Home Buying in Lincoln Park>Question Details

Maggie Yen, Home Buyer in Illinois

To pay cash for a home or get a loan - which way saves more money if I plan to sell it in 7 years?

Asked by Maggie Yen, Illinois Thu Nov 15, 2007

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Answers

7
Hi Maggie,

You've gotten some great advice already.

The best way to make your decision on cash v. mortgage is to measure the risk on return for both scenarios (with a financial adviser!).

Obviously, paying cash for a home means relatively few risks because a paid-for asset remains paid-for (until, in the case of real estate, there is enough equity in a property to start making the property work for you), but putting all your eggs in one basket does expose you to some risk: First, your cash is all tied up in one place -- what if you need it? Life emergencies do happen! One way to be proactive about this is to always have that 'emergency fund' of 6-12 months of living expenses set aside.

Another risk: There is always a chance that a "should not pass up!" investment opportunity might present itself, and with all your money tied up in the house, there goes the opportunity (ties in with the liquidity risk).

Paying cash also means losing out on the tax-deductible interest rate of a mortgage. If you stay in your home for minimum of 2 years, you will be sheltered from up to $250,000 in capital gains if you are single, and $500,000 if you are married. Returns on other investments are taxable, which minimizes your return.

In the end, it will take an analysis with a CPA to determine your personal best route. It depends on so many things: If you take out a mortgage and have lots of cash on hand, are you actually going to invest it wisely or blow it? You know yourself. If you do invest it, how much risk can you tolerate? It's not always easy to predict return and risk level on stocks and bonds, whereas real estate, though at the mercy of the market, is a bit more stable and predictable.

Best of luck in determining what's best for you.
4 votes Thank Flag Link Fri Nov 16, 2007
Patti Pereyra, Real Estate Pro in Chicago, IL
MVP'08
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Hi Maggie-
To answer your question, ask yourself these questions...

Do I make money on a cash sale? Or do I make money on a loan purchase?

Is your money working for you or are you working for your money?

How much monies do I need to use to make this a win-win.

Yes, I'm answering a question by asking a question. But you must consider all ramifications of tying up your monies long term.

Which way do you create the most benefit is what you're really asking.
The Answer:
It is different for every situation. So there is not a right or wrong answer. It's what you are most comfortable with. Make yourself a pro and con list. How much risk can you absorb? Only then, will you know the answer to your question.

Hope that helps!
1 vote Thank Flag Link Mon Jul 14, 2008
Maggie,

I'd suggest you run this by your tax accountant, but at first glance, if you pay cash, you have ALL THOSE FUNDS tied up in the real estate...not liquid. It would seem you might want to invest as little of your own money in the real estate, take advantage of the tax benefits of doing so, and use the cash for other investments that not only can grow during their holding periods, but that are more liquid for you (you can get at them more readily). Why not let your real estate investment grow WITH SOMEONE ELSE'S MONEY tied up in it.
1 vote Thank Flag Link Sat Nov 17, 2007
Hi Maggie,

It depends on what other things you could do with the money you would spend on the house.

Let's say today's interest rates on your mortgage are 7 percent. If you can make 10 percent or more on your money by investing it wisely and you have a proven track record of doing so, then it might make sense to take out a mortgage.

If your money is sitting in a bank account earning less than 5 percent, then it would NOT make sense to take out a mortgage and pay a higher interest rate on your loan to buy your house.

Even if you decide to borrow to purchase your new home, you will probably want to put a 20 percent down-payment on your house so that you will avoid higher interest charges or private mortgage insurance.

This is a great discussion to have with your financial planner or your accountant. Let me know if you need a referral for either.
0 votes Thank Flag Link Fri Nov 16, 2007
Maggie....I would suggest you run the scenario's past your CPA or financial advisor. Each has it's own merits.
0 votes Thank Flag Link Fri Nov 16, 2007
Pam Winterba…, Real Estate Pro in San Ramon, CA
MVP'08
Contact
Hi Maggie,
Cash may be the quickest and easiest to get thru escrow, but not neccessarily the best. I would recommend you talk with a mortgage lender about the type and rate loans available to you. Also talk with a CPA or accountant. (I am niether!) There may be tax advantages (mortgage deductions) to the loan. Also, assuming you have great credit with full purchase price availability and income to support payments, why not talk to a lender about an interest only. Don't scream "OH NO' yet. Here is a scenerio ... 20% down interest only. Find the 15 or 30 year payment for the same loan. Each month you make your "interest only" mortgage payment AND pay the diference of the 15 or 30 year payment into a savings or other investment. Now you have 80% of the purchase price still earning money in your savings/investment, plus you are adding to it monthly. You allow appreciation to grow the equity in the home. Like I said, I am not a mortgage or tax professional, so before you do anything, talk to them. But, I have seen this scenario work.
0 votes Thank Flag Link Thu Nov 15, 2007
Hi Maggie,

Cash.

Ken.
Web Reference: http://www.KDRchicago.com
0 votes Thank Flag Link Thu Nov 15, 2007
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