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Cash or Finance?

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With interest rates at an all-time low (under 4%) the question of should I pay cash, or finance my new home seems to be a prevalent question with many home buyers. Let’s take a look at a small purchase and see how it shakes out, cashing it, or financing it. For the sake of ease, we’ll keep this at $100,000.

If I purchase a home for $100K, and put down 20%, ($20,000) then I am financing $80,000, meaning I am using the bank’s money. So, right off the bat you can see you are keeping $80,000 in your own pocket verses emptying your pockets to purchase the home outright. If on the average, you plan on keeping your home for 7 years, what will your finances look like in 7 years when you sell your home? Assuming the current 3.8% interest rate (yes, I said 3.8%!) what will you have paid and what will you have saved?

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Beginning today, after 7 years, your monthly payment will be $372 and you will have paid a total of $31,250 (principle and interest) plus your original investment of $20,000 (your 20% down payment) for a g rand total of $51,250. Remember, you still have the $80,000 in your bank account that you did not plunk down to pay for this home in cash. What could you have done with that $80,000 in the past 7 years?

If you invested your $80,000 in a simple interest account, after 7 years you would have about $82,000. Invest in a 7 year CD at a 2% rate, you would end up with $92,000. Invest just $50,000 of your $80,000 in a Money Market Account, with a $500 a month continued contribution at a .84% rate, you would end up with $95,700. So, assuming you invested in a MMA for 7 years, you will have made $15,000 on the investment, paid $51,000 for the house which means you lived in your home for 7 years for a total of $36,000. That means you had a nice home for $428 a month (which includes your original $20K down payment.)

Now, if you had taken your original $100,000 and bought the home in cash, after the same 7 year period, you will will have in essence, paid $1190 a month with no investment cash left over. Now of course, after 7 years if you decide to sell your home, you will recoup some of that money, but not at the same rate of return had you borrowed the money up front. Also keep in mind using all your cash leaves you bare thread for emergencies, home renovations, etc.

So, if you are considering purchasing a home and you have the ready cash, but the interest rates are so low, consider what your best financial option is in the long range. (Always consult with a mortgage expert and maybe a financial advisor.)

Thomas Schoenbeck, Keller Williams Realty, Lewes DE (302)360-0300(o) (302)632-7407(c)

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