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Paying Cash For That House May Not Be Best

If you sell your home after living in it for many years, you may recive more than enough money to pay cash for your next home. However, you should weigh your alternatives before you decide to pay cash.

You may find it's better to make a low downpayment and pay off your new house over the years. That way you'll get the benefits of leverage, which enables you to obtain appreciation on the entire value of your new house while using relatively little of your own cash.

For example, if you bought a $200,000 (We know, this is the Bay Area, just play along with us) house with a 10 percent downpayment, and during the first year buyer demand and inflation increased the home's value only 3 percent, the property would be worth an additional $6,000 - a whopping 30 percent return on your cash investment. On the other hand, if you paid all cash for the home, the $6,000 in appreciation would have been a mere 3 percent return on your total $200,000 cash investment.

Of course, you'll have to make house payments, but the interest you pay is deductible from your taxes. Over the years, inflation - even a low rate of inflation - will make it possible to pay off the home with easier-to-obtain dollars. Futhermore, you'll have $180,000 left over after the downpayment, to invest in anything you wish or just living expenses.

If you decide to go the cash route after considering a mortgage, you will at least have considered both options and made the choice that's best for you.

Article Compliments of Dave and Carla Higgins, Re/Max, East Bay Hills