Should You Pay Cash For A House

When you pay cash for a property, you are missing out on the opportunity to earn a rate of return on that cash.

In the illustration below, Option 1 is to pay cash for a $200,000 house. Option 2 is to use $100,000 of cash, and a $100,000 mortgage.

If you go with Option 1, you’d be losing money by giving up the ability to earn a rate of return in an outside investment (such as stocks, bonds, or another real estate property). If you go with Option 2, you’d be losing money by paying interest. You’d lose money either way.

Pay Cash
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Funds Needed
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Opportunity Cost %
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What You Could Earn By Investing
Use Mortgage
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Funds Needed
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Mortgage Cost %*
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Mortgage Cost


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These are the two questions you could ask yourself in order to find out which option would cause you to lose the least amount of money:

After Tax Interest Rate

What would be my after-tax interest rate if I used a mortgage? Mortgage interest may be tax-deductible.

Investment Return

What would be my after-tax rate of return if I keep my cash invested? Please see a financial advisor for more details on this.

For example, a 4.5% tax-deductible mortgage for someone in a 24% income tax bracket may only cost 3.42% after-tax (4.5% minus 24% tax benefit = 3.42% after-tax cost).

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Tax Bracket
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Income Tax Bracket
After Tax
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After Tax Mortgage

If your rate of return on investments is greater than the after-tax cost of a mortgage, it may make more sense for you to use a mortgage and keep your funds invested.

Source: CMPS Institute

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