Whether you talk to your family, relatives, colleagues or anyone you know, everyone will tell you how stressful it can become to take a debt. Therefore, when purchasing a home or other real estate property, people think it to be a more prudent choice to buy it with cash. However, a lot of things need to be considered when you are contemplating to buy a home. Sure, paying the entire cash for your home has lots of benefits, but here I will tell you why you should take a home loan to buy a property.
- Your Cash will Not Get Tied Up
I recommend that even if you have the capacity to purchase your home in full cash, you should still opt for home loan, as it might be more prudent to not tie up the whole cash in purchasing the property. There is always a risk associated to the future. Your credit score may not be as good as it is now. In that case, finding a lender can become pretty difficult, down the road. Therefore it is extremely important to maintain plenty of liquidity if things do not go well in future. Even if you are planning to pay whole cash, I would suggest you to ensure that you have plenty of liquidity to cover your expenses of next six to twelve months.
- You Can Invest The Cash
Home loan comes with an interest that you have to pay. Many cash buyers think that they are saving on the interest by making cash payment. However, this decision may not be financially practical. When you have plenty of cash available, you can invest them to other short term and long term financial instruments that can earn you much more money than that you can save from not paying the mortgage interest. Therefore, when you take the home loan, you have the option to diversify and manage your cash more prudently.
- Improved Credit Score
Home mortgages are long term, which means that you have a long time to gradually improve and build your credit score. A home loan can help you in building healthy and sustainable financial habits. By making full payment on your home loan in a timely manner, you are improving your credit reports. This in turn opens more line of credit for you down the road. I know many people who have built a higher credit score, by making disciplined financial decisions, owing to the huge mortgage loan they carried.
- You Get Tax Benefits
The tax laws allow the homeowner to reduce their tax obligations by deducting the mortgage interest from their taxable income. This can give you a lot of advantage in early years of your mortgage, when the interest is the major constituent of your monthly payment. On the other hand the cash payment has tax implications.
- You Get Protection for Your House
Having mortgage gives you the Homestead Exemption. Most states provide some level of protection to the debtor when it comes to their homes. Many states exempt the house from sale in case you find yourself in serious debt at some point of your life. This means that the creditors cannot compel the sale of your house to realize their payments.
- Manageable Amount
Buying a home can be your most expensive financial decision. The home loan allows you to spread the amount that needed to pay over a large number of years. You have to make monthly repayments which are more convenient than paying the whole amount together. When you take a home loan, you can opt to make repayments for 25 years or more. However, I still suggest that you should keep the term of home loan as short as possible. This may increase your monthly repayment amount, but it will make you free from debt. You will pay much less interest rate in a 15 year home loan as compared to a 30 year home loan.
- Cost Effective Option
The interest rate on home loan is a lot cheaper when compared with other types of loans. This is due to the fact that it is a secured loan where you are taking loan against your property. Though you have the option to choose for fixed or flexible interest rates, most people opt for the fixed rate that do not change throughout the term of the loan. I would also recommend you to opt for a fixed rate, for the reason given in the next point.
- Hedge Against Inflation
The mortgage also offers you to hedge against inflation in an effective manner. When the inflation rises in the economy, the Fed increases the interest rate to control the inflation. While you can now save your money at an improved interest rate, you have borrowed the money at a cheaper and fixed rate.