Eli5<- what are the pros/cons of borrowing money from the bank vs paying cash when buying a house?


And why would it ever be a good idea to borrow if you can pay cash and pay no interest to the bank?

In: 18

If you can make more money doing something else with your cash than using it to pay down your mortgage, then it’s beneficial to take out a loan. It depends on your credit rating what kind of interest you’ll get on your loan, and what the long term stock market trends are, or if you want to buy multiple properties at the same time, for example.

But making money in the stock market is not a given, so there is risk involved in going that route.

Also, you want to have cash on hand for possible emergency situations, like big unexpected medical bills, your car dies, you lose your job, etc.

On the other hand, if you lose your job and you have a mortgage, then you might end up defaulting on your loan, and lose the home and any of the equity you had in it.

Depends on the interest rate, and your own time discount rate. Money now is worth more than money tomorrow. And every person has a preference for how much more money is worth now compared to tomorrow. E.g., some people will prefer 100 dollars now over 200 dollars a year from now. Some, would prefer to wait the year.

If the interest on the loan is lower than your own time discount rate, it is preferable to pay the money in the future instead of paying the full price today, because it is essentially less expensive according to your own preferences for the time value of money.

There’s also some real advantage depending again on inflation and the interest rate. If the interest rate is low compared to inflation over the time of the loan, it’s also cheaper to pay over time.

The simple benefit is that you get a house now as opposed to when you finally get the money together. It also allows your normal rent payment to go into your mortgage and not someone else’s pocket. That way instead of paying your landlord to borrow your dwelling for a time, you pay the bank to own it and can sell it or pass it to your children. You can even sell the house before you pay off the mortgage, so long as you pay off the remaining debt on the loan.

Assuming buying with cash is a real option for you. If you have that kind of cash flow, it really comes down to how you feel.

You’re wealthy enough that the opportunity cost either way probably isn’t a big deal.

Cash is hugely useful – you can use it for anything you want.

House equity is one of the least liquid assets. Accessing it in good times is a hassle, and if you lose your job the only way to access it is a sale, at which point you have to settle for whatever the market says it’s worth and pay the transaction costs.

If you lose your job would you rather have $100,000 in equity or $100,000 in cash or other liquid assets?