Should You Keep Ahold Of The Folded Gold?
In spite of the financial stress and strains on the average consumer there is apparently a large subset of investors capable of paying cash for homes these days.
You may feel that you are getting some extra security when you own your home debt free. This may be the case but it might work out that the cash could be put to better use when you have a low interest, tax deducted payment and a health investment portfolio.
To Finance Or Not To Finance
When you have the cash you are definitely in a position of strength in negotiations. You represent less risk and the chance to close fast. There will be less paperwork and sellers will prefer you when there are other offers that are financing. The cost of setting up finance is considerable even if you can get the lowest available interest rates.
On the other hand real estate is not a liquid asset. This means that all of the cash you put into your home will be tied up and subject to delays, paperwork and fees if you need to get at it. Having a home loan for at least part of the asset will free up the capital for other projects or just for contingencies.
Cash In The Bank Is A Liquid Asset
The uncertainty of changing personal needs means that it is prudent to have cash accessible in case of medical emergencies or a change in your work status. You will have an easier time approaching the bank in good times; attempting to finance is always easier when you have no pressing need.
If you do decide to finance a new purchase or refinancing while putting in cash on your existing home you do have the option of exactly how much to fund yourself. Real estate finance companies and banks take a very favorable view of leveraged properties where you have an equity stake of greater than twenty percent.
After all, it is your equity that will be lost first if there is a substantial drop in price or you are forced to sell at a discount. From your perspective, with a twenty percent equity stake or more you will not have to take out mortgage insurance and you will be positioned to get the best available interest rate.
Retirees Get Taxed On Lump Sums
Finally, your distance in time from retirement is a critical factor in whether you choose cash or finance but it might not be in the way you would expect. It depends on your taxable status and the source of your cash.
In retirement it may save on your tax bill to defer savings withdrawals from your 401k or IRA. So continuing to make the house payment could be cheaper than clearing the balance with savings. You don’t want the lump sum you withdraw to kick you into a higher tax bracket.
What A Choice To Have
It is an interesting dilemma when you have significant amount of cash to invest. The lower long-term costs plus the need for accessible cash to fend off the unexpected turns in life must be weighed against the costs of initially creating the loan. Arguably this is a wonderful position to be in if it applies to you; being stumped by your choice of financial options is the definition of the expression embarrassment of riches.