Imagine you win the lottery. Not many people know this, but lottery winners are given two options on how to take their money: They can either take it up front, or over time.
If they take the money up front, then the total amount of money they get is lower. But if they take the money over time, then it is a larger amount. So, what is the right answer? Money now, or more money later? Your parents would definitely advise you to take the second option, right?
And that is the conventional wisdom. But imagine that instead of winning the lottery, you are buying a house. Is it better to lose all that money immediately, or over time? How do taxes play into this? The more you think about it, the more layers you find there are.
Teifke Real Estate knows all about those layers.
We are going to explore those layers: The good and the bad of paying for a house in cash.
Pro: It Can Bring Down the Cost
This is the reason most people buy houses in cash. By guaranteeing the payment up front, you get rid of basically all of the risk on the part of the seller. Without any loan to pay off, they no longer have to worry about getting their money from a bank that pays in installments.
Con: That Much Money is Hard to Handle
Getting that much cash on hand is difficult, even if you can pay the bill ten times over. You cannot exactly buy a home with a credit card, nor can you withdraw that amount of money easily. In short, there are barriers in place to make sure that you cannot do it on accident.
The best way to get this much money on hand is to slowly withdraw it over time.
Pro: It Makes Everything Move Faster
If you are buying a home with the intention of bulldozing it to replace it with a storefront, apartment building, or some other development, then that is a project you will want to start as soon as possible. Using cash to buy the home can accelerate it by weeks, if not a month.
Con: You Might be Committing to a Bad Price
By paying the cost of a home all at once, you are committing to that cost, and that state of the home. This means if there is a storm, or an out of control truck, or some other random occurrence that destroys the home, then you are stuck with it in that condition.
If you are paying for it normally, over time, then there are ways out of that contract in those situations.
Pro: Your Credit Score Would go Way Up
Not that you need to worry too much about credit score if you have the finances to buy a house in cash, but it is worth noting. Particularly due to the industry that it puts you in. A good credit score is instrumental to getting the loans you need to actually do something with that property.
Buying in cash helps banks believe that you are good to pay off a loan that you use to exploit a property.
Con: You can get a Bad Deal Due to Inflation
When you are buying a home, there are two prices you can choose from: The higher price with the payment plan, and the lower price with paying in cash. But that first price is set in stone even if it is paid overtime. That means the value of the main can change over that time.
If inflation is particularly bad the year you buy the house you can end up with a value leak due to the payment plan actually costing less than if you had just invested your money while paying.
Pro: No Bank Trading Your Home Assets
An element of taking out a mortgage that people do not often know about is that the bank you take out that loan from will usually sell the parts of the property you live on as fractional shares of the debt. This is complicated, but it is also normal. It also happens to be dangerous.
If someone comes collecting and you bank cannot pay, they can end up handing your home to someone else.
Con: No Mortgage Tax Deductions
The government is pretty kind to first-time home buyers. This includes things like tax breaks for people who are paying off mortgages. And not only that, but these tax breaks can also be maneuvered to be larger than the mortgages themselves. This is a pretty large amount of value to miss out on. However, you can only get these tax breaks once, so keep that in mind.
Pro: Your Home is Yours
This is related to the previous pro. A roadblock you will sometimes face when buying a home normally is that the home is owned by multiple realtors. This means that there is a ton of risk involved in getting a mortgage that you are unlikely to be aware of. Paying in cash dispels that.
Con: It Reduces Your Liquidity
It is often said that homes are always valuable, even if their price is not very high. Well, value might be what you are looking for, but price is important too. And buying for cash means that your home will technically have a lower price tag on it if you try to leverage or collateralize it.
Most times, you will want to get your lottery winnings all at once. The same is true for a home. The most you can do with a home being mortgaged is make use of some sneaky tax code tricks. But if you own the home outright, everything moves faster and smoother for you.
But of course, it is up to you how you spend your money. It is totally possible that you find some very good financial reason to buy a home slowly rather than quickly.