|Sell at a profit? Read this before
put a downpayment on your next home
Garton-Good, GRI, DREI
Congratulations. You've just sold your home and are ready to
purchase a new "castle."For the first time in your life, you may have
enough money to pay cash for a home. But should you? Does it make sound
financial sense to do so? Let's explore the pros and cons and help you weigh
what you could stand to gain (and lose) if you purchase your new home for cash.
To make the most sense of your alternatives, you need to
know what you're trying to achieve. In other words, have a financial game plan.
Where does owning a home free and clear fit in this picture? Paying cash for a
property may make sense if you are trying to avoid paying loan fees and
settlement costs. However, if you finance the property later, you will be paying
these costs as both the seller and the buyer! These include appraisal fees,
discount points, and origination fees. In many cases, pulling cash out of your
home later will be viewed as a refinance and therefore may carry a higher
interest rate and higher costs and fees.
You need to evaluate your personal circumstances before
purchasing for cash. First, do you have funds set aside for retirement, cash in
savings accounts or other liquid assets, and sufficient health, life and
disability insurance? Most financial planners suggest at least six months of
financial padding in liquid assets. Paying cash for a property may drastically
limit your liquidity.
If you are close to retirement, buying a home for cash will
cut monthly living costs. Just make sure you have enough income from other
sources to live comfortably, including financial resources to pay for property
taxes, insurance, and maintenance on the home. Also evaluate how important
interest deductions are to your tax picture. A home without a mortgage is a home
without a major tax deduction. It may make more sense to use your cash to pay
off non-deductible credit obligations you have than to put cash into a home.
Third, if you later need equity from your home, what size
monthly payment would you be comfortable making, and would you be able to
qualify for it? Are your financial circumstances likely to change (i.e. future
retirement) so that you couldn't qualify for a loan? It may be wise to consult
with a lender now to see if changes in your financial picture could later
restrict you from getting a loan.
Lastly, how does a mortgage look as an investment? Are there
other investment vehicles which could give you a greater financial yield with a
similar amount of risk? It's wise to consult with a financial professional to
help you evaluate the dollars and sense of paying cash for a home. Don't
overlook the fact that it may the psychological value it may have for you to own
your home free and clear. In today's world where many home owners are cutting
back on expenses rather than incurring new ones, owning a home free and clear
can be a liberating experience.