Cash vs. Mortgage: The Ultimate Showdown

People always assume it’s bad to carry any kind of debt.

From credit cards to student loans to car payments, the borrowed life isn’t so glamorous! When the bills roll in each month, being reminded of the massive amount you owe can be downright depressing. And when you can’t pay…(well, that’s another topic entirely!).

The point is, owning things outright is synonymous with freedom. Society has us thinking in such a black and white way, but in reality, strategic debt can be advantageous to your financial health—especially when we’re talking mortgages!

Real purchasing power?

At Everest, we meet lots of clients who can afford to purchase their homes outright. But when making such a life-changing decision, we are careful to consider every possibility—including the option to finance.

Over the years, what we’ve found is that both options come with their own unique advantages and disadvantages. Every individual’s financial situation and long-term goals are different, so it’s important to approach each transaction with a fresh perspective.

Let’s discuss the classic debate: is it better to buy or borrow?

The benefits of cash

Is it really king?

In a competitive real estate market, paying cash makes a buyer more desirable in the eyes of the seller. Having a thick wallet in hand often gives you an edge over other hopefuls when it’s a hot market where bidding wars are likely.

“A seller is likely to take a cash offer over other offers because they don’t have to worry about a buyer backing out due to financing being denied,” says Peter Grabel, a contributor at Investopedia. “A cash buyer might be able to obtain the property for a lower price and receive a ‘cash discount’ of sorts.”

Because cash promises a speedier closing process compared to one involving financing, eager sellers may be willing to sell for less. Not to mention, someone who buys outright can always do a cash-out refinance down the line. With money in tow, there’s flexibility for all parties.

And not having to pay interest? That’s a win!

Not so fast…

Laying down all that money isn’t exactly easy. For one, you’ll need liquidity to cover the costs associated with homeownership. And if you’re a savvy investor, you know that money tied up in your home isn’t exactly useful from a financial perspective.

It might feel good to own your home outright. But wouldn’t it feel better to own three more income-producing properties?

Some people also assume that paying cash saves you a ton of money because you get to skip the origination fees, appraisal fees, and other charges related to the mortgage. In reality, many of these fees are minimal, and when it comes to interest, you can always refinance! After the crazy-low rates we saw this past year, having a mortgage isn’t so scary.

Oh, and don’t forget, you’ll still have to pay some closing costs (yes, even when you pay cash).

The benefits of a mortgage

Yes, we approve!

As aforementioned, sinking a huge sum of money into a house isn’t always smart. Any temporary emotional relief will quickly dissipate when you realize you have no quick access to that cash. So for many people, getting a mortgage actually provides MORE relief.

Relief knowing you can afford your payments, but also have liquid cash on hand in case of emergency. This is particularly important for homebuyers who don’t come from immense wealth.

What if you want to sell and need cash for a down payment? What if your job changes tomorrow? What if the home needs significant repairs?

A home equity loan is always an option, but the process will surely take time—and approval is never guaranteed.

Grabel notes, “It might make sense to not tie up a lot of cash to purchase real estate. Obtaining financing also has significant benefits.”

If you’re looking to expand your real estate portfolio, having cash on hand is crucial to your next purchase. Not to mention, it’s no secret that mortgages provide some amazing tax benefits! Interest payments are almost always deductible if you itemize. In certain states, a mortgage may also grant you protection from creditors (homestead exemptions).

Finally, investing your cash in the stock market, retirement funds, or some other venture can easily offset those interest payments over time—and then some.

Any downsides to debt?

In the realm of real estate, not really!

Even if you have bad credit, it’s still possible to be approved for a mortgage. Astute homebuyers know they can invest their cash in other (more profitable) ways, and that buying with cash doesn’t protect you from foreclosure. Don’t forget the pesky tax lien!

If speed of sale is your goal, paying cash may make sense. But by working with an experienced loan officer, you can get things moving relatively quickly, especially if you seek pre-approval.

In closing, mortgages are made for one and all—the modest first-time buyer, the wealthy Wall-Streeter, and everyone in between.

Everest says: we love good debt!