• Cash Vs Mortgage Home Financing

    A beautiful home is on the wishlist of every Filipino. A villa, an apartment or an independent house, house are looked upon as not just an essential part of a person’s life but is also regarded as a status symbol. In addition to this, possessing a house can also bring in additional income, by either collecting rent for it or by utilizing the home equity and so on.

    Obtaining finance to purchase a house may have been a deterrent for Filipinos in the past, but with loans and other financing methods such as Pag-IBIG government fund enables those living in the Philippines to purchase the house of their dreams a little more easily.

    Customers can opt for any of the financing methods available to them to purchase their home. One of the popular financing methods chosen by customers is mortgage. Another option that Filipinos can avail of is purchasing their home by paying cash. Both methods are sought after in their own way and come with a set of advantages and disadvantages. A comparison of both methods is given below.

    Purchasing a home by paying cash

    Customers within the Philippines opting to purchase their home through cash will have to face steeper transaction costs compared to those purchasing homes through mortgage or home loans. According to a popular website, home purchasers put in about 2% to 4% of the value of the property and this includes the deed of sale, lawyer charges and so on. Even so, using cash to pay for the property is still preferred as it does not result in additional hassles and difficulties.

    Apart from this, paying by cash gives customers a distinct advantage while procuring various deals and offers from different developers. The biggest advantage of paying by cash is the security that comes with it as the customer owns the house outright. In addition to this, motivated realtors may also offer discounts and better deals and customers are in the position to negotiate for more advantageous rates. Although there will be certain extra amounts to pay such as insurance, taxes and others, the amount is not very high.

    Other than security, customers who pay by cash also do not have to worry about making monthly payments to lenders and also need not worry about interest rates. Although interest rates might seem to be a small percentage, over the course of the tenure the sum increases to quite a substantial amount. Hence by paying for their homes through cash, customers need not worry about this.

    In addition to this, in case customers require immediate finances or if the need arises then they can sell the house at that current market rate at any given time without much hassle.

    However, there are also certain disadvantages to financing a house completely by cash. The biggest disadvantage is illiquidity. Although they can sell their house at any given point of time, unless the market is agreeable, this is not very easily accomplished. This is especially a hindrance if the customer requires funds urgently. Those who have retired may find it even more difficult to obtain urgent funds if they do not have mortgage on their house to borrow against.

    In such cases, customers are advised to open a home equity line of credit where money can be borrowed against the value of the house (at that point of time). This enables them to obtain finances if required urgently. When it comes to finances, it is important to not focus all investments in just one thing as they may prove to be very risky. Therefore, although paying for the home via cash may seem to be a good idea, there are also certain downfalls that need to be addressed.

    Purchasing a home through mortgage

    As is the case with purchasing a house by paying cash, there are distinct advantages and disadvantages to purchasing a home by paying mortgages. The biggest advantage of mortgages is that it allows customers to actually afford the house as most cannot pay for it in one lump sum amount. However, customers are advised to negotiate with respect to interest rates and opt for the shortest tenure that is possible so as to avoid paying a lot in just interest amount. Purchasing a home via mortgage allows customers to unlock the actual value of the house. Home equity and loans against their home allows customers to use the finance for any other purpose such as home renovation, funding a vacation, tuition fee and so on. In this sense, the home takes care of the employer and itself.

    Mortgages are also cheaper compared to other forms of loans available in the market and are also less risky. Since the investment of the customer is not very high, he/she is relatively safe in case of unfortunate incidents that could result in damage to the house. There are also tax benefits to mortgages and customers can borrow loans against their property. There is however, much to be done within the Philippines to improve mortgage systems such as lowering the interest rates, ensuring the presence of a credit bureau and so on.

    There are again, disadvantages to mortgages. The biggest is the amount that customers pay in terms of interest amount which is nearly double the value of the house sometimes, and since the mortgage is secured against the customer’s house, failure to pay the mortgage or even falling behind could result in their losing the property. Although interest rates and the amount paid back in installments every month may seem relatively small, they add up to a substantial amount post completion of tenure. Apart from this, other fees such as legal costs, penalties (if applicable) also add up to a big number.

    Cash or Mortgage?

    Now that we have looked at both the pros and cons of buying a house via cash and mortgage, the choice should be made by the customer keeping their financial situation in mind.

    Customers should preferably for opt to pay for their home by cash if want to buy a house at the earliest and may not want to keep it for a long time. Also this is an advantageous option for customers who do not want to go through the hassles of monthly mortgage payments, interest rates and such and also if they do not qualify for mortgages.

    On the other hand if customers cannot afford to pay by cash and also want to diversify their investments and assets, then opting for a mortgage is the best option. This option can also be considered by those who are not looking to sell their property for a long time.

    Customers can also pay a larger deposit and avail a relatively smaller mortgage. Again, the choice they make must be advantageous to their financial future.

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