sheer numbers of homes in foreclosure today.
Buying with cash eliminates mortgage interest. The cost of the mortgage may double, or even triple, the property's purchase price if the loan runs its full term.
The cash buyer doesn't spend money, time, or effort obtaining a loan. Closing costs may be minimized, to include only expenses such as notary fees, deed preparation, recording documents fees, trust fees, etc.
Cash buyers don't necessarily need to obtain the property appraisal that's required with most mortgage loans (Except possibly to verify that he or she is paying a fair market price).
Cash gives the buyer greater purchasing power. Since a cash purchase is free of financing contingencies, having an all cash purchase helps the purchaser negotiate a discount of the original purchase price.
The cash buyer can take out a loan on the property later, using its value as collateral.
Some benefits of financing the purchase:
By obtaining a mortgage, the borrower employs one of the most basic principles of real estate purchasing: using leverage by buying with other people's money, or OPM. This eliminates the need to use precious cash to buy the home; potentially depleting resources which could be used for other purchases, emergencies, or lucrative investment opportunities.
No mortgage interest means loss of the interest tax advantages. Also, if consumer loans are needed later to finance other purchases (due to cash shortages), that interest is not tax deductible (check with your accountant).
Some of the closing costs may also be tax-deductible. For example, discount points – even those paid by the seller -- are tax-deductible for the homebuyer. Additionally, with a mortgage loan, some fees can be financed to provide greater purchasing leverage.
The cash buyer who doesn't obtain an appraisal could be paying too much. Especially in a speculative real estate market such as the one we have in Playa del Carmen. You would be better off paying for a property appraisal.
Closing costs on a refinanced property may also be costly. By taking out a loan later, the homebuyer actually becomes both the borrower and the seller for the purpose of paying closing costs. These additional expenses can include the cost of a new trust, recording and notario fees, title insurance, discount points, and other closing fees.
Mortgages applied for after cash purchases are considered refinances and may have higher interest rates. In addition to the fact that refinances may provide a lower LTV (Loan To Value) that the borrower may be getting when purchasing the property.
You should consult your accountant, attorney or mortgage broker so as to best determine on whether to purchase your home with cash or through a mortgage.
This article is provided by Enrique (Henry) Saldana-Mexico Mortgage Solutions (Mexico)/Advanced Mortgage Corp (USA). For further information you may contact us at
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Cel: (984) 116-8528.
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