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Buying Outright vs. Getting a Loan

 

Many people have a fantasy of buying a house with cash. It really does sound like a great idea. You will get out of spending tens-of-thousands of dollars in interest, private mortgage insurance, loan origination fees, etc. Many people say the word “debt” as if it was a disgusting word.

And, yes, sometimes debt can be a very negative thing when used wrong.  However, so much more needs to be calculated into this decision to strike out the idea.

Where are you living while you save up? If you are paying rent, none of that money is working to build you equity.

If you pay $700 in rent and are able to save an additional $300 a month to put into your house savings, it would take you 22 years to save up enough to buy an $80,000 house. Even worse, look how much better an $80,000 house was 22 years ago! We don’t know what the future holds, however house prices don’t tend to fall.

Instead, if you took out a loan for $80,000 in 1993 (22 years ago) and applied your $700 you had been paying in rent and your $300 extra, you would have paid off the loan in 2002. If you saved that $1000 you were paying from 2002 until 2015 you would have $156,000 and your new home value would be probably around $160,000.

Total equity in 2015

Paying in cash: $80,000

Getting the loan: $316,000

Difference: $236,000 of equity

These numbers are fairly rough, not including property taxes, or changes in income, however they represent the advantages of taking out a loan over waiting and saving.

 

 

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