Should You Ever Pay Cash When Buying Home?

cashhome

 

 

 

 

 

 

Recently, Time Magazine asked a great question should you pay cash for your home? With interest rates as low as they are, paying cash should not be on first your list of financial priorities. Saving for retirement, building adequate emergency savings.

1. You’ll Miss Out on Tax Advantages

During the first half of a 30-year mortgage, a large percentage of your mortgage payments go toward paying down the interest, so your principal balance only decreases a little from year-to-year. It’s frustrating to say the least, but think twice before dumping your disposable cash on extra principal payments.

Some people will jump at any opportunity to pay off their home sooner, but there are tax advantages to keeping a mortgage loan. If you itemize your yearly tax return, there’s the option of writing off your mortgage interest payments and lowering your taxable income. This reduces the amount owed to the state and federal government, or it might result in a bigger refund. This single deduction reduces my tax liability by more than $2,000 a year.

2. You Don’t Have Any Type of Emergency Fund

Everyone needs an emergency fund, period. It doesn’t matter who you are or what you do, if you’re a middle-income American, you’re going to hit at least one rough patch in your lifetime. A six to 12-month cash reserve is your backup plan for unexpected expenses or major setbacks like a job loss. However, you might feel paying off your home takes priority over saving. Your home is your biggest investment, and naturally, you want to protect it. But ask yourself: How’s your savings account looking?

If you have plenty of cash in a rainy day fund to handle life’s curveballs, paying off your house early isn’t a bad plan. But if you don’t have any type of emergency savings, the focus should be on building your account. Paying more toward your principal builds equity and gets you closer to owning the property outright, but this plan might backfire if you find yourself unemployed without a cushion.