If you have a lot of cash and are considering buying a property, you may be tempted to pay for the home outright. After all, not having a mortgage sounds nice.
But the reality is that it’s not always a good idea to buy your house in cash for many reasons. Before writing a big check for your real estate investment, you’ll want to consider the opportunity costs of tying up your money this way.
The downsides of buying a house in cash
The biggest downside of buying a house in cash is that you can’t invest the money you sink into the home.
Your return on investment (ROI) for paying cash is the interest you save on your mortgage loan. Even with rates still hovering near record highs, your ROI would still be around 6.93% (the 52-week average interest rate for a 30-year mortgage loan as of September 12, 2024.) Meanwhile, the S&P 500 has produced a 10% average annual return since its inception almost 70 years ago, offering a potentially higher ROI if you invest in the stock market.
If you itemize your deductions, you can get a tax break for your mortgage interest, so the government subsidizes your home purchase. Plus, your housing payment effectively gets cheaper every year due to inflation, which reduces the value of the money you're making housing payments with.
You also have the chance to refinance your mortgage if rates drop. With today's 6.93% typical rate still well above the pre-pandemic averages, there's a good chance you'll eventually be able to get into a cheaper loan. If so, it would lower the ROI of paying cash for a home.
Finally, by paying cash for a home, you'd be locking your money into an asset that's hard to get out of. You can sell stock if you need it, but selling your home to access its equity would be a much costlier and more complicated proposition.
Higher returns, better tax breaks, and fixed payments that get cheaper with inflation are all great reasons to invest instead of paying cash for a house.
While investing and getting a mortgage is often the best choice to maximize your returns, money isn't just about math. If you feel more comfortable not having a monthly payment or believe an all-cash offer would put you in a more competitive position in the real estate market, those are valid reasons to buy the house outright.
The same is true if you can't qualify for a mortgage at a reasonable rate. Say you have bad credit, and your loan rate would be in the mid 8.00% range. If you don't itemize and claim tax savings, the odds of a higher ROI in the market are diminished — remember that the market doesn't provide guaranteed returns, and paying off your mortgage does.
The bottom line is that you must consider your financial situation and goals. What you should never do, though, is take money out of retirement accounts to pay cash for a home. This could lead to penalties before age 59 ½, and you can't live off your house as a retiree.
If you have excess cash outside your retirement accounts and don't want to go into debt, or if qualifying for a mortgage would be tough, an all-cash offer might make sense. For most people, though, keep your money invested and take advantage of the many benefits mortgages provide.
Christy Bieber is a US based personal finance and legal writer who has 15 years of experience. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
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