This is the second post in a 2-part blog series comparing the advantages of a mortgage versus the advantages of buying a home with cash in Northern Virginia. Click here to read the first post in this series, which focuses on the pros and cons of paying cash for a home.
Advantages of a Mortgage
Smaller Amount of Cash Up Front
One advantage of buying a home with a loan is that you only have to come up with a smaller percentage of cash as a down payment, leaving some of your savings intact. This means you will have more cash on hand for any other emergencies that pop up. Even if you can afford to pay in cash, it may be better to leave some of your assets available for other things.
Taxes
One of the other advantages of a mortgage is that in most situations the interest paid on your loan is considered tax deductible. That reduced tax obligation can, in the end, be a good way to finance a home in Northern Virginia. Also keep in mind that mortgage rates are currently quite low.
Getting on the Property Ladder in Northern Virginia
A mortgage can allow more people the chance to become a homeowner. In reality, not many people can afford to put down a few hundred thousand dollars on a cash purchase. A home loan allows you to buy the home and make those payments in smaller, more affordable chunks.
Equity
Taking out a loan to buy a home means you will have access to equity, which is the difference between the worth of your home and what you still owe on your mortgage loan. For example, if your Northern Virginia home is worth $450,000 and you still owe $350,000 on your mortgage, that gives you $100,000 of equity that you can tap into for emergencies by taking out a home equity line of credit. Home equity lines of credit and loans also have a much lower interest rate than you would get with a credit card.
Are you thinking of buying a home in Northern Virginia and want to learn more about how loan pre-approvals work before you contact a lender? Email me at DarrenRobertsonHomes@gmail.com!
Disadvantages of a Mortgage
Less Security
One of the biggest downsides to having a mortgage is the monthly payments that you will be paying for a long period, such as 30 years. And this means paying a lot of interest, too. You also don't have the security that you get with buying your home flat out, because you don't own the home until you finish paying off the mortgage. And, in the rare event that you should fall too far behind on your payments, you could lose your home.
More Costs Involved
There are more fees associated with taking out a mortgage, such as the lender fees, required assessment fees and closing fees. In addition to that is the interest that will greatly increase the amount of money you end up paying back.
More Time
It can take some time finding the right loan, going through the approval process, and then the closing process. Some people end up waiting for a couple of months from the time they start the application and buying process, to the day they close on the deal and get their keys.
Over Spending
While one of the advantages of a mortgage is that it gives a buyer leverage, enabling them to use less cash to buy a property, this can sometimes cause people to buy more house than they can actually afford, causing them to get in way over their heads. Of course, this can be rectified by planning well and sticking to what you know your realistic budget is.
Harder to Sell
Owning a home is a long term commitment. Should you need to sell your home early on, you may find that you have very little or no equity in the home, which will make it much harder for you to sell it without losing money.
Advantages of a Mortgage versus Advantages of Paying Cash – Final Thoughts to Consider
Whether to buy a Northern Virginia home with cash or with a loan really comes down to your situation, what you have to work with, and some proper future financial planning. When buying with cash, it’s important to plan ahead and make sure you have enough left for things like renovations and repairs. Where buying with a mortgage can be a slower process, buying with cash can get you in a home much more quickly, while cutting out a lot of the fees you would normally end up paying.
While you might think having a loan could hurt your credit rating, one of the advantages of a mortgage is that it can actually improve your credit score. This is because mortgages fall under the “installment loan” category, something creditors like to see on your credit report. A mortgage also allows you to buy the home you want, yet pay for it over time, opening the door of opportunity to those who can't afford to buy a nice home with cash up front. It also gives you a better chance of getting a 2nd mortgage somewhere down the line, should you need one.
Okay, enough about my thoughts on this topic! I would love to hear about your experiences below in the comments section!