Buying with Cash vs Loan. Best Cost Effective Method.

[Amir B.]

Hello BPers,

I recently started thinking about the cash offers I have been making for the past four months. I wanted to know if buying with a cash offer and refinancing later on, to pull the cash out is cheaper than a traditional loan. 

For example, fees for refinancing or closing costs involved with a home loan.

Thanks in advance.

@Shane Kelly

@Joe Villeneuve

[Adriaan Sierra]

The loan will always be "cheaper" in a spreadsheet as leverage means very few bucks in, which would always increase your return on investment. Mortgage interest payments are tax deductible to some extent and a fixed monthly payment decreases in real terms, so those are all arguments for high leverage.

That being said there are no free lunches here. Higher leverage means higher risks, higher monthly fees and fewer equity means that you are just one bad shock underwater, so that is another thing to balance. 

Different people have different philosophies and only time will tell if they were right.  For example, Dave Ramsay advocates never using leverage. This strategy would make you move at a glacial pace, but it guarantees survival from ruin. Most people that you see in the BP podcast "from 0 to 80 units in 3 years" are jacked in leverage, they are all paper millionaires, but we will see if they make it next year...

If you are thinking of refinancing later that is essentially a speculative bet on where interest rate will go in the future.