Cash vs. credit when purchasing a home
Purchasing real estate, whether it's for personal use as your primary property or for income purposes as a rental property, is a big commitment. A common question from those wanting to buy a home is how to finance the purchase of real estate, either for primary or secondary residences.
To be honest there is not one correct answer that applies to everyone. The answer depends on the personal financial situation of the future homeowners including their savings capacity, credit history, monthly budget and comfort level with having debt.
Using your own money to purchase real estate
Before the market crash in 2008 it was not very common for people to purchase real estate with their own money and without financing. However, the opposite is true today as more people are purchasing their homes, vacation homes and rental properties with cash.
The main advantage of using your own money to purchase real estate is that you don't have a monthly debt payment to worry about. Another advantage of purchasing real estate with your own money is that you have full ownership of the home without a mortgage, so when you sell the home the profit is all yours.
The disadvantage of using your own money to purchase real estate is that you will most likely be using a huge chunk of your savings. This may not leave you a lot of money for the other expenses that come with owning real estate such as property taxes, moving costs, the price of home furnishings and the cost of upgrades or maintenance.
Applying for a personal loan to finance real estate
Applying for a personal mortgage loan is the most common way for people to finance their real estate purchase. A major advantage of applying for a personal loan to finance real estate is that you only need a small percentage of the purchase price to buy your real estate, and the bank will finance the rest. You don't have to pay a large amount of cash out of pocket.
A disadvantage of applying for a personal loan is that since the market crash it is becoming harder for people to get their personal loan approved because banks are imposing strict policies. Another disadvantage of applying for a personal loan is that the loan has to be repaid regardless of how the value of the real estate fluctuates. In this situation people can find themselves with negative equity, meaning that the value of their home is less than the amount of money owed.
Charging a real estate purchase on your credit card
This is an option that I would personally not recommend because the interest rates on credit cards are usually a lot higher than mortgages. However, a major advantage of using your credit card to purchase real estate is that you can earn reward points, travel benefits and cash back on your credit card purchase.
Which works best? This depends on your goals and current financial situation. What works for you may not work for someone else. Choose wisely the option that suits your end goal based on what your current financial situation allows.