Paying for property with cash won't send you to jail, but even if it doesn't, a mortgage might be a smarter financial move. When deciding whether to pay cash for a home, the opportunity cost of putting your funds in a home should come before thoughts of jail. You will only go to jail for a cash purchase if you commit fraud.
Buying a home with cash is legal and people often do this because they would rather not have to worry about a mortgage should their finances take a hit. You also have another consideration: You could have invested the money into something more profitable. Mortgages tend to have very low rates because the bank will collateralize the loan with property. If the bank offers a mortgage at 7 percent, any investment that returns more than 7 percent pays the interest on the mortgage and anything over that is profit.
Illegal Mortgage Cash-out
Some fraudsters perpetrate a mortgage scam known as an illegal "cash-out." This most commonly occurs when someone buys a home and then quickly resells it at an artificial value. This typically involves a phony appraisal that claims renovations that never happened or those that do not appreciably affect the value of the home, according to Freddie Mac. Illegal flipping usually involves a mortgage as well as cash money. Say a buyer agrees to purchase a home for $50,000 and has an agreement with another party to sell the property immediately for $110,000. The buyer can purchase the home for $50,000 in cash and then the second party in the crime takes out a loan $110,000 -- approved because of the artificial increase in the value of the home. The original buyer receives his $50,000 back and the two parties split the remaining $110,000. Often, the participants of this type of scam let the home go into foreclosure.
The IRS allows homeowners to deduct interest on mortgages as of 2011. Paying all cash means you lose out on this. It could be more profitable to put the money that would go to a deductible mortgage to a debt that is not deductible. Also, having a mortgage forces you to invest in the home every month. If you do not invest your extra monthly capital after forgoing a mortgage, you won't benefit from spending cash.
Consult a real estate attorney if you are worried about accidentally taking part in an illegal cash-out transaction. Also, go to a financial adviser and planner about whether a mortgage might be better for your financial health. If you decide to go with a cash purchase, The Wall Street Journal suggests taking out a line of credit on the home -- called a home equity loan -- to make up for the fact that you are tying up a lot of your available capital and won't be able to liquidate easily.
- Freddie Mac: Emerging Fraud Trends: Illegal Property Flipping with Cash-out Purchases
- "The Wall Street Journal"; The Pros and Cons of Paying For a New Home With Cash; May 2002
- REALTOR.com; Should You Pay Cash if You Can?; Shirley J. Hagler
- The Mortgage Professor; Should I Purchase the House For All Cash?; Aug. 31, 2007
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