Paying Cash for a Home...Should we?

Congratulations. You've just sold your home and are ready to purchase a new "castle". For the first time in your life, you may have enough money to pay CASH for a home. But should you? Does it make sound financial sense to do so?

Let's explore the pros and cons and help you weigh what you could stand to gain (and/or lose) if you purchase your new home for cash.

To make the most sense of your alternatives, you need to know what you're trying to achieve. In other words, have a financial game plan. Where does owning a home free and clear fit in this picture? Paying cash for a property may make sense if you are trying to avoid paying loan fees and settlement costs. However, if you finance the property later, you will be paying these costs as both the seller and the buyer! These include appraisal fees, discount points, and origination fees.

In many cases, pulling cash out of your home later will be viewed as a refinance and therefore may carry a higher interest rate, higher costs and fees, yet provide you with a lower loan-to-value ratio loan.
You need to evaluate your personal circumstances before purchasing for cash. First, do you have funds set aside for retirement, cash in savings accounts or other liquid assets, and sufficient health, life and disability insurance? Most financial planners suggest at least six months of financial padding in liquid assets.

Paying cash for a property may drastically limit your liquidity. This can be especially critical if you'll send kids to college soon or need to assist an elderly relative with living costs.

If you are close to retirement, buying a home for cash will cut monthly mortgage expenses. Just make sure you have enough income from other sources to live comfortably, including paying rising property taxes, insurance, and maintenance on the home.

Of perhaps lesser importance, evaluate how important interest deductions are to your tax picture? A home without a mortgage is a home without a major tax deduction (even though paying interest is never better than paying none!) It may make more sense to use your cash to pay off non-deductible credit obligations than to put cash into a home.

Third, if you later need equity from your home, what size monthly payment would you be comfortable making, and qualified for? Are your financial circumstances likely to change (i.e. future retirement) so that you couldn't qualify for a loan? It may be wise to consult with a lender now to see if changes in your financial picture could later restrict you from getting a loan.
Lastly, how does a mortgage fair in your total financial/investment picture? Are there other investment vehicles that could give you a greater financial yield with a similar amount of risk? And don't forget, you'll be paying your mortgage payment (as well as your home expenses) with after-tax, not pre-tax, dollars.

It is wise to consult with a financial professional to help you evaluate the dollars and sense of paying cash for a home. But you shouldn't overlook the fact that it may have intrinsic psychological value to own your home free and clear. In today's world where many home owners are cutting back on expenses rather than incurring new ones, owning a home free and clear can be a financially and mentally liberating experience.SJ Hagler