If you’re considering paying cash for a home, read this first.
- The average rate for a 30-year fixed rate mortgage is over 5%.
- There are reasons to believe that rates could climb even higher.
- This does not mean that paying cash for a property is a smart financial choice.
Mortgage rates are much higher today than they were last year. Despite a recent drop in rates, the average interest rate on a 30-year fixed rate mortgage is still well over 5%. This is disappointing for buyers who missed rates below 3% last year.
But while it will certainly cost you more to borrow to buy a home now, taking out a loan is still the best decision for most people, even those who can afford to pay cash for a property.
If you’re considering paying out of pocket instead of taking out a loan, here are some big reasons why you might want to reconsider.
You can always get a better rate of return elsewhere
Although mortgage rates are currently above 5%, which seems high compared to what home loans have cost recently, the reality is that it is still quite a low rate. The average annual rate in 2007 and 2008 was over 6%, and during the 1980s and 1990s people regularly paid over 10% for a home loan.
A 5% rate isn’t too bad when you look at the big picture – and especially when compared to the returns you might get elsewhere.
The S&P 500, for example, is one of the safest investments for patient long-term investors. It tracks a financial index made up of 500 major US companies, allowing you to invest in major US companies. Historically, it has produced average annual returns of around 10%.
If you pay cash for a house, the return on investment (ROI) you get is the interest you save on the loan it would have taken to purchase the same property. If you have the choice between a 5% rate of return or a 10% rate of return, why would you choose to pay cash for a house and accept the fact that your money will return half of what it could? report ?
When determining your rate of return, you should also remember that you can deduct interest on up to $750,000 of mortgage debt if you itemize when you file your taxes. This makes borrowing even cheaper. And your rate is fixed over time, so your payments effectively get cheaper when you pay off your loan with money that’s worth less due to inflation.
Borrowing so much money just doesn’t make sense to most people
Besides the fact that you can always borrow at a reasonable rate, it generally doesn’t make sense to tie up hundreds of thousands of dollars in a house, which is not a liquid asset. If you are investing in the stock market and need repayment, you can easily sell your assets immediately and without large transaction costs. It is not the same for a house.
It doesn’t make sense to deprive yourself of flexibility when you can borrow at a good rate by historical standards and when you can invest elsewhere, get a better rate of return and have easier access to your money. Instead, it’s usually best to shop around for the lowest rate available now and refinance later if rates drop in the future.
The Best Mortgage Lender in Ascent in 2022
Mortgage rates are rising – and fast. But they are still relatively low by historical standards. So if you want to take advantage of rates before they get too high, you’ll want to find a lender who can help you get the best rate possible.
This is where Better Mortgage comes in.
You can get pre-approved in as little as 3 minutes, without a credit check, and lock in your rate at any time. Another plus? They do not charge origination or lender fees (which can reach 2% of the loan amount for some lenders).
Read our free review