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Buy home with cash or take advantage of low interest rates?
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Buy home with cash or take advantage of low interest rates?

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Q: I know mortgage interest rates are hovering at an all-time low. But is there anything wrong with paying cash for a home?

A: There’s nothing wrong with buying a home with cash, but not everybody has the cash available to do that. Given your question, we’re going to guess that you have sufficient cash to buy a home without a mortgage, but you’ve read somewhere that you’d be foolish not to get a loan at today’s low interest rates — so, you’re wavering, wondering which way you should go.

Well, we like to keep our readers’ options open. Just as we will let our readers know that it’s perfectly fine to pay down a mortgage or pay it off entirely if you have the funds, we’re just as enthusiastic about telling our readers that if they want to pay cash for a home, it can be a smart move.

There are strong opinions on all sides of this issue. Some of our readers have told us that tying up cash in real estate is just plain wrong when interest rates are so low, and you can (if you have good credit) take out a loan and use any cash you have on hand elsewhere. But where you keep it is part of the equation, because if you simply keep the cash in a checking or savings account making virtually no money, you’re generally better off paying cash for the property. Others may invest the money poorly and lose money.

You may not get the independent guidance you’re looking for from industry pros. Traditionally, real estate brokers tell buyers to stretch their budget when they purchase a home. They assume that buyers’ incomes increase over time and that a young buyer might buy something today that puts pressure on their finances but will be easier for them to manage financially over time.

Sounds easy. Buy big and those payments get easier to swallow over time. But, given two major recessions over the past 12 years, and 30 years of wage stagnation, you may not be inclined to leverage your down payment as far as your real estate agent may suggest or your lender will allow.

Still, when a crisis like the current COVID-19 pandemic strikes, it’s helpful to have cash on hand. If you use up all your cash to buy your property, thinking you’ll be able to tap into some of that equity in the form of a home equity line of credit (HELOC) when times get tough, think again. Right now, many lenders have pulled back on their HELOC approvals, because job security seems elusive in some industries, and so many families are dealing with income reduction.

We’ve long held that the important question for you to answer is this: What will help you sleep well at night? Some of our readers would prefer to live debt-free while others have the ability to leverage up and use their cash in ways that would drive many of our readers crazy. We think that each homebuyer should choose to spend their cash in the way that makes them feel good.

So, do what makes you feel comfortable. Don’t worry about what anyone else says. That’s generally good advice when it comes to your money.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)

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