For most homeowners, investing in a new home requires taking on a mortgage to cover a portion of the cost. But that isn’t always the case. Retirees who are downsizing from their family home may find themselves in a position to choose whether they want to finance or pay cash. But which is the best choice?
Why Pay Cash?
Over the course of paying off your mortgage, the accumulated interest can significantly raise the total cost of your home. This makes the idea of owning a home free and clear sound very appealing. Without a mortgage, you may have more expendable income each month. Paying cash also puts you in a strong position to negotiate a better price on your new home. Yet, there are situations when being debt-free is not the best option, particularly when you consider that the interest on a mortgage is tax-deductible.
Paying for your home up front ties up a large amount of available cash. Most experts recommend keeping enough funds liquid (easily accessible) to cover your expenses for six months. During retirement, this might translate to having liquid cash for emergencies, such as unexpected medical or dental expenses. Putting too much of your cash into a new home could land you in a position where you would have to pay large fees to access your retirement savings ahead of schedule.
Things to Consider
Buying a new home is never as simple as comparing its sales price to your available funds. There are several things to consider when choosing whether to finance or pay cash for your home. A few factors include the current mortgage interest rate, the terms of available loans, the condition of the stock market and the state of your other investments (IRAs, 401(k)s, pensions, mutual funds, etc.).
With mortgage interest rates at record lows, taking out a loan and putting more cash into your retirement funds could actually work in your favor. Whether you plan to finance or have the available funds to pay in cash, it’s important to remember that your home is a substantial investment. Instead of thinking of it as a single purchase, it’s wiser to consider your new home as one more piece of your total investment portfolio.
Speak with a Professional
Meeting with a professional financial consultant will make it easier to understand all of your options before making a decision. If you do decide to purchase a home with cash, make sure that the previous owner has actually used the money you gave them to pay off the mortgage they had on the property. When you take out a new loan, this detail is handled by your new mortgage holder.
Given your personal situation, you may find that paying cash is the best option. Or you might decide that you would be better off financing a portion of your home. There is no single right answer. However, taking the time to understand all of your options will help you make the best decision for your financial needs.