There has long been a great deal of debate among personal finance experts about when to use a mortgage to buy a home and when to use cash. Radio talk personalities, like Dave Ramsey, generally recommend paying cash whenever it is at all feasible to do so. However, there are some real plusses and minuses to using cash to purchase a home. And even for those who have the cash to cover the full purchase of a house, doing so may not always be the best option.
Paying cash has many advantages
Paying cash for a home has some significant advantages. One of the first is that it can make the difference between closing sales and being shut out of competitive markets. In hot real estate markets, sellers have little interest in waiting for a month or longer to see if a particular buyer gets approved for a mortgage while many better-qualified buyers slip through the cracks. In this case, cash is king.
Paying cash can also save massively on fees and costs. The typical mortgage takes thousands of dollars to close. These fees are usually rolled into the mortgage itself, but avoiding them is still preferable. The real savings, however, come from avoiding all of the interest payments, which on a 30-year mortgage can add up to far more than the principal amount. All told, paying cash rather than the equivalent mortgage is equivalent to buying an investment that earns the interest rate on the mortgage amount. That is, paying $500,000 in cash where the mortgage is 7 percent is like a $500,000 bond that pays 7 percent annually, for 30 years.
Cash also sharply limits risk as it becomes both far likelier that the equity will grow and the risk of repossession is removed entirely. For these reasons, cash is king.
Even with all their drawbacks, mortgages can still be a better option
There is one hugely compelling reason that a buyer might want to get a mortgage: They just don’t have sufficient cash to afford the home otherwise reasonably. This is of particular concern for young people who want to form families. Waiting to save enough cash to buy a home before starting a family could easily mean missing their prime fertility window.
This isn’t just a problem for people with no cash. Those who may even have enough funds to pay for a home may be left with such stretched finances that taking out a mortgage would be the far safer option.
David S. Chang is an entrepreneur, wealth manager, keynote speaker, consultant and Chairman/CEO of Chang Holding Company. David is also the editor of The Art of Thinking Smart, a blog and finance column in The Star-Advertiser’s weekly Midweek with a readership of over 400,000 people. He is also proud to serve as an Intelligence Officer in the Hawaii Army National Guard.
A longtime expert in finance, David uses his executive roles in various companies under Chang Holding Company in order to help people achieve their personal financial and business goals throughout all phases of their lives:
A wealth management firm (which has become ranked as one of the top in the nation and featured in Forbes)
WealthBridge Private Equity
A private equity and venture capital fund
Care for Life
A private-duty home and senior care company
Other companies under Chang Holding include GreenTech Pacific LLC and Pacific West Import/Export Hawaii.
David S. Chang is the founder of The Art of Thinking SMART, The Art of SMART Money, and The Art of SMART Stocks. He created the Simple 4-Step System to Wealth and Financial Freedom. Supported by over a decade of research and driven by David’s desire to help others excel in all areas of their lives, this step-by-step online training program enables people to take control of their wealth immediately.
Everyone should have a financial plan, regardless of age, income or net worth.David S. Chang
David has always loved to learn and seek out opportunities to achieve the American Dream– so it comes as no surprise that he has taken numerous continuing education courses in finance, investments, and insurance. He also completed the Chartered Financial Consultant® (ChFC®) program at The American College.
In 2015 David was chosen as a member of InvestmentNews’ 2015 40 Under 40 list of top young advisers and associated professionals in the financial planning industry. He has been featured in Forbes as one of America’s Select Financial Leaders. In 2013, David S. Chang was selected as 40 Under 40 Military by CivilianJobs.com, 2011 Pacific Edge Young Professional of the Year, 2010 Business Leader of the Year from the Pacific Business News Forty Under 40 and 2011 finalist for The Business Leadership American Savings Bank Business Leader of the Year.
In addition, WealthBridge Inc. was selected as a FIVE-STAR Wealth Manager for the State of Hawaii in 2014 through 2011, representing the top 2% of Wealth Managers statewide. In 2014 through 2012 WealthBridge Inc. was also selected by The National Association of Board Certified Advisory Practices (NABCAP) as a Premier Adviser.