| The decision to pay all cash for a home is certainly a | | | | a much higher variable rate attached to it, and then |
| sound one in some situations. However, there are | | | | you would also have an extra (probably unplanned) |
| three very important factors that must be | | | | monthly payment. An important note here is that |
| considered before allocating a portion of your | | | | there is less safety and predictability with a variable |
| personal wealth into one area. Since your home is | | | | rate loan. |
| also considered a large investment, there are a few | | | | 3. Will I be properly diversified? |
| questions that you should ask yourself before making | | | | If you were to invest a large portion of cash into |
| a decision to allocate a significant amount of funds to | | | | your homes equity, then a certain portion of your |
| your home versus putting these same funds to work | | | | wealth is tied up in the potential returns of one asset |
| for you in alternative investments. | | | | (real estate). If your money is diversified into |
| 1. Is this the BEST use of my money? | | | | different types of financial assets (real estate, |
| If you pay cash for your house, you will be stashing | | | | stocks, bonds), then one area can face disaster while |
| quite a bit of money away in an investment - an | | | | the others are doing well. If a majority of your |
| asset (real estate) that has a particular average | | | | wealth is tied up in your home, it's all or nothing. |
| annual return. Remember, there are always several | | | | Currently the housing slump has had a major negative |
| forces at work depending on HOW you own your | | | | impact on real estate, and returns have been minimal, |
| home. Inflation will always eat away at your assets | | | | if any. Those who have a majority of their wealth |
| cash, and you will always enjoy the appreciation from | | | | tied up only in real estate now face a declining net |
| your house whether it's mortgaged or not. When | | | | worth. |
| rates are low, your mortgage acts as an investment | | | | In some economic environments it makes sense to |
| just like your home, but only if it is used correctly. | | | | put as much cash down as possible. But, relative to |
| Also keep in mind that interest paid on a mortgage is | | | | other markets, mortgage money is cheap right now, |
| tax deductible. There is no deduction if there is no | | | | and you want your money to work as hard for you |
| mortgage. | | | | as it possibly can. To help you avoid putting all of |
| 2. Will I need this money later? | | | | your eggs into one basket, these are just a few of |
| One other important factor to consider is liquidity. In | | | | the questions you should ask yourself before tying |
| the face of changing economic environments and a | | | | up a large amount of cash in your home. |
| softening housing market, liquidity challenges can | | | | For their contributions to this article, a very special |
| impact your personal bottom line. If you invest all of | | | | thank-you to: |
| the money necessary to pay a house off, and later | | | | 1. Dr. Dorla A. Evans, Finance Professor and |
| need that money, turning your money from equity to | | | | Chairperson, Department of Accounting and Finance |
| dollars will be more expensive than cashing out | | | | at the University of Alabama in Huntsville. |
| another type of investment. Keep in mind that | | | | 2. Libba Hartzog, High School Literacy Coach, |
| cashing out would most likely mean taking a second | | | | Gwinnett County Board of Education, Georgia. |
| mortgage or an equity line of credit that would have | | | | |