SHOULD YOU PAY CASH FOR A HOME?
If you have the cash and plan to buy a home, there are different issues to consider to determine your best strategy.
First, you may consider peace of mind. Does having no debt make you sleep like a baby?
Next, consider financial effectiveness, tax and retirement planning. If you pay cash for a home and in the future need to refinance with cash out to use some of the equity, the interest you pay on the mortgage will NOT be tax deductible.
The tax code says that deductible mortgage interest must be from either:
- First lien ACQUISITION indebtedness; or
- Second lien (i.e. equity line, 2nd mortgage) of up to $100,000 - funds can be used for any purpose.
Consider this example:
- You buy a $400,000 primary home with cash and later on want to pull $200,000 with a FIRST MORTGAGE at 5.5%. The process may take a little time (not suitable for emergencies?) and the interest would NOT be deductible.
- Or, you buy the $400,000 home and take a $200,000 FIRST MORTGAGE loan at 5.5%. The interest is now deductible, yielding an approximate 4.125% after-tax interest expense (depending on your marginal tax rate). You can deposit the $200,000 in a brokerage account earning interest and available on call for emergencies and/or expenses.
- Or, if you are over 62, you can buy the home using cash, and take a REVERSE MORTGAGE for up to $200,000 - and have no mortgage payments
Everyone's financial and personal situation is different. It is important to get the right tax and mortgage advice to make the best decision.
Contact us to receive sound real estate advice, or to get connected with trusted professionals in financial, legal, retirement and tax planning.