And why would it ever be a good idea to borrow if you can pay cash and pay no interest to the bank?
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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?
I thought about paying off my mortgage faster until I realized that $1 today would be worth more than $1 in about 5-10 years. I can do better things with that $1 today, and the 3-4 cents in interest that I’ll pay is less than what I’ll lose to inflation.
I can do better things with that money today, like keeping it around for an emergency, using it for my family and I to live a little more comfortably, or even gambling it in a retirement fund.
My dad retired young and invested in real estate. He always told me you never want to pay off ur house loan, it’s the cheapest money u will ever get.
Essentially the house is increasing in value and at the same time inflation is depreciating the dollar.
Most people do not have enough cash to buy a house, so another similar question is whether you take 15 year mortgage or 30 year mortgage. You have to make some market decisions depending on the interest rates for each type of mortgage (15% is lower than 30 year).
The question becomes, what do you do with the monthly difference between the 15 year and 30 year mortgages? The 15 year mortgages while having a lower interest rate have a much higher monthly payment.
So now you have two plans:
1. Pay off the house in 15 years.
2. Get a 30 year mortgage and invest the difference between the higher 15 year mortgage and the 30 year mortgage. After 15 years, depending on the choices you made, you may have enough money to pay off the house and still have more money left. It all depends on the interest rates of the two mortgages and the markets for those 15 years.
Usually these questions are sidelined in that many people either can’t afford the 15 year mortgage payments, or do not invest the difference, but rather spend it on other things.
Another benefit of the 30 year mortgage is if you have an emergency, your payment required is lower. A 15 year mortgage and an emergency means you are on the hook for a larger payment.
Some people like 15 year mortgages as “forced savings plans” and the thought of just being done with the debt in 15 years.
Some mention taxes but that depends where you live in the US. Where I live I’d never pay enough mortgage interest to get to the standard deduction. Have a mortgage in parts of California and yep no problem.
It used to be you’d get tax credits for the interest payments, so if you earned $40k/yr and paid $20k/yr on interest, it was like you earned $20k/yr for taxes. But Trump limited that to a maximum of $10k/yr for interest deductions, so you don’t want your interest payments on your loan to exceed $10k/yr.
There are great online “mortgage amortization” calculators which show you payment numbers. The goals are to keep cash on hand for emergencies like earthquake damage or flooding damage so you won’t lose your house. Most insurance plans don’t cover these for a reasonable cost so unless you are in a known area, most people opt out of coverage. Since cars don’t get a tax deduction for interest, paying cash for a car beats paying cash for a house. Also, credit cards charge even higher rates, so pay off your credit cards first, then your car, then your house.
Paying cash can save a lot of interest, and is usually cheaper in the long run (but not always, depending on inflation, house prices and interest rates). It also means you will immediately own the property outright and you can’t be ousted by the mortgage provider in the event you cannot meet your mortgage payment obligations.
The main advantage of borrowing is that it enables someone to buy in the first place, as property prices are usually prohibitively expensive without a mortgage or loan.
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