Paying cash for your home is a bad idea for these 4 reasons
It could get you on the property ladder, but at what cost?
- As mortgage rates soar, more and more people are buying cash.
- Paying cash for a home locks up a lot of cash in an asset that is not liquid.
- It’s wiser to put down a solid down payment and take out a mortgage, even if you end up refinancing when rates drop.
After rock-bottom interest rates during the first phase of the COVID-19 pandemic, mortgage chickens have finally come home to roost. In October 2021, the average US mortgage interest rate for a 30-year fixed rate mortgage was just 2.99%. As of this writing, it’s 6.66%. Ouch. With such an increase, combined with extreme competition in many housing markets, as well as a shortage of homes available to anyone who wants to buy them, it is no wonder that many people are bidding for cash on a house. Is it a good idea to give up taking out a mortgage and buy cash (if you can afford it)? Maybe not.
1. Homes are not a liquid asset
While the mainstream wisdom in this country states that home ownership is the only key to wealth (spoiler alert: it’s not the only way), homes aren’t a liquid asset like cash in a savings account or even an investment account. A liquid asset is something you own that can easily and quickly be converted into cash. A home you own does not fall under this designation because of all the hurdles you would have to jump through to sell it. If you had $300,000 in cash and spent all or even most of it buying a house, and then had an emergency where you needed a large sum of money, you would be really in a difficult situation. You can try to sell your house, but there is no guarantee that you will be able to find a qualified buyer quickly. And if you did, you’d still need to wait for the sale to close if your buyer used a mortgage to purchase your home, which would likely take 30-45 days.
2. You may not have money for repairs…
Another problem with paying cash for a home is that you may find yourself unable to pay for repairs. Ideally, you don’t buy a home (cash or otherwise) without having a home inspection done. However, a home inspection will not reveal everything. You might move into your house and after a few weeks or months have to replace your air conditioner or water heater. If you paid cash for your home and found yourself without solid savings, you may have to go into debt to finance expensive repairs.
3. …Or renovations
If you tie up all your money on buying your home, you could find yourself with no money to undertake fun renovations. Maybe your new house has good bones, but the kitchen is a bit old-fashioned and you really like to cook and entertain. You may have to wait a bit and save some money to pay for a kitchen renovation. It’s not a tragedy, of course, but it might be a little disappointing if you’ve rented houses all your adult life and were thrilled to finally make your own home the perfect home for you.
4. You may need to pay
If you’re determined to buy a house with cash and avoid a high mortgage interest rate, you may have to settle for the house you can afford with cash. While it’s a bad idea to live beyond your means and try to buy more homes than you can afford, you may be able to buy a more expensive home if you get a mortgage. If your cash reserves are $200,000, but a mortgage calculator shows you can comfortably afford a $300,000 home with a mortgage, based on your income and other bills, you risk missing out on the opportunity to buy something you’ll really like for more money.
What to do instead
Buying a house with a mortgage is certainly not a tragedy; even billionaire investor Warren Buffett is a fan of the traditional 30-year fixed-rate mortgage. And if the thought of being stuck with a mortgage payment for 30 years is too much to bear, you can opt for a 15-year mortgage or go with a mortgage lender that offers even more flexibility with loan terms. Although a 20% down payment is recommended, if you have plenty of cash, you can make a larger down payment without tying up all of your money in buying your home. In fact, making a bigger down payment will make you a more attractive buyer to both home sellers and mortgage lenders. And even if you’re stuck with a higher interest rate than you wanted, you can refinance when rates come back down.
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It’s been a tough year for budding homebuyers, and while it might seem like a good idea to buy cash if you can afford it, these reasons should give you pause.