Paying cash for a home has the major advantage of avoiding additional debt. But, even if you have the cash to pay for a home, there are advantages to taking out a mortgage as well.

Here are some of the major differences between using cash to buy a home versus taking out a mortgage, including the pros and cons of each payment method.

Paying cash for a home eliminates the cost of interest on the loan and any closing costs, which can total tens of thousands of dollars. “There are no mortgage origination fees, appraisal fees, or other fees charged by lenders to assess buyers,” says Robert Semrad, JD, senior partner and founder of DebtStoppers Bankruptcy Law Firm in Chicago.

Paying with cash is usually more attractive to sellers, too. “In a competitive market, a seller is likely to take a cash offer over other offers because they don’t have to worry about a buyer backing out due to financing being denied,” says Peter Grabel, managing director, MLO Luxury Mortgage Corp.

A cash home purchase also has the flexibility of closing faster than one involving loans, which could be attractive to a seller. A cash buyer might be able to get the property for a lower price and receive a ‘cash discount’ of sorts, Grabel says.

A cash buyer could also purchase a home for cash and then still do a cash-out refinance after they have already closed on the home purchase. This provides:.

Financing a home also has significant benefits. Even if you can pay cash for a home, it might make sense to keep your cash instead of using it to buy real estate.

If the home turns out to need major repairs or renovations, it may be tough to obtain a home equity loan or mortgage. You don’t know what your credit score will look like in the future, how much the home will then be worth, or other factors that determine approval for financing.

Paying cash could also cause a problem if the owners want to buy a new home but have used their cash to buy their current home. “If cash buyers decide it’s time to sell, they need to make sure they will have sufficient cash reserves to put down as a deposit on the new home,” says Grabel.

In short, cash buyers need to be sure they have enough liquidity to meet their other financial needs. By opting to go with a mortgage, you can give yourself more financial flexibility.

You can use a mortgage calculator to budget some of the potential costs.

Of course, with a mortgage, you end up paying more overall, since it comes with interest payments that add up over time. But, depending on the state of the stock market, you could be saving less than that money might have earned had you taken out a mortgage and invested the cash.

The average annualized return of the S&P 500 is about 10% from its inception through 2022. Of course, each year the return can be significantly higher or lower than 10%.

You may also possibly save even more on your taxes than you would save with a mortgage interest deduction. If you use your extra cash to invest in the stock market directly or to live on while investing in a tax-advantaged account like a traditional IRA, Health Savings Account (HSA), 401(k), or other workplace plan, you will potentially save more in taxes than you would have by itemizing your mortgage interest.

In some instances, having a mortgage can protect you from certain creditors. Most states grant consumers a certain level of protection from creditors regarding their home.

Other states set limits ranging from as little as $5,000 to up to $550,000. “That means, regardless of the value of the house, creditors cannot force its sale to satisfy their claims,” says Semrad.

If your home, for example, is worth $500,000 and the home’s mortgage is $400,000, your homestead exemption could prevent the forced sale of your home in order to pay creditors the $100,000 of equity in your home, as long as your state’s homestead exemption is at least $100,000.

Paying off your mortgage doesn’t mean your house can never be foreclosed on. You can still go into foreclosure through a tax lien.

Buying a house is much easier with cash. You don’t have to wait for an inspection, appraisal, or underwriting.

Even though an inspection isn’t required when you buy a home with cash, it is still a good idea to get one to make sure your new home won’t come with any expensive surprise repairs. Cash isn’t your only option for buying a home if you have bad credit.

On the one hand, you could have a higher net worth at the end of 30 years if you invest extra money instead of using cash for a house. However, not having a mortgage gives you freedom from mortgage debt.

My entire family got involved when I first considered buying a house, since I have the luck of being related to real estate agents, investors, and other experts that are more than happy to give advice about buying a property — even before I ask. The first thing they asked me was exactly how long I expected to stay in the house.

Why’s that. What’s the five-year rule for buying a house.

It definitely varies by geographic area — if not by specific neighborhood — but a lot of folks near me will buy a townhouse or condo as their starter home. After about three years, they’ll start looking for a bigger place to upgrade to, either a bigger townhouse or a single family home.

The thought seems to be that if you’re making a little more money every year, you’ll be in a position to afford a bigger house in three years time. And everyone knows assumes that buying is more cost-effective than renting — as long as you’re paying down the principal on your mortgage, you’re going to come out ahead.

When you purchase a house, the general rule is that you want to be sure you’ll be in the same location for at least five years. Otherwise, you’re probably going to take a hit financially.

Every time you go through closing — buying and selling — money hits the table. Depending on where your house happens to be, the buyers and sellers pay different amounts, but everyone pays something.

And you take a second hit when you look at your mortgage statement to see exactly where your monthly payments are going. The way mortgages are structured, you pay much more interest in the first few years you own a house.

David’s Note: When you take out a mortgage, you are paying an interest rate on what you owe. So, in the first year, when the principal is highest, the interest you need to pay is also the highest.

As your principal goes down, your interest payments will go down, leaving more of your check to go towards the principal. If you can wait at least five years to move, you’re in a better position to be ahead of the game.

If you add in a couple of other factors, you can make buying a house that you don’t plan to stay in long-term a better choice. The biggest factor is how much you’re going to pay on your mortgage.

That’s usually the upper end of what you can financially manage. If, however, you buy at the lower end of what you can afford and make extra payments, you can pay off a bigger chunk of the principal.

You may also consider buying a house you won’t stay in for five years — but that you also won’t turn around and sell. It’s not out of the question to purchase a house, start paying it down, and fix it up so that you can then rent it out.

There are plenty of other arrangements that can work out similarly, but you need to study up on real estate before making such a choice. [Click here for a discussion on whether you should buy an investment property.].

David’s Note: Here’s a quick and dirty formula you can use to help you figure out whether it’s better to buy or rent, which works with any duration of ownership. Try to calculate: Seller and Buyer Agent Fees When You Sell + Purchase Price + Maintenance Cost for the Time of Occupancy + Interest Paid on Mortgage + Investment Gains from Your Down Payment + Taxes Paid (Such as Property Tax) + Closing Costs – Selling Price.

If the number is higher, meaning that the selling price wasn’t high enough to cover all those costs, then renting would be the more cost-effective choice. One of the realities I had to face when I recently moved across the country was that I needed to sell my home fast.

Our family was also willing to take a loss on the home and pay out of pocket to make the deal go through if necessary. In the end, we sold the house in less than a week without it ever being officially listed.

Here is what Bennie D. Waller, a Professor of Finance & Real Estate at Longwood University, suggests when it comes to selling your home fast:

That way, you have a better idea of what your home is really worth. Too often, we attach a higher value to the home due to sentiment.

Your next step is to price your home below market value. If you want to sell your home fast, you need to offer an attractive deal.

You also have a better chance of attracting multiple offers, which will not only increase the selling price with a bidding war but motivate buyers to eagerly do what he or she can to close without giving you too much of a hassle. Make sure that you present your home in its best light.

Rent a storage unit if there is excessive clutter,” says Waller. That way, you will be able to show your home when it’s most attractive.

If you fix cosmetic issues to make your home more attractive, you will have better luck selling your home fast. Waller suggests you attract brokers willing to list your property by offering better commissions.

“Give 3% to the listing broker and 5% to the selling broker. This will generate traffic from your listing agent as well as cooperating agents.” Money talks, and nothing motivates an agent to bring in buyers more than higher commissions.

However, he says that you should avoid a broker that is marketing his or her own property or has a lot of listings similar to yours. “I have a research paper that shows that agents marketing their own properties displace efforts.” Make sure that your listing is going to have priority if you want your home to sell fast.

The truth is that selling your home fast is likely to be an expensive experience. You will probably have to do a little more, and pay extra for the convenience of a fast sale.

Tagged as: Housing, Investing, Real Estate. Editor’s Note: I’ve begun tracking my assets through Personal Capital.

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As mortgage rates reach all-time lows due to the pandemic, demand for real estate has increased exponentially. But that doesn’t necessarily mean you should buy a home right now.

As a result, most of us paid the price. Having your neighbor conduct a short sale or foreclosure isn’t good for your wealth, even if you borrowed well within your means.

The rule has three parts. ideally, you want to follow all three, but if not, then at least one.

But as mortgage rates continue to decline, many people may be tempted to go beyond 30%. When rates are lower, you can already spend more on a home if you keep your spending as a percentage of gross income fixed.

For example, spending 40% of your monthly $50,000 gross income on a mortgage still leaves you with $30,000 in gross income. Spending 40% of your monthly $5,000 income, however, leaves you with a much smaller cushion to take care of your basic needs.

Before buying a home, have at least 30% of the value of the home saved in cash or low-risk assets — 20% for the down payment (to get the lowest mortgage rate and avoid private mortgage insurance) and 10% as a healthy cash buffer. This might sound like a lot, especially since there are programs that allow you to do a smaller down payment.

Homeowners who got blown out the quickest during the previous recession had minimal down payments, which increased the temptation to walk away from an underwater mortgage. (Those who did between 2008 and 2012 missed out on one of the largest real estate recoveries.).

It’s unwise to invest your down-payment in stocks and other risk assets if your homebuying time horizon is so short. This is a quick way to screen for homes in an affordable price range.

If you earn $100,000 a year, then you can comfortably afford up to a $300,000 home. Or if you have a top 1% household income of $500,000, you can afford up to $1,500,000.

Therefore, you could stretch this final rule and extend the home value by up to five times your annual household income. Just keep in mind that a salary five times larger not only means more absolute debt, but also higher property taxes and maintenance expenses.

Not bad. But you’re salivating for an $850,000 home, which is seven times your annual income.

This leaves you with only a $15,000 cash buffer and a $765,000 mortgage. Due to a lower down payment, the best mortgage rate you can get is 3.75%.

But your monthly payment of $3,543 is 35.4% of your $10,000 gross income. You’ve violated all three rules.

You might get by with unemployment benefits and a couple of stimulus checks, but think about all the stress you’ll have to endure. Instead of buying a home now, first save up another $155,000 to get to $255,000 in cash and semi-liquid investments.

Although my homebuying rule may seem stringent in such a low interest rate environment, just know that plenty of people pay all-cash for their homes, too. This idea of taking on lots of debt to buy property hasn’t always been the norm.

Despite all the benefits of investing in real estate, it’s best to avoid overextending your finances. Remember, in addition to a mortgage, you’ll also have to pay for other things like homeowner’s insurance, property taxes and maintenance fees.

If it happens to appreciate in value, that’s wonderful. If not, then it doesn’t really matter because you spent all those years creating great memories in your home.

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If you’re shopping for a home in today’s high interest-rate market, you might be tempted to skip the financing and buy the place outright. There has always been a competitive advantage to making an all-cash offer, but with the rise in mortgage rates to 20-year highs, there’s another: Borrowing money has gotten expensive.

Many people have taken this route of late, with the percentage of buyers using a mortgage to purchase a home falling from 87 percent in 2021 to 78 percent in 2022, according to the National Association of Realtors’ latest Profile of Home Buyers and Sellers. Let’s assume you can buy a home with cash.

Even if you can afford it, is it a good idea. We’ll cover the pros and cons.

If someone is selling a property for $250,000, for example, and you have that sum on hand, there’s no reason you couldn’t offer to simply write them a check then and there — or even dump a mountain of dollar bills on them. (While you could technically do so, dealing with IRS reporting requirements for such large cash transactions makes it not very realistic.).

It just means you’re paying the agreed-upon price in full out of your own pocket. You’re drawing from your own resources — be they savings, sales of investment assets, retirement account withdrawals, or financial gifts from other people, as opposed to seeking a loan.

There are both advantages and drawbacks to paying cash compared to getting a mortgage. All-cash offers are different from those that involve loans in some ways — but in others, they’re the same.

For the benefits of making a cash offer without having to tie up all of your money in your home, delayed financing might be an appealing choice. In effect, you pay cash for a property, then get a mortgage after completing the purchase.

You turn some of the equity into cash you can use for other purposes and make monthly payments on the balance. You still need to have enough cash upfront to pay for the home, which is a drawback.

You could also consider financing a portion of the home, though not the typical 80 percent. If you can pay half of the purchase price outright, for example, that strengthens your offer and helps you reduce the cost of a mortgage, even with currently high rates (since you’re borrowing less overall).

But in high-interest-rate environments, the advantage of financing evaporates. Along with saving money, buying a home with cash can speed up the closing process and make your offer more appealing to sellers, especially in a hot seller’s market.

Still, keep in mind that cash purchases have drawbacks. You’re tying your money up in an illiquid asset.

Also, while it’s great to avoid outstanding balances and interest payments, be advised that mortgages aren’t as much of a liability as, say, credit card debt or student loans. In fact, mortgage obligations are often considered “good” debt — because they go towards building equity in an asset — and having one can actually improve your credit history, as long as you make payments promptly.

A cash-on-cash return is a rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property. Put simply, cash-on-cash return measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year.

Investopedia / Matthew Collins. A cash-on-cash return is a metric normally used to measure commercial real estate investment performance.

The cash-on-cash return rate provides business owners and investors with an analysis of the business plan for a property and the potential cash distributions over the life of the investment.

When debt is included in a real estate transaction, as is the case with most commercial properties, the actual cash return on the investment differs from the standard return on investment (ROI).

Cash-on-cash return, on the other hand, only measures the return on the actual cash invested, providing a more accurate analysis of the investment’s performance.

Cash on Cash Return = Annual Pre-Tax Cash Flow Total Cash Invested where: APTCF = (GSR + OI) – (V + OE + AMP) GSR = Gross scheduled rent OI = Other income V = Vacancy OE = Operating expenses AMP = Annual mortgage payments \begin{aligned} &\text{Cash on Cash Return}=\frac{\text{Annual Pre-Tax Cash Flow}}{\text{Total Cash Invested}}\\ &\textbf{where:}\\ &\text{APTCF = (GSR + OI) – (V + OE + AMP)}\\ &\text{GSR = Gross scheduled rent}\\ &\text{OI = Other income}\\ &\text{V = Vacancy}\\ &\text{OE = Operating expenses}\\ &\text{AMP = Annual mortgage payments}\\ \end{aligned} ​Cash on Cash Return=Total Cash InvestedAnnual Pre-Tax Cash Flow​where:APTCF = (GSR + OI) – (V + OE + AMP)GSR = Gross scheduled rentOI = Other incomeV = VacancyOE = Operating expensesAMP = Annual mortgage payments​.

For example, suppose a commercial real estate investor invests in a piece of property that does not produce monthly income.

The investor pays $100,000 cash as a down payment and borrows $900,000 from a bank. Due are closing fees, insurance premiums, and maintenance costs of $10,000, which the investor also pays out of pocket.

After one year, the investor has paid $25,000 in loan payments, of which $5,000 is a principal repayment. The investor decides to sell the property for $1.1 million after one year.

The investor’s cash-on-cash return is then: ($205,000 – $135,000) / $135,000 = 51.9%.

However, unlike a monthly coupon payment distribution, it is not a promised return but is instead a target used to assess a potential investment. In this way, the cash-on-cash return is an estimate of what an investor may receive over the life of the investment.

Cash-on-cash return, sometimes referred to as the cash yield on a property investment, measures commercial real estate investment performance and is one of the most important real estate ROI calculations. Essentially, this metric provides business owners and investors with an easy-to-understand analysis of the business plan for a property and the potential cash distributions over the life of the investment.

Most commercial properties involve debt and the actual cash return on the investment differs from the standard return on investment (ROI). ROI calculates the total return, including the debt burden, on an investment.

Cash-on-cash returns are calculated using an investment property’s pre-tax cash inflows received by the investor and the pre-tax outflows paid by the investor. Essentially, it divides the net cash flow by the total cash invested.

The investor also pays $10,000 cash for ancillary costs out of pocket. The investor decides to sell the property for $1.1 million after having paid $25,000 in loan payments that include a principal repayment of $5,000.

So, the investor’s cash-on-cash return is 51.85% [($205,000 – $135,000) ÷ $135,000].

I love investing in real estate, and it’s a major reason why I was able to become a self-made millionaire. But I’ve learned that buying a single-family home to live in isn’t always a great investment.

I realized this in 2003, when I was a newlywed with a newborn, and bought my dream home in Los Angeles. But as time went by, I wasn’t seeing a return on the money or time I put into my house.

Then my family became renters again. Don’t get me wrong: I still support homeownership.

But at the end of the day, for many people, owning a home takes money out of their pockets. Here’s why I believe buying a house isn’t a wise investment, especially right now with rising inflation and high home prices:

Then 10 years later you sell the house for $200,000. It looks like you killed it: You turned $5,000 into $100,000, after you pay your mortgage.

Total cost before maintenance: $86,000. That leaves you with a net return of $14,000 (or 14%) of that $100,000.

A good general rule to keep in mind is that you will spend about 1% of your home’s purchase price on maintenance each year, but those fees can be more expensive during times of high inflation. Tip: Don’t buy a house expecting to make a true profit.

True real estate investments provide you with monthly passive income — or cash flow — after all the mortgage payments, property taxes and maintenance. When your home doesn’t provide monthly cash flow, its value is always tied to having a homebuyer who is qualified to buy and who likes your home.

Tough times often benefit the value of rental properties and hurt single-family homeowners. When I go to sell a rental property, I only need to find someone who wants to make a profit, and that’s not hard to do.

For instance, you are limited to how much interest you can write off your home, and you are only allowed a tax exemption of one $250,000 gain on the sale of a single family home every two years. But when you go from investing in your house to investing in income-producing real estate, the tax benefits skyrocket.

Tip: To make passive income off of real estate, invest in rental properties with favorable tax situations. My opinion: Don’t buy a home — unless you can afford to waste money.

But if your goal is to create wealth, there are so many other options, such as stock market or commercial real estate investing. I also don’t believe that owning a home should be considered as the “American Dream.” For the most part, it’s simply a place to live — and there are always costs attached.

Grant Cardone is the CEO of Cardone Capital, bestselling author of “The 10X Rule,” and founder of The 10X Movement and The 10X Growth Conference. He owns and operates seven privately held companies and a $5 billion portfolio of multifamily projects.

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Sellers can pay the buyer’s closing costs. A seller credit is a sum of money the property seller agrees to give the homebuyer at closing.

Seller credits are negotiable and can be included as part of the terms of the sale if both the buyer and seller agree to them. The specifics depend on the circumstances of the sale.

It’s a valuable tactic, especially for first-time home buyers who want to buy now rather than wait to save enough money for closing costs.

After reading this article, you’ll know the limitations and how to avoid costly mistakes when negotiating credit from sellers.

Then, include the amount of the seller credit in the real estate sales contract when offering to buy a home. Your real estate agent will help you prepare the sales contract and make an offer to the sellers.

Usually, the price increase and seller credit amounts are about the same. So, for instance, if you ask for $3,000, you should expect to pay $3,000 more for the house.

If the sellers would accept $100,000 for the house, and your closing costs are $3,000, offer them $103,000 and ask them to pay your closing costs of $3,000. After paying your closing costs, the seller will still get $100,000 from the sale, and you’ll save $3,000.

If the seller agrees, remember you still pay the closing costs over time by financing them into the loan amount. As a result, your loan increases, making your monthly payment higher.

When negotiating, be realistic and consider the seller’s perspective. Negotiating a seller’s credit may be more difficult in a seller’s market, where buyers compete more.

Also, consider the condition of the home and any necessary repairs or updates. If the house needs a little work, the seller may be more willing to agree to a seller credit to make the sale more attractive.

The seller can pay some or all of your closing costs. Be sure that your sales contract states that the seller credit is paying the buyer’s closing costs.

On the Real Estate Purchase and Sale Contract, Section 6, “Closing Cost Credit to Buyer from Seller” reads as follows: “Seller agrees to credit to Buyer at Closing $_________________ OR _______% of Purchase Price (“Closing Cost Credit”), to be applied to prepaid expenses, closing costs or both as lender permits.”.

Closing costs are loan costs and other costs associated with purchasing a home. Loan costs are lender and third-party fees for underwriting, a property appraisal, and title work.

Check out our Loan Estimate Explainer for more information about closing costs.

Use our Mortgage Calculator to get the details on rates, payments, and closing costs online, 24/7. Talk to a mortgage expert at NewCastle Home Loans to better understand the costs of buying a home and determine how much money you’ll need to save to be prepared to make this significant purchase.

When buying a home, you can’t use any portion of a seller closing cost credit for the down payment.

It’s a crucial part of the home-buying process, as it is a way to demonstrate your commitment to the purchase. You must come up with the money for the down payment and prove to the lender that it came from a legitimate source by providing copies of documents like bank statements and gift letters.

For a conventional loan, the minimum down payment is 3%. The money you need to buy a home, or the cash-to-close, is the sum of the down payment plus the closing costs.

Let’s say the purchase price is $103,000, your down payment is $3,090 (3% of the purchase price), and the closing costs are $3,000. The most the seller can pay toward your closing costs is $3,000, the actual closing costs.

Before receiving a seller credit, you needed $6,090 in cash to close. However, the seller credit reduces your cash-to-close by $3,000, so all you need is enough money to cover the down payment, which is $3,090.

The seller credit can’t be more than the actual closing costs. Otherwise, it pays a portion of the down payment, which is not allowed.

Suppose the closing costs are $2,000, and you negotiated a seller credit for $3,000. Unfortunately, you can’t use the entire seller credit because it’s more than the closing costs.

Getting pre-approved for a mortgage is a good idea before negotiating seller credits. When you get pre-approved with NewCastle Home Loans, you’ll know the closing costs, so you’re ready to deal and won’t make costly mistakes.

Remember, the seller may pay some or all of your closing costs with a seller credit. But lenders won’t allow you to use it to pay for repairs or improvements.

Lenders call credits for repairs and improvements “repair credits” and treat them differently than closing cost credits. The lender will lower the sales price by the amount of the repair credit, not your closing costs.

If the home requires repairs or improvements, you and the seller may agree to include a repair credit as part of the terms of the sale to cover the cost of these repairs. However, if the sales contract states that the credit is for repairs or improvements, the lender will reduce the sales price by the amount of the repair credit when calculating your loan amount.

Assuming the purchase price is $103,000, the down payment is $3,090, and the closing costs total $3,000, you and the seller negotiate a repair credit for $3,000 instead of a closing cost credit.

Next, the lender calculates the loan amount from the adjusted purchase price. The repair credit affects how the lender calculates your loan amount, not the sales contract.

To make matters worse, you have to pay the costs too.

When negotiating a sales price and seller closing cost credit with the seller, consider the condition of the home and any minor repairs. If the house needs a little work, like painting or clean-up, the seller may be willing to agree to a seller credit to make the sale more attractive.

First, call it a seller closing cost credit, not a repair credit. Next, ensure the seller credit is less than or equal to the closing costs.

Before closing, the seller must fix defects concerning the property’s safety, soundness, or structural integrity.

For a conventional loan, sellers can pay your closing costs up to 3% of the property’s purchase price if your down payment is less than 10%. If your down payment is 10% or more, the seller credit increases to 6% of the purchase price.

However, the credit may not be more than the actual closing costs.

For an FHA or USDA loan, the seller can pay up to 6% of your closing costs. For a VA loan, the seller can pay up to 4% of your closing costs.

The appraised value may limit the seller’s credit. When determining the property’s value, the lender uses the lesser of the sales price or the appraised value.

When the seller’s credit exceeds the closing costs, lenders typically ask you to reduce the amount of the credit on the sales contract. Otherwise, they may lower the property’s sales price by the amount exceeding the limit.

Either way, lenders only allow you to close with a credit within the limit. When a seller’s credit exceeds the limit, the extra goes toward the down payment.

Instead, you must come up with the down payment money.

Last Updated on February 24, 2022 by Mark Ferguson. Paying cash for rental properties may seem like a safe bet, but it may actually be costing you a lot of money.

Many people feel paying cash is the best option because you don’t have to pay any interest, but I make more money when I use loans. I can buy more rentals, which means I have more tax advantages, more equity, more cash flow, and more appreciation.

The key to my strategy and obtaining great returns is being able to leverage my money. Leveraging is using other people’s money for investments so you use less of your own money.

If you pay cash your returns decrease dramatically, and all the benefits of owning rental properties decrease as well.

Some of the largest companies in the world have used debt to grow faster and bigger as have some of the richest people in the world. If you have an investment or business that makes more money than the interest rate costs you on the debt, it might make sense t0 get a loan to multiply your returns.

If you want to make a lot of money very quickly, debt can help you. With real estate, you can control an asset that is worth hundreds of thousands of dollars (or more) with 20 percent down or less as an owner occupant.

You made a 10 percent return paying cash or a 100 percent return if you put 10 percent down and only has $10,000 invested into the property. Now, real estate is not that simple and there are many more costs than just the down payment, but I wanted to start with a straight forward example to show how debt can make you money.

I tend to think that using all cash to buy rentals can be risky as well. The problem with real estate is that it is not very liquid.

It can take 30 days to get a loan if all your finances are in order. If you have a high debt to income ratio, don’t have an income, or have bad credit you may not be able to get a loan at all even if you have a property completely paid for.

If you want top dollar it may take months to sell. If you sink all of your money into a property so that you can pay cash it is very hard to get that cash out.

I would rather use a loan to buy a property so that I have cash in reserves and readily available than spend all my money to buy with cash. I also believe that is is better to have more cash flow with multiple rentals than less cash flow with one paid off property.

If you buy a $100,000 house with cash that makes $500 a month in cash flow, you are making about a 6 percent return from the cash flow alone. Cash flow is the profit you make after paying all expenses on a rental property.

If you are paying a 4 percent interest rate, your principal and interest payment will be about $382 (check out the bank rate mortgage calculator for calculating mortgage payments). You are only making $118 a month cash flow after subtracting the mortgage payment, but you are making a 7 percent return on your money due to the lower cash investment.

You are also paying down the principal on the loan by an average of $118 each month. That $118 equals another 7 percent return on your money that you would not have on a cash purchase.

The exciting part about using leverage is when you get a higher cash flow, the returns increase even more. If you can make $800 a month cash flow without a mortgage, you will be making 9.6 percent cash on cash return.

The way to make big money in rental properties is finding properties that will give you big cash flows and buying as many as possible while leveraging your money. Below is a video that goes over this topic as well:

The best part about leveraging your money is it allows you to buy more properties. You can buy three or four homes with $100,000 instead of just one home paid for with all cash.

Not only does your cash flow increase by purchasing more properties, but the equity pay down increases, the tax benefits increase and the appreciation increases. If you can purchase homes below market, then every time you buy a home, your net worth increases as well.

Rental properties have many tax benefits including depreciation. The IRS allows you to depreciate a percentage of your rental properties every year and write that off as an expense.

You can also deduct the interest paid on the loan and most expenses. If you have three houses instead of just one, you can get triple the tax deductions.

It is the same situation if rents go up, the more properties you have, the more money you will make. I never count on rents to go up or appreciation, but it is a nice bonus.

Some markets may not see any appreciation at all. With multiple rental properties, you are also paying down the loans on three properties, which increase your returns as well.

One of the biggest advantages of real estate is being able to buy below market value. I can buy a house for $100,000 that is worth $120,000 or even $150,000 today.

There are many ways to get great deals but it is not easy. If I buy one house with cash I would gain $30,000 in equity if I bought it $30,000 below market (this assumes it needs no repairs).

When you think of the tax savings, possible appreciation, buying below market, and equity pay down the returns shoot through the roof. With leverage, I can buy three properties for every one property with cash.

When you use leverage, do not blindly get a loan for as much money as you can. Make sure you have enough cash flow as we have already discussed.

Reserves are extra cash you have available in case a problem comes up. If you have an eviction, someone stops paying rent, or repairs to make you need cash available to cover those expenses.

If you have one or two mortgages I would suggest having even more cash ($10,000 would be ideal). There is a downside to more properties.

You will also have three rental properties to manage instead of one. However, if you are able to cash flow $400 or more with a mortgage, you will still be way ahead of the game by leveraging your money.

We accounted for the repairs and maintenance when we figured the cash flow, so it won’t be an added expense with more properties, but it will be more work if you manage the properties yourself. Some people think it is less risky to buy with cash than with a loan, but I would also disagree.

When you buy with cash you have fewer properties. The fewer properties you have, the fewer sources of income you will have, and the more a loss of an income will hurt.

But if you have three rentals that have loans on them, one may go vacant, but you have two more that are bringing in money. When you have multiple rentals, you also have more diversification.

With multiple rentals, you have less of a chance of all your properties being damaged or hurt by other factors. You actually lose less money when prices go down with multiples properties.

It can be expensive to buy rental properties since most banks require at least 20 percent down. If you are looking to buy many rental properties as I do, it is tough to avoid putting 20 percent down.

Most banks will stop lending to you all together once you reach ten financed properties. There are ways to finance more than four and more than ten properties with a portfolio lender.

Depending on house values in your area, a 20 percent down payment can be a lot of money. The houses I buy are usually right around $100,000, which is about $20,000 needed for the down payment.

It is usually safe to assume closing costs will be at least three percent of the purchase price, but you can ask the seller to pay all or part of your closing costs. I usually ask the seller to pay part of my closing costs to reduce the amount of cash I have into a property.

Repairs can add a huge chunk to how much money is required to buy a rental property and you have to wait for the repairs to be completed before it can be rented. While you are waiting for repairs, you are paying carrying costs on that property, which also increases the money needed.

In a perfect world, it should only take a week or two to have a professional contractor complete most repairs, but it usually takes longer. As for repairs, they usually cost more than you think they will.

On a house that requires more repairs and updates, I can easily spend $20,000 or more. It is always the little things that take time and add up to big repair costs.

Make sure you get bids if you are not an expert at estimating repairs. Estimating repairs can be a very difficult thing to do, even for experienced investors.

Turnkey rental properties are one way to save money on repairs and put less money into rental properties. Here is a breakdown of the costs that I would normally have on a $100,000 rental property.

Closing costs: $3,000. Repair costs: $10,000.

Total investment: $34,000. These figures would be on a home that needs moderate work.

I could also ask the seller to pay $3,000 of my closing costs if I thought it would not jeopardize my chances of getting the deal. Having to put 25 percent down on a property would greatly increase the amount of money needed.

Another factor to consider is that the bank will want you to have money in reserves when you get an investment property loan. There are ways to decrease how much money is required to buy a rental property.

Rental property number ten and rental property number nine were both in decent shape and purchased below market value. You can ask the seller to pay part of your closing costs when making an offer.

If the seller does not want to budge on price, raise the price of the property to make up for the closing costs. The cash you save upfront will make up for the slightly higher loan and purchase amount.

I am a real estate agent and I save thousands on each property I buy because I am paid a commission for my side of the transaction. This decreases how much money is required to buy rental property tremendously.

Here is another article on how much money real estate agents can make.

There are always unexpected costs and delays associated with repairs. Make sure you have a cushion in the bank for the worst-case scenario.

This would be money on top of the initial investment used for repairs and carrying costs. You may need as much as $30,000 to buy a $100,000 house, but that can increase if many repairs are required or if you have to put down more than 20 percent.

Remember, if you are purchasing more expensive homes, that number will increase significantly and it will decrease if you are buying lower-priced homes.

The housing market of the past few years sent home values skyward. And while prices have started course-correcting, they’re still relatively high — the median home price in the U.S.

So how much do you need to make to buy a $500,000 house. Let’s start by assuming you’ll spend about a third of your total income on housing (more on the 28 percent rule below).

Multiply that figure by 12 to come to an annual amount of $30,336. If that is a third of your earnings, multiply $30,336 by three to determine the minimum annual income you’ll need to afford a $500,000 home: $91,008.

So the salary needed to comfortably afford the payments without stretching yourself too thin will likely be more than $91K. Here’s more on how to determine if you can afford a $500,000 house.

One commonly used guideline is the 28/36 rule. This rule of thumb states that no more than 28 percent of your income should be spent on your housing payments, and no more than 36 percent should be spent on total debt (housing plus any student loans, credit card bills, car payments and more).

You’ll need to also pay homeowners insurance and property taxes, both of which can vary wildly depending on where you’re located. You will also need to cover maintenance costs.

And if your home is part of a homeowners association, there will be HOA fees to pay as well. As you may have noticed, location matters a lot when it comes to home prices.

Individual markets with medians close to $500,000 include Sacramento, California ($463,000), Charleston, South Carolina ($517,500) and Olympia, Washington ($525,000). Buying a home is a complex process, and it makes sense that a variety of factors come into play.

Your debt-to-income ratio, or DTI, is the percentage of your monthly income that you spend on paying off debt. In general, the lower your DTI, the better: A DTI of 36 percent or less is what most mortgage lenders want to see.

Here’s a DTI example. Using the calculations at the top of the page, your monthly income from a $91,008 salary comes to $7,584, and your monthly interest and principal payments on a $500,000 house come to $2,528.

However, that does not leave a lot of room leftover for other debt payments, so you’d have to be very careful with your other spending. Another major consideration is your down payment.

In addition, if you put down less than 20 percent, you’ll likely have to pay an extra monthly fee for private mortgage insurance. Many mortgage products will allow a much lower down payment, but again, that will result in higher monthly mortgage bills.

Think of it as an inverse to your down payment: If you put 20 percent down, your LTV is 80 percent. Generally, the lower your LTV, the better.

To qualify for most types of mortgages, you’ll need a credit score of at least 620. Some loan types, such as FHA loans, accept lower scores, but a higher score will almost always get you the lowest available interest rate.

If you’re a first-time homebuyer, you may qualify for a government down payment assistance program. These are available at the local, state and even federal level, and they typically provide financial help to cover a down payment and closing costs.

Buying a house involves a lot of moving parts. Even once you’re in contract on a home, it’s important to stay on top of your finances until the deal is done.

Working with a trusted real estate agent can make the entire homebuying process easier and less stressful. An agent will guide you through finding the right house, making the right offer and negotiating a contract, and then see you through to closing.

Caret Down.

Caret Down.

You’d like to sell your home, getting ready to move on. But you took out a mortgage to buy it, which you’re nowhere near paying off.

True, a mortgage is technically an encumbrance on your home, which means that someone else (namely, your lender) has a claim on the property. Unlike other liens, however, it’s usually not considered a cloud on the title — because it’s so common, and because it’s easily settled.

“Having a mortgage does not get in the way of the sale of a home, as long as there is enough equity to pay it off in full when they close.”. In short, yes, you can sell a home even if you still owe money on the mortgage.

But you must settle the outstanding balance when you complete the sale. it’s often part of the round of exchanged checks that occurs during the closing.

Equity is the key to selling a property with a mortgage on it. Basically, your home equity is equal to the value of your home minus the outstanding mortgage balance.

This is the amount of cash, minus your closing costs and expenses, that you will receive when you sign the final purchase agreement, finalizing the home sale. This positive home equity is necessary for you to be able to pay off the loan using the proceeds from the sale.

You can grow your home equity by paying down your loan balance or realizing an increase in your home’s value, either by natural market shifts or by implementing upgrades that boost its value. If you can afford to, a great way to increase your equity is to make a 13th mortgage payment every year and specify that it should be applied to principal.

Keep in mind that you’ll have to pay closing costs when you sell, which can include Realtor commissions and more. So if your equity is just barely positive, it might not be enough.

The one instance where you may have trouble selling a home with a mortgage is when you have negative equity. Colloquially known as being underwater or upside down, it basically means that the home is worth less than the amount you owe on it.

Alas, the local real estate market tanks, and you find you can only sell the home for $215,000. If you still owe $225,000 to your lender, you won’t be able to sell your home at a price tag that allows you to pay back what you still owe.

You have a few options in this situation: In general, you must pay off any mortgage or loans secured on a home when you sell the property.

Here are four steps to follow. The first thing to do if you’re thinking about selling your home while having a mortgage on it is contact your lender and ask for a payoff statement or letter.

The payoff amount will change every month, even on a fixed-rate mortgage, since you’re making monthly payments. So be prepared to get a second statement when your closing date is set.

It will give you a specific amount to pay, which includes any accrued interest and other charges, as well as the due date for the payment. It may also include penalties for prior late payments and an early payment penalty.

There are many ways to estimate how much your home is worth, but a good place to start is to look for comparable homes, or comps, in your area that have sold recently or are on the market now. That can provide helpful context.

These online tools can also help you get an estimate of your home’s worth, though they are not guaranteed to be accurate. You’ll get the most accurate valuation, though, by hiring a professional appraiser (a real estate agent can help arrange this for you).

Regarding how much you’ll make on the sale, keep in mind that if you owe $150,000 on your mortgage and you sell your home for $300,000, that remaining $150,000 isn’t all pure profit. Selling a house costs money: You’ll likely work with a real estate agent, who will need to get paid (be sure to negotiate commissions and services before you list, not after) and a real estate attorney.

In general, expect to pay between 7 percent and 10 percent of your home’s value in fees. Make sure that your actual net proceeds are sufficient to pay off both your mortgage and the fees.

If you feel good about the value of your home and that the net proceeds can cover the remaining balance of your mortgage and fees, start looking for a real estate agent. Finding a good agent who you like is essential, because you’ll be working with them throughout the sale process.

They may advise staging the home to help generate more interest, and they can help you analyze any offers that you receive to make sure you’re getting the best deal possible. Your agent should also prepare a seller’s net sheet for you — a kind of itemized work or balance sheet, detailing costs and giving a sense of how much you stand to gain once a deal goes through.

Once you receive a good offer and accept — congratulations. — it’s time to sign the purchase and sale agreement, which begins the closing process.

When you close on the sale, you’ll use the proceeds to pay off your mortgage lender and any outstanding fees or closing costs. A representative of the lender will be at the closing to collect the money due to them.

For example, if you sell for $300,000 and owe $150,000 to pay off the mortgage, plus $20,000 in closing costs, your profit is $130,000. Ideally, your home will have appreciated in value while you owned it and will sell for more than you paid for it.

Typically, to trigger capital gains taxes in real estate, the home would have to have been your primary residence, and you would have to have made a significant amount — hundreds of thousands of dollars — on the sale. If you sell a primary residence, you can exclude the first $250,000 in profit, or the first $500,000 if you’re married and file taxes jointly.

Caret Down.

Caret Down.

In fact, it’s likely that most real estate transactions involve homes for which the seller still has a mortgage. Make sure you know your home’s payoff amount and your expected proceeds from the sale, after commissions and closing costs.

Ever heard someone say everyone should buy a house. Or that renting is a lot like flushing a whole bunch of money down the toilet every month.

And it’s nonsense. The truth is, not everyone should buy a house.

Because, if you sign the dotted line on a new home when you aren’t prepared financially and emotionally, the house will wind up being a curse instead of a blessing. It will wind up owning you instead of the other way around.

At this point, you’re probably asking yourself, Am I ready to buy a house. What a great question.

If you can say, “Heck, yes. ” to each statement below, then pack your bags, baby—you’re ready to buy a house.

The first step in making sure you’re financially ready to buy a house is paying off all your debt and saving up a full emergency fund. That’s right—it’s time to say goodbye to your credit card balance, car payments, student loans and everything else you owe money for.

Why is it important to accomplish those goals before buying a house. First off, if you try buying a house while you have debt, it’ll be tough to save up a strong down payment since most of your extra money will be going out the door to credit card companies or Sallie Mae.

So, before you buy a house, buckle down and knock out your debt as fast as possible using the debt snowball. Once debt’s a distant memory, get busy stockpiling money in an emergency fund.

Speaking of down payments.

A cash-out refinance is a mortgage refinancing option that lets you convert home equity into cash. A new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash.

In the real estate world, refinancing in general is a popular process for replacing an existing mortgage with a new one that typically extends terms to the borrower that are more favorable.

Investopedia / Madelyn Goodnight. A cash-out refinance allows you to use your home as collateral for a new loan as well as some cash, creating a new mortgage for a larger amount than what is currently owed.

Borrowers seeking a cash-out refinance find a lender willing to work with them. The lender assesses the current mortgage’s terms, the balance needed to pay off the loan, and the borrower’s credit profile.

The borrower gets a new loan that pays off their previous one and locks them into a new monthly installment plan. The amount above and beyond the mortgage payoff is issued in cash.

With a standard refinance, the borrower would never see any cash in hand, just a decrease to their monthly payments. The funds from a cash-out refinance can be used as the borrower sees fit, but many typically use the money to pay for big expenses such as medical or educational fees, to consolidate debt, or as an emergency fund.

A cash-out refinance results in less equity in your home, which means that the lender is taking on greater risk. As a result, closing costs, fees, or interest rates can be higher than a standard refinance.

Department of Veterans Affairs (VA) loans, including cash-out loans, can often be refinanced through more favorable terms with lower fees and rates than non-VA loans.

Savvy investors watching interest rates over time typically will jump at the chance to refinance when lending rates are falling toward new lows. There can be a variety of different types of options for refinancing, but in general, most will come with several added costs and fees that make the timing of a mortgage loan refinancing just as important as the decision to refinance.

In addition to checking rates and fees to make sure that refinancing is a good option, consider your reasons for needing the cash. This refinancing option typically comes with lower interest rates than unsecured debt, like credit cards or personal loans, does.

Carefully consider if what you need the cash for is worth the risk of losing your home if you can’t keep up with payments in the future. If you need the cash to pay off consumer debt, take the steps you need to get your spending under control so you don’t get trapped in an endless cycle of debt reloading.

The cash-out refinance gives the borrower all of the benefits they are looking for from a standard refinancing, including a lower rate and potentially other beneficial modifications. Borrowers also get cash paid out to them that can be used to pay down other high-rate debt or possibly fund a large purchase.

Home equity loans and home equity lines of credit (HELOCs) are alternatives to cash-out or no cash-out (or rate-and-term) mortgage refinancing. Say you took out a $200,000 mortgage to buy a property worth $300,000, and, after many years, you still owe $100,000.

If rates have fallen and you are looking to refinance, you could potentially get approved for up to 80% of the equity in your home, depending on the underwriting.

Let’s say your lender is willing to lend out 75% of your home’s value. For a $300,000 home, this would be $225,000.

This leaves you with $125,000 in cash.

The new mortgage would consist of the $100,000 remaining balance from the original loan plus the desired $50,000 that could be taken out in cash.

That’s the advantage of collateralized loans. The disadvantage is that the new lien on your home applies to both the $100,000 and the $50,000, since it is all combined together in one loan.

As mentioned above, borrowers have a variety of options when it comes to refinancing. The most basic mortgage loan refinance is rate-and-term refinance, also called no cash-out refinancing.

For example, if your property was purchased years ago when rates were higher, then you might find it advantageous to refinance to take advantage of lower interest rates. In addition, variables may have changed in your life, allowing you to handle a 15-year mortgage (saving massively on interest payments), even though it means giving up the lower monthly payments of your 30-year mortgage.

Nothing else changes, just the rate and term.

You receive the difference between the two loans in tax-free cash. This is possible because you only owe the lending institution what is left on the original mortgage amount.

Compared to rate-and-term, cash-out loans usually come with higher interest rates and other costs, such as points. Cash-out loans are more complex than a rate-and-term and usually have higher underwriting standards.

With a cash-out refinance, you pay off your current mortgage and enter into a new one. With a home equity loan, you are taking out a second mortgage in addition to your original one, meaning that you now have two liens on your property.

Closing costs on a home equity loan are generally less than those for a cash-out refinance. If you need a substantial sum for a specific purpose, home equity credit can be advantageous.

In both cases, make sure that you are able to repay the new loan amount because otherwise, you could end up losing your home.

If you think that you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S.

Home equity is the market value of your home minus any liens, such as the amount you owe on a mortgage or a home equity loan. The equity in your home can fluctuate based on real estate market conditions in the community or region where you live.

For example, if your home is valued at $600,000 and you owe $200,000, then you have $400,000 in home equity. There are no restrictions on how you can use the funds from a cash-out refinance.

Marisa*Nampa, IdahoAge 39Lives with son. Also helps to support her father.Mortgage: $1,700/monthTithing: $590Medical: $580Groceries: $400Monthly student loan payment: $380Car payment: $370House cleaners: $140Son’s extracurricular activities and allowance: $108Family fun: $30.

I don’t get any child support or anything. Never have.

And I half support my dad. he’s on Social Security Disability.

I thought, “I have made it,” and then I was like, “It’s all gone.” It feels almost the same as before, which seems incredibly silly to me. How can it feel like it’s the same when I’m making so much more money.

Part of that is I previously didn’t feel I could pay tithing with my church, and now I am. Obviously, that’s optional, but it’s important to me, and that’s 10%.

I’m approaching 40 now and significantly behind, so I put 5% into my retirement account with a 50% employer match. I also directed money into maxing out my HSA account to pay medical expenses.

Then I put a little bit towards a vacation fund, because I only have about six more years until my son’s out of the house, and I need to start making memories.

Importantly, however, this analysis probably overstates the magnitude of the financing gap for two key reasons. First, Pew is unable to observe the physical quality of the homes purchased in the studied counties.

Second, even if small mortgages are readily available, many sellers, and probably some buyers, are likely to prefer cash transactions. (See “Cash purchases” below for more details.) Still, these factors do not fully account for the gap in small mortgage financing.

purchase their home using cash. or forgo owning a home and instead rent or live with family or friends.

Many alternative financing arrangements are made directly between a seller and a buyer to finance the sale of a home and are generally costlier and riskier than mortgages.16 For example, personal property loans—an alternative arrangement that finances manufactured homes exclusive of the land beneath them—have median interest rates that are nearly 4 percentage points higher than the typical mortgage issued for a manufactured home purchase.17 Further, research in six Midwestern states found that interest rates for land contracts—arrangements in which the buyer pays regular installments to the seller, often for an agreed upon period of time—ranged from zero to 50%, with most above the prime mortgage rate.18 And unlike mortgages, which are subject to a robust set of federal regulations, alternative arrangements are governed by a weak patchwork of state and federal laws that vary widely in their definitions and protections.19.

Pew’s first-of-its-kind survey, fielded in 2021, found that 36 million people use or have used some type of alternative home financing arrangement.20 And a 2022 follow-up survey on homebuyers’ experiences with alternative financing found that these arrangements are particularly prevalent among buyers of low-cost homes.

(See the separate appendices document for survey toplines.). Further, the 2022 survey found that about half of alternative financing borrowers applied—and most reported being approved or preapproved—for a mortgage before entering into an alternative arrangement.

However, regardless of a borrower’s reasons, the use of alternative financing is cause for concern because it is disproportionately used—and thus the risks and costs are inequitably borne—by racial and ethnic minorities, low-income households, and owners of manufactured homes.

And nearly half of surveyed manufactured home owners reported using a personal property loan.24 In all of these cases, expanding access to small mortgages could help reduce historically underserved communities’ reliance on risky alternative financing arrangements.

If you feel like you’re ready to buy a home, the first question you’re likely to ask yourself is, “How much can I afford. ” And answering that question means taking a look at several factors.

Before you snap up that seemingly great buy on a home, learn how to analyze what “affordability” means. You’ll need to consider various factors ranging from the debt-to-income (DTI) ratio to mortgage rates.

Investopedia / Ellen Lindner. The first and most apparent decision point involves money.

Even if you didn’t pay in cash, most experts would agree that you can afford the purchase if you can qualify for a mortgage on a new home. But how much mortgage can you afford.

The 43% debt-to-income (DTI) ratio standard is generally used by the Federal Housing Administration (FHA) as a guideline for approving mortgages. This ratio determines if the borrower can make their payments each month.

A 43% DTI means all your regular debt payments, plus your housing-related expenses—mortgage, mortgage insurance, homeowners association fees, property tax, homeowners insurance, etc.—shouldn’t equal more than 43% of your monthly gross income.

Now, let’s say you already have these monthly obligations: Minimum credit card payments of $120, a car loan payment of $240, and student loan payments of $120—a total of $480. That means theoretically, you can afford up to $1,240 per month in additional debt for a mortgage and still be within the maximum DTI.

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take.

Department of Housing and Urban Development (HUD).

Usually, lenders like that ratio to be no more than 28%. For example, if your income is $4,000 per month, you would have trouble getting approved for $1,720 in monthly housing expenses even if you have no other obligations.

Why wouldn’t you be able to use your full debt-to-income ratio if you don’t have other debt. Because lenders don’t like you living on the edge.

If your mortgage is 43% of your income, you’d have no wiggle room for when you want to or have to incur additional expenses.

Keep in mind that you may be making those payments every month for the next 30 years. Accordingly, you should evaluate the reliability of your primary source of income.

Getting approved for a mortgage up to a certain amount doesn’t mean you can actually afford the payments, so be honest about the level of financial risk that you are comfortable living with. It’s best to put down 20% of your home price to avoid paying private mortgage insurance (PMI).

There may be some reasons that you might not want to put down 20% toward your purchase. Perhaps you aren’t planning on living in the home very long, have long-term plans to convert the home into an investment property, or you don’t want to risk putting that much cash down.

You can buy a home with as little as 3.5% down with an FHA loan, for example, but there are bonuses to coming up with more. In addition to the aforementioned avoidance of PMI, a larger down payment also means:.

While there are many benefits to a larger down payment, don’t sacrifice your emergency savings account completely to put more down on your home. You could end up in a pinch when unexpected repairs or other needs arise.

A house is an expensive investment. Having the money to make the purchase is excellent, but it doesn’t answer whether or not the purchase makes sense from a financial perspective.

One way to do this is to answer the question: Is it cheaper to rent than buy. If buying works out to be less expensive than renting, that’s a strong argument in favor of purchasing.

Similarly, it’s worth thinking about the longer-term implications of a home purchase. For generations, buying a home was almost a guaranteed way to make money.

While real estate has traditionally been considered a safe long-term investment, recessions and other disasters can test that theory—and make would-be homeowners think twice.

If you are buying the property on the belief that it will rise in value over time, be sure to factor the cost of interest payments on your mortgage, upgrades to the property, and ongoing or routine maintenance into your calculations.

If prices are so low that it is obvious you are getting a good deal, you can take that as a sign that it might be a good time to make your purchase. In a buyer’s market, depressed prices increase the odds that time will work in your favor and cause your house to appreciate down the road.

Interest rates, which play a prominent role in determining the size of a monthly mortgage payment, also have years when they are high and years when they are low, which is better. For example, a 30-year mortgage (360 months) on a $100,000 loan at 3% interest will cost you $422 per month.

At 7%, it jumps to $665. So if interest rates are falling, it may be wise to wait before you buy.

The seasons of the year can also factor into the decision-making process. Spring is probably the best time to shop if you want the widest possible variety of homes to choose from.

If you want sellers who may be seeing less traffic—which could make them more flexible on price—winter may be better for house hunting (especially in cold climates), or the height of summer for tropical states (the off-season for your area, in other words). Inventories are likely to be smaller, so choices may be limited, but it is also unlikely that sellers will be seeing multiple offers during this time of year.

However, it is worth noting that some savvy buyers also like to make offers around holidays, such as Christmas or Easter, hoping that the unusual timing, lack of competition, and overall spirit of the season will get a quick deal done at a reasonable price.

Is your need for extra space imminent—a new baby on the way, an elderly relative who can’t live alone. Does the move involve your kids changing schools.

You may love to cook with gourmet ingredients, take a weekend getaway every month, patronize the performing arts, or work out with a personal trainer. None of these habits are budget killers, but you might have to do without them if you bought a home based on a 43% debt-to-income ratio alone.

Before you practice making mortgage payments, give yourself a little financial elbow room by subtracting the cost of your most expensive hobby or activity from the payment you calculated. If the balance isn’t enough to buy the home of your dreams, you may have to cut back—or start thinking of a less expensive house as your dream home.

If you are selling a home and plan to buy another, save the proceeds from your current home in a savings account and determine whether or not—after factoring in other necessary expenses like car payments or health insurance—you will be able to afford the mortgage. It is also important to remember that additional funds will be allocated for maintenance and utilities.