Why People Who Could Pay With Cash Get Mortgages

If you happen to have half a million dollars, you could buy the typical U.S. home with cash. But would you?

Do the current mortgage interest rates impact your decision?

Let’s take a walkthrough, Q and A style.

What’s the Key Advantage of a Mortgage?

Remember the immortal words of Warren Buffett. The famous investor called the 30-year mortgage “the best instrument in the world” because it’s so flexible. The deed holder can refinance it to get new interest rates later on in the loan. And putting a lender’s money to work in a home purchase allows the buyer to keep cash on hand to invest.

It’s a compelling argument, for those who want to keep their 401(k) or individual retirement accounts as full as possible.

A 30-year mortgage comes with relatively low monthly payments. It makes borrowing possible for many hopeful home buyers. In what other situation can someone buy an asset worth several times what they currently have?

Even cash-rich home buyers often prefer the 30-year loan. It lets them get more for their money with lighter payments. And then they can invest the spare cash.

What Might Change The Equation and Make Mortgages Less Advantageous?

If you want to sell soon after your purchase, cash might be your pick. Mortgages have fees and costs, making them financially viable tools for those living in homes long enough to see substantial property value appreciation.

Also, high interest rates on home loans do make borrowing money less attractive. If a borrower can’t get a higher return from growing a retirement account than they pay in mortgage rates, a mortgage is somewhat less fabulous.

But of course, most people can’t pay in cash. A mortgage is necessary. So…

• Picking a 15- year loan instead of a 30-year loan could be one way to pay less interest. As a rule, the shorter the loan, the more affordable the rates. But the borrower is under pressure to pay more per month, to get through it in time for the final payoff date. 

• In a time of high mortgage rates, a buyer could get the standard 30-year loan but put as much cash down as possible — and maybe even pay the mortgage off faster than required.

As Buffet says, we can’t take the flexibility of the 30-year standard for granted.

What’s the Deal With Paying a Mortgage Off Faster Than the Loan Agreement Requires?

This is the flexibility factor. The deed holder can shorten that 30-year span. By assigning extra payments to the loan principal, the borrower cuts the timeline — and reduces the total interest load.

How does this work? A borrower pays interest on the total loan principal. Pre-paying some of this principal leaves less of a balance for the lender to charge interest on. Every extra payment against the principal lowers the total interest that will be paid through the life of the loan.

So, when it’s possible, some home buyers make extra payments to the loan servicer. (The borrower can set this up automatically through the online portal.) Today’s 30-year loans rarely penalize borrowers for paying early. Ask your loan servicer to be sure.

We Keep Hearing About Inflation. Would Inflation Make a Mortgage More Attractive?

Yes, for most buyers. Most people want a home to live in for many years. A monthly payment on a fixed-rate mortgage never changes. Inflation can’t touch it! That’s why people might think of paying monthly mortgage payments as something like paying rent that won’t go up.

Inflation can get scary. Buying a home is a move toward financial safety. Keeping monthly housing bills as steady and predictable as possible is one way a mortgage supports the deed holder through inflationary times.

What’s more, if interest rates later cool off a lot, mortgage borrowers can refinance to snag those lower rates in the future.

Inflation is double-edged. It means the market value of real estate goes up. Buyers don’t like high home prices. Sellers do.

In any case, whether you pay cash or finance a home purchase, you’ll still get the same level of real estate price movement.

We’re Young Adults. Is It Better to Save for a Big Down Payment, or to Take Out More Debt?

It depends how much cash is available to you. Definitely save up to cover the down payment and closing costs, plus the funds you’ll need for several months of mortgage payments. Lenders insist that borrowers have cash set aside.

These mortgage reserves tide you over in case you need to make a job change or have unexpected bills. What if you became unemployed for six months? And don’t forget you’ll be paying for furnishings, home upkeep, property taxes, insurance, and maybe association dues.

Some buyers borrow against their homes when they need to. Just note that a newly bought home will take years to build up enough equity to make borrowing against the home feasible.

The U.S. real estate market has been rapidly gaining value for several years running. Prices appear to be on the verge of easing, though. The silver lining? Looks like a good real estate market for buyers is finally arriving. 

What About Us Older Adults? Should We Be Taking on a Loan That Spans 30 Years?

Some older adults want shorter terms, or hope to buy with cash — simply for peace of mind. And once they’ve paid off most of the mortgage balance, some decide to pay it all off early to be sure heirs won’t be saddled with the loan.

A lot of this comes down to the way a homeowner feels about being in debt and about market risks. Plenty of people don’t like debt in retirement. Then again, it could be just as prudent to borrow money — especially when mortgage rates are low and investments are doing well.

What will be higher: the interest you pay into the mortgage, or the returns from investing the money in stocks instead? The buyer can control only one side of that equation. The lower the mortgage rates, the lower the borrower’s overall risk.

You’ll find your own comfort level regarding money that’s tied up in your home versus invested in the market. Of course, it’s normally easier to get money out of financial accounts than to borrow against the home when the money is needed.

Your Mileage May Vary

The calculus of taking out a loan versus paying cash depends on many factors. We’ve looked at just a few. A good mortgage specialist gladly helps hopeful home buyers understand what suits the individual’s (or household’s) circumstances.

Deeds.com does not offer case-specific legal or money advice. You can think of this article as an orientation. Enjoy the read, then proceed with your own due diligence.