Traditionally, people buy houses via mortgage loans. You pay a deposit that equates to a percentage of the home’s value, and then you get a loan to cover the rest of the costs. It’s a standard transaction that happens all over the world.
Realistically, the only alternative to a mortgage is to pay in cash. Most people don’t do this, but is it actually a smarter idea than you think? You want to get the most out of your property investments, so here are some key considerations when thinking about paying in cash.
If you use cash to purchase properties, you will incur no debt. You don’t borrow money from anyone or owe them anything. From a long-term financial perspective, this can be really advantageous.
A Better Deal
Moreover, a lack of debt also means you get a better deal on the house. Paying with a mortgage means you’re technically spending money on two things. Firstly, you have the house itself to pay for. Secondly, you have interest rates on top of the loan, meaning you’re paying the mortgage provider. If you pay in cash, no interest rates are paid, so the overall cost of buying your house is cheaper.
Additional Investment Opportunities
If you get a mortgage to buy a house, the chances of you being able to afford a second mortgage to get another property are slim. On the contrary, paying for a home in cash opens you up to something called delayed financing. In simple terms, you pay for a house with cash, and then get a mortgage after. Essentially, you now have some extra funds to help you make more investments. Instead of only owning one home, you now have two!
Houses Are Ridiculously Expensive
All of the previous points indicate that using cash to buy a house is actually fairly clever. Unfortunately, there’s a massive elephant in the room. The average house price in 2022 is $348,000. Usually, when you apply for a mortgage, you can make a downpayment that’s around 10% of that, sometimes less. It will mean you only have to save around $34,000. That’s still a lot of money, but it is doable.
Imagine how hard it is to save the full amount to buy a house in cash alone. For the average human, it’s impossible. To put it into context, life expectancy in the US is currently at around 77 years. You’d have to save around $4500 per year to save enough money to buy a house based on the average price today. In reality, you want to afford a house before then, so you’d need to try and save tens of thousands per year. It is simply unrealistic for the majority of people to buy houses with cash.
Having said that, there are instances when it is possible. For example, attending auctions or buying uninhabitable homes could help you find more affordable bargains. Likewise, if you already have a house and sell it, the cash can be used to get a new one without a mortgage.
Overall, buying a house with cash is the preferred and smarter method of investing in property. But, it’s understandable if you can’t afford this. Get a mortgage if you have to, but if there’s any way to buy a house with cash, do it!