HOW advisable are all-cash payments when the purchaser is financially able to cover them? There was a time when debts, particularly mortgage debts on a home, were considered ill-advised.
Times, however, have changed, and with them our modes of living.
A problem of deep concern to prospective home buyers is how best to finance a home and how to derive a mode of payment that will cause the least strain on the family budget and not end in financial grief.
A secondary problem generally arises out of the purchaser’s desire to safeguard the investment into which he, like most home owners, has poured the bulk of his live savings.
Broadly speaking, home purchases fall into two groups.
One includes those who have accumulated limited savings and are thus unable to provide a substantial down payment.
The other is composed of those more fortunate in their financial standing, and who are able and willing to acquire a substantial equity in the home or pay entirely in cash.
The “pay as you go” home purchase plan, for several decades now, has proven to be sound in principle and a strong incentive toward the promotion of thrift and general “good housekeeping” among those who have adopted it.
Even where a home buyer has accumulated the required savings, the purchase of a home free from mortgage debt may not always prove advisable, since the purchase of a home converts savings from liquid assets to a relatively fixed and immobile form.
Sudden or emergency needs for cash may arise, and with “all eggs in one basket,” the raising of large sums over a relatively short period of time may prove costly and embarrassing.
Second, mortgage amortization payments constitute a form of regular and consistent saving which, as a rule, increases an owner’s equity faster than the resulting losses accounted for by wear and tear, the action of the elements and other causes that contribute to the decline in the value of the home investment.
Mortgage amortization thus indirectly contributes to stability and enhancement of the initial investment depending on the extent and rate at which amortization exceeds accrued depreciation.
Finally, a home can be more readily sold when the need arises, if it is subject to a mortgage debt, assuming that the mortgage bears a fair ratio to the price of property and is financed at currently available low rates of interest.
The reason for greater marketability arises out of the fact that a prospective purchaser need not finance the total purchase price, but merely raise the equity required over and above the existing mortgage debt.
There are, of course, laudable benefits that flow from “outright” home ownership, like satisfaction or civic pride of undisputed ownership of a home, free from debt.
Second, there’s the freedom from fear of monetary complications that may terminate in foreclosure of the home.
Third, there’s greater flexibility in the disposition of current income and, finally, a haven to which the unemployed, ailing or aged owners may retreat without fear of interference by an “unfeeling” mortgagee.
Yet, despite these advantages, an all-cash purchase of a home is not advisable where such cash outlay necessitates delay in home acquisition for many years (in order to accumulate the necessary savings) or where such cash requirements bankrupt a purchaser’s savings or obscures the real costs of home ownership.
It should be remembered that homes, like automobiles, furniture and fixtures, are consumer goods, which deteriorate and lessen in value with use and changes in design or the environment.
And yet, somehow, the concept that a home is an investment prevails, causing distress to home owners who are faced with the need to meet ever-increasing bills for home repair, or who suffer accelerated home destruction caused by wear and tear.
Flaws in ready-built homes can be detected without difficulty by an expert architect or builder, either of whom should be called in an advisory capacity by the buyer.
A planned “dream house” may turn out to be a financial nightmare if major construction flaws will later appear.
The ridiculous failure of the subprime mortgage debt financing in the United States is due, in part, to the hasty decision to own a home. Trillions worth of home mortgage plans were foreclosed due to the hidden costs of the “pay as you go” home purchase plan.
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