We bought our first home a year after I became an attending physician. As I was on a J1 visa waiver program and National Interest Waiver (where professionals, mainly doctors, can get green card after serving in a rural/under-served location for five years), we knew we will be staying put for a while. Back then, despite our high savings rate, we could not afford an all-cash transaction. We did put over 50% down-payment on our first home. Our interest rate was 4.25%/year.
Two years later, and with overpaying our mortgage every month, we were able to pay off the remainder of the loan. While a home mortgage is sometimes considered a ‘good debt’, I consider having no debt even better. Frankly, it helps me sleep better at night. It also allows me to carry a lower disability insurance (which means less monthly payment). With my Type A personality, I have enough stress in life that not having a mortgage is good!
When purchasing our second home, it was building up to be a pretty hot real estate market where we live. By offering to pay all cash, we were the top picks by the seller. The home was sold as a corporate relocation, and the company wanted to sell it as soon as possible.
1. Got the house we wanted, for a good price. The house we were looking for had more than 30 showings in three days. It was priced below market rate in a very hot housing market. Our offer was all cash, at asking price. We got our home.
2. Low closing costs. We paid for a home inspection, but decided to forgo the home appraisal. With the hot housing market and having lived here for a few years, we knew we were getting a good deal on this house. It did not make sense to pay another 500-700 for an appraisal. This may not be the case in all locations.
3. Move in faster. While we were in no desperate rush to move, it was nice to move before my children started the new school year. Since the prior owners had already moved out, we were able to move in within a month.
4. Low savings interest rates. Back when we purchased our home, we were great savers but knew nothing about investing. As such, our money was sitting in the bank, earning less than 0.5% interest. It was better to pay cash for the house, at 4% interest rate, than to earn (or lose, if you take into account inflation) a very low interest rate.
5. No monthly payments. We did not have to deal with a recurring monthly mortgage payment. Because of this, my disability insurance is far less than what I earn. Once we achieve financial independence, I intend to stop paying for disability insurance. This means that we typically spend 10-15% of my salary on a regular month. Lots more money to go into savings! Quicker route to financial independence.
6. Pay less in property taxes. Our county gives us a 3% discount for paying our property taxes before a certain date. Since we own our home outright, we pay that amount annually and get the 3% discount. If we have a mortgage, this is not possible as taxes have to be placed and paid monthly by the mortgage company.
7. In a pinch, we can still get a Home Equity Line of Credit (HELOC). This means I can use my home (which is paid off), to leverage and borrow some cash if something unexpected occurs.
8. Less concerns about house pricing changes. It is impossible to be upside down in your mortgage, because you have none! Obviously, if the housing price drops, it will accordingly drop your net worth. If it is your primary home and you have no desire to move, then it does not matter (apart from the emotional part of the dropping net worth).
9. In some financial circles, there is a lot of talk about mortgage interest deduction on taxes. This has become a big topic especially with the new tax proposals. When I ran the numbers, it really did not make a whole lot of sense. If I had let our original 15 year home mortgage run its course, the total among we would have paid over the life of the loan would be more than twice of what I borrowed. Even with some mortgage tax deduction, I am still paying more in interest rate in the end.
10. Peace of mind. To me, this is reason enough to pay cash for my home!
Dear readers, what do you think? Did you get a mortgage on your home purchase or did you pay cash/paid off your mortgage?
Click here to subscribe to my updates (no more than once a week).