Home Madrid Economy If you can pay cash for a house, should you still consider getting a loan?

If you can pay cash for a house, should you still consider getting a loan?


Ilyce Glink and Samuel J. Tamkin, Tribune content agency

Q: We are considering purchasing a new home in the development from a national home builder. We could go through their lenders or pay cash. We don’t know exactly what the costs of the loan process with them may be, but before we start, what is your opinion on whether it is better to mortgage with these low rates or to buy with money ? We have more than enough to pay cash.

A: You’re right: interest rates are at historic lows these days. If you factor in the rate of inflation, taking out a mortgage is like borrowing money for free.

However, you are in a unique situation because you can choose to pay cash for your new home rather than take out a loan. Since your money really earns no interest in the bank, it would be cheaper in the long run to pay for the house in cash rather than take out a loan. But, if you have a place to invest your money, or if buying the house for cash leaves you penniless, it might be a good idea to take out some sort of loan. You should definitely speak with the builder’s lender and get an idea of ​​what mortgage products they offer and what those fees, interest rates, and terms would be.

Recently, Sam made a deal for a buyer who got a loan of around $200,000. He didn’t need the loan, but wanted to have the money on hand. What’s interesting about the loan, which carries an interest rate of 3%, is that he paid over $5,000 in fees. That’s a high upfront cost for a relatively small loan.

The total cost of the loan for the buyer was average; but if he had paid cash, he could have saved over $5,000. These fees included a loan processing fee of approximately $1,000, an appraisal fee of $650, and an additional $800 in miscellaneous lender fees. After you paid the lender’s fees, he also had to pay the lender’s title insurance policy and other closing fees and charges from the title company. These costs amounted to an additional $3,000.

We report these charges to make sure you understand what it might cost you to take out a mortgage instead of paying cash. When you start weighing the options, ask the builder’s lender for an estimate of the costs (without officially applying for the loan or giving them your credit information). Once you have this information in hand, you can decide whether the fee is worth it or not.

If you opt for the mortgage, what is your plan for the money you have? Some people are risk averse and may put the money in a savings account to gain next to nothing. Well, if you plan on keeping the money interest-free, you might be better off paying cash for the home and saving all the extra fees associated with applying for and closing the loan.

On the other hand, if you need money for medical bills, tuition or travel expenses, or just want to invest in something else, then taking out the loan may be right for you.

We’ve said it many times in the past: Investing your money is good and if you have room for those dollars, then taking out a mortgage is a good idea, especially with historically low interest rates. of today. But, please understand and define your investment strategy and the inherent risks that come with it. And don’t underestimate the power of living debt-free.

Some of our readers can’t resist these extremely low interest rates, and we often hear about them when writing about how good some homeowners feel knowing their mortgage is paid off. To them, equity means your money is trapped inside your home and they believe you should always make your money work as hard as possible for you.

We don’t disagree, but not everyone shares this level of risk tolerance. As we have all seen over the past few weeks, the stock market can experience wild, jarring, and painful swings. The trick is to sit still and let your money weather the storm.

No one can time the stock market. If you’re investing for the long term, history says you should do well. But if you needed your money on a day when the stock market is down 2,000 points, you might just want to have your money in a savings account, even if it pays no interest.

Make sure you ask lots of questions, understand your options, and have thought through all the ramifications. Good luck.

Contact Ilyce Glink and Samuel J. Tamkin through his website, ThinkGlink.com. (c) 2020 Ilyce Glink and Samuel J. Tamkin