Is buying a house on mortgage worth it
Many of today’s recent homebuyers financed their property purchase in Malaysia. While some opt to pay for the deal in cash, there are others who choose to get a mortgage instead. Is buying a house on mortgage worth it, then?
Well, it is definitely not that simple and easy to eliminate a mortgage payment. There are also numerous factors that must be taken into consideration such as the existing mortgage rates, the specific amount that you will need to finance, as well as your own personal financial situation.
Why Get a Mortgage?
Although you have the money for funding the purchase of a house, this might not be the best choice all the time. Some of the perks of buying a house on mortgage include the ability of growing wealth with the use of leverage, ancillary tax and credit benefits, and the corresponding opportunity costs.
Here are some of the top reasons that make it worth it to buy a house on mortgage:
It boosts your credit score
Although this is might not be the fastest way to build credit, taking on a mortgage and paying everything on time can benefit your credit score in the long run. In general, credit reporting agencies prefer better debt diversity, with home loans typically considered as a productive type of debt that can improve the credit profile of the borrower. While this might only be small points for now, after a few years, not taking on a mortgage might mean losing the chance to substantially improve your credit.
This can leverage your debt
When you pay for a property in cash, you will only use the money for buying the house and nothing else. The moment you complete the home purchase process, you may no longer access that money unless you decide refinancing the property or taking out a home equity loan.
This means that the growth potential is directly associated to the ability of the property to appreciate. If you are living in a flat or an area with declining market, it can result to negative return on home purchase.
But, when you take out mortgage for part or all of the home purchase, this will leave you with substantial cash savings that you can use somewhere else for a return as you enjoy the perks of mortgage loans and their relatively lower interest rates.
Make the most out of the tax deduction
One more advantage of mortgage debt is that it is tax deductible. Couples who are planning to buy a house can typically write off the interest of the mortgage on their taxes to a certain amount. While such write-off may no longer be as lucrative as in the past, this still offers a benefit for some homeowners who have existing mortgages.
You can earn more somewhere else
When the existing mortgage rates are much lower compared to the average return rate on the stock market, investing your money will make more sense instead of locking this up in a substantial purchase. Buying a house on mortgage is usually comparable to carrying negative interest rate on home loan. On the other hand, when you buy a house in full cash, you are basically locking in a return rate equivalent to whatever existing rate of mortgage you might have been able to take out.
Things to Consider Before You Finalize Your Home Purchase
Make sure that you factor in the rest of your financial goals such as college savings plans, retirement, and more. If you are not sure about the rest of your savings, it might not be a sound decision to tie up a significant amount of cash in real estate alone.
As long as you got the money and you still lots of left over for covering all the associated taxes, maintenance fees, and costs, it might be worth it to buy the house in cash instead, particularly if you are planning to boost the amount of on hand cash you have every month. The fees and interest that come with mortgages on top of the usually long process of approval and closing can often be avoided when you got the ability to buy the property outright.
See to it that you got enough money for covering you through expenses of at least a few months. You might need access to the funds when there is a change in your financial situation. Although you would have the choice to access money from your home’s equity, it will take several weeks to process the home equity loan.
Generally, it is recommended that families have living expenses that can cover 3 to 6 months worth saved up in high-yield savings account. When purchasing property using cash will totally get rid of all the savings you have, it might increase your risks if ever a major life event takes place such as hospitalization or job loss. It is a must that you maintain the basic level of savings that can pay for unexpected costs that might come your way.
How Long Will It Take You to Breakeven?
One more thing you need to consider when buying a house on mortgage is to figure out how long it will take to earn back the closing costs through the sale of the house. Upfront costs linked with a home purchase, like real estate agent and attorney fees, inspection costs, and government taxes will not really make a lot of sense if you have no plans to hold on to the house.
For example, if you have plans to move in just 5 years or so, there might be no chance for the house to appreciate in value. This means that if you opt to sell it, you might not be able to earn back the cash you spent on paying for the house on top of the closing costs and incremental interest.
A mortgage is a front-loaded amortizing loan and this means that majority of the interest that you will pay is going to the loan’s first few years while you are not likely to make a significant dent in the principal until 10 to 15 years in for 30-year mortgage. Make sure you use a mortgage calculator that will help you estimate the length of time that it will take before you can breakeven on the mortgage.
What is the Market Condition?
The last but not the least, if the real estate market is hot and is a bidding war is brewing on the horizon, you might want to consider going for a full cash offer since this offers the chance of closing the deal right away. When there are two similar offers available before you, with one requiring financing and the second one is a cash offer, home sellers might be overwhelmed to go for cash offer because of the certainty that it has to offer. There is also the possibility of the mortgage lender rejected the buyer at the last minute.
[Image sourse: Mortgage photo created by freepik]