Why Are You Buying With Cash
I am baffled by the numbers that show that people are still purchasing homes with cash in today’s market. The numbers in Southwest Florida still continue to be that more than 62% of home purchases are made with cash. (stats are from Mid-Florida Regional MLS)
Now I want to start off by stating in my humbled opinion, that a person should never refinance their primary residence to max out cash to purchase another property. Always protect your primary resident foremost. Too many people are taking out home equity lines of credit (HELOCs) on their primary homes to purchase second homes or investment properties.
Taking out a second mortgage on your primary residence more than 60 days from the closing of you first mortgage could put you in a bad position for refinancing if needed later on down the road. When you are in this position the better loan products and options offered through Fannie Mae and Freddie Mac are greatly reduced. Especially if we enter into another down market.
Since 2009 when interest dropped in the 3’s we have only seen two spikes in rates up into the mid or high 4’s, currently prevailing rates are in the low 4’s and high 3’s depending on your credit score, loan to value, loan amount, type of property, debt to income ratios and other factors.
Chances are the interest you are paying on a mortgage is likely to be tax deductible. Talking to a CPA prior to purchasing is not a bad idea. You may want to ask the CPA if maxing out on all your retirement plans that are available to you as well is a better option for your cash. Many retirement plans are tax deductible too.
Here is where I am going with this. Paying cash for a home, after the closing cost your tax deductions are reduced to maybe just depreciation. If you get a mortgage loan with a interest where it is today with interest that maybe tax deductible. By putting your cash in a retirement plan or other investment vehicle you may be able to exercise more tax deductions as well.
Let’s take this a step further, if you purchase a second home for $200,000 with cash and you do not rent out that home, your deductions may be limited to only your closing cost. The home value may or more than likely see market appreciation of 4 to 8 percent depending on the market area.
Now instead of purchasing the home with cash, you may want to consider taking a mortgage loan of about $150,000 to help purchase that home and then invest that $150,000 in a good mutual fund or other type of investment, but max out all your retirement options first. This would be a good time to consult a financial planner or advisor.
Many mutual funds over the past 8 years have seen growth or gains over 10%. There are some which have seen gains of over 20%. But let’s stay in the reality of most people, we see 10% return on investment which may have the potential to be deductible as well.
You have a $200,000 with potential capital appreciation, outpacing your interest rate on your mortgage loan of $150,000. You have another investment of $150,000 with the potential to grow at a rate of 10%. So, combined you have a total investment of $350,000 working for you versus $200,000. Your potential for net worth growth is much greater.
I know what you’re thinking, what if something goes wrong and my spouse dies and I can’t afford that mortgage. Remember real estate is not a liquid asset. If your spouse dies or loses their job or source of income, waiting to sell that home could take months. Having the option to sell shares in a mutual fund or other form of liquid invest is generally under 10 days. This would allow you to either pay off that mortgage or simply make the payments until the home is sold. This is more likely to still have you with a gain and in a better financial place.
Do your homework, get real facts, being a home should never be just an emotional experience. Ask questions seek advice from an investment advisor, CPA, and a real estate attorney. Find a good loan originator like me and we will see you at a happy closing table.