When you are purchasing a home, you have two main financing options: (1) leverage; (2) purchasing with all cash. Is one better than the other?
The use of leverage is one of the reasons why people like to invest in real property. Why? Here's a quick example.
Say you had a $100,000 cash. You could purchase a home for $100,000 (or less). Or, you can use leverage.
Leverage allows a prospective Buyer to "purchase up" or as we like to say, "lever up." Ideally, mortgage lenders and banks want the Buyer to put 20% down. Having $100,000 down means one could purchase a $500,000 home. That is, 20% of $500,000, is $100,000.
There's no right or wrong answer because each Buyer is different. I've worked with some Buyers who "enjoy" taking on debt. On a the flipside, I've worked with Buyers who hate debt with an extreme passion.
If you're debating between a mortgage or all cash, here are some things to consider:
1. Speak with your financial advisor. He or she can help you analyze your personal finances.
2. Ask your real estate agent to get you in touch with a mortgage lender. Speaking with a mortgage lender will give you an idea on what your monthly mortgage payments will be like (especially at different down payment percentages). The higher the down payment, the lower your monthly mortgage payment will be.
3. Get a pencil and paper and try to create a snapshot on what your life will be like in the next 5 years. Are you looking to start a family? How often do you travel? Do you need to purchase a new car? Basically, the goal is to analyze what your finances are going to be like.
-RO