At the end of 2019, the average home was worth around $245,000. At the beginning of 2021, the worth of the same home grew to over $266,000. In the wake of the COVID-19 pandemic, homeownership has become more competitive.
The availability and affordability of options will affect your decision about whether you should buy a property with cash or take out a mortgage. Many buyers are considering buying property in Dubai or other countries, where they can enjoy lower rents and higher returns on investment.
If you’re thinking of buying a villa or penthouse in Dubai, the first thing to decide is whether you should pay for it in cash or receive a mortgage. A lot depends on your circumstances, but if you’re considering either option, you should be aware of its pros and cons.
Pros of Buying a Home with Cash
Buying a home with cash can be beneficial for buyers in several ways:
- Avoiding interest. When you buy a home with cash, there’s no monthly mortgage payment to make — and therefore no interest paid on the loan amount. It means that even if your down payment is small (say $5,000), it can still be worth it to go this route because of the savings over time.
- Saving on closing costs. Closing costs are fees like document preparation fees, inspection fees, and administrative services charges that must be paid when purchasing any kind of property like a home or condo. If you go with a cash offer, this is one area where you’ll save money compared with traditional financing.
- More bargaining power. With cash, you don’t need to get pre-approved for financing. Buying a property outright gives buyers more bargaining power when negotiating terms with sellers and their agents.
- Closing faster. Buying with cash doesn’t require a lender to be involved, making the process more straightforward.
Cons of Buying a Home with Cash
Buyers should be aware that buying a home with cash may have some disadvantages:
- Tax deductions. You can deduct the interest payments from your taxes when you use your credit card or take out a mortgage to buy a home. However, if you pay for your home in full without taking out any loans, the Internal Revenue Service (IRS) will not allow any deductions for property taxes or mortgage interest payments.
- Limited financial flexibility. Buying real estate with cash involves substantial upfront costs. Your capital is tied up in one place, and you can’t use those funds for alternative investments like stocks or other purchases. And if the price of your home drops significantly in value after you buy it, then you could suffer significant losses that would not affect someone who took out a mortgage because they would still have their home equity as collateral.
Buying a house with cash means you have to save up for a down payment, which can take years. If you’re looking to buy a house now and don’t want to wait until your savings are sufficient, going with a mortgage is likely your best option.
Pros of Buying a Home with a Mortgage
A mortgage allows you to purchase more houses than you could afford with cash. Here are more reasons why buying a home with a mortgage can be beneficial:
- Leveraging debt. When you buy a home, you’re leveraging your future income into a smaller amount of money.
- Build credit. Mortgages are one of the best ways to build a credit history because they show lenders that you are responsible with your finances and can make payments on time every month — which can help you qualify for other loans later.
With a mortgage, you won’t have to save a large amount of money and pay it right away. Monthly payments will allow you to live in your dream house and possibly increase your cash flow if you choose to invest your money in more lucrative ventures.
Cons of Buying a Home with a Mortgage
In 2023, mortgage demand from homebuyers drops to a 28-year low. It shows that people are more willing to own a house or rent it rather than take on a mortgage they will be paying off for years.
If you have enough money available to buy the property outright, buying a house with a mortgage will likely not make sense for you because it will cost more than if you had paid for it with cash in the long run.
There are some drawbacks to buying a home with a mortgage you should be aware of:
- High-end cost. Buying a home is expensive, and it only gets more expensive if you choose to buy with a mortgage. Not only do you have to pay for the down payment, which can be anywhere from 3% to 20% of the purchase price, but you also have to pay for closing costs — and these can add up quickly.
- Complexity. The process of buying a house with a mortgage is complicated. It can be difficult to understand all the details involved. You’ll need to work closely with your agent and lender.
- Uncertainty. No matter how much research or planning goes into buying a home with a mortgage, there are still some things that are out of your control like market fluctuations or interest rates changing unexpectedly.
With a mortgage, you have to make payments on time every month. If you miss one payment, the bank will charge you a late fee and may even take money out of your account to cover the cost of the late fee.
Conclusion
The decision to buy a house with cash or a mortgage is not one to be made hot-headedly. You should be careful with an evaluation of your financial circumstances and life goals. Consider all the pros and cons of each option and make a decision based on what works best for you!
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