After succeeding in gathering a substantial trove of cash, you find your dream house—and now the decision: mortgage or cash? Cash is tempting: No mortgage payment. No interest. No monthly insurance set-aside or property tax pre-payment shunted into some account the mortgage company insists upon. Although there are definite plusses to buying your dream house with cash, there are at least three opposing reasons why it would be prudent to at least think twice before writing that monster check:
1. Taxes. The federal tax reform passed in 2017 may limit the interest tax deduction to $10,000, but that’s still a hefty plus come tax time—one that cash buyers might miss. It has the effect of reducing a mortgage’s bottom line cost.
2. Diversification. Investment counselors preach the advantages of diversification. If buying your Greenwich property with cash means funneling the preponderance of your liquid assets into that one investment, it limits your freedom to explore all other avenues. If a business opportunity beckons, you might wind up borrowing against your home equity—in which case you could have saved the trouble with a home loan in the first place!
3. Leveraging your position. Even if you don’t make an all-cash offer, that solid bank balance will contribute mightily to the way you will be viewed by lenders. The home loan terms you are offered should reflect that substantial financial standing. When historically low interest rates are offered, the financial consequences they embody are worth considering.
Of course, one major advantage of paying cash is that you look most appealing in the eyes of the sellers, who would love not to have to wait for the lender to give their stamp of approval.