5 Times Buying a Home With Cash Is Bad for Your Budget


Buying a home with cash is usually considered a smart financial move, if you can swing it. That's because taking out a mortgage loan to finance your home requires you to pay a ton of interest, even in today's low-interest rate environment. With cash, you don't have to worry about interest at all.

For example, let's say you take out a 30-year, fixed-rate mortgage of $200,000 at an interest rate of 3.93 percent. You'll pay more than $140,000 in interest if you take the full three decades to pay back your loan. If you pay in cash, that $140,000 stays in your pocket.

What could possibly be the downside of paying this way? Here are a few possibilities.

1. When making an all-cash offer will deplete your savings

If you can afford to buy that $300,000 home with cash, that's great. But if that purchase leaves you with little or no money in your savings, it can put you in financial jeopardy.

It's important to have cash reserves to handle life's emergencies. What if you lose your job? You might wish you still had some of those savings available.

Remember, your investment in your home is largely illiquid. To access it, you'll have to sell your home or take out a home-equity loan or line of credit. Neither option is as appealing as having cash reserves on hand.

If you do have plenty of cash — but not enough to have funds leftover after buying a home — consider coming up with an extra-large down payment instead. This way, you can reduce your mortgage while keeping some cash on hand.

2. When your cash is earning you money

Are your cash savings earning you plenty of big returns? Then it might not make sense to take a big chunk of this money and invest it in a house. Yes, it's nice not to have to make a mortgage payment each month. But you'll have to determine if the return that your invested dollars are generating outweighs the savings in interest you'd get by avoiding a mortgage.

3. When you'll miss out on a tax break

Homeowners can deduct the amount of interest they pay on their mortgage loans each year. This tax break is more valuable during the earliest years of a mortgage, when homeowners are paying the most interest.

You'll have to determine how valuable this tax break is to you. If you do need to reduce your tax bill each year, using some of your cash to come up with a bigger down payment and then taking out a mortgage to finance the rest of your home purchase might make the most sense.

4. When your home's value might fall

There was a time when no one thought homes could lose value over a seven- or 10-year period. Then came 2007 and 2008, when home values suddenly plummeted.

There's a lesson here: There is no guarantee that your home will increase in value after you buy it. There's also no guarantee that it won't lose value.

The hope is that after buying your home in an all-cash offer, the property will become even more valuable. When it's time to sell, you'll earn a profit. But there is no guarantee that this will happen. And if you do have to sell your home at a loss one day, that money you invested in it will be lost.

5. When you'll miss out on great interest rates

Mortgage interest rates have risen, but they are still at historic lows. The Freddie Mac Primary Mortgage Market Survey says that the average interest rate on a 30-year, fixed-rate mortgage was 3.89 percent as of June 8, 2017. The average rate on a 15-year, fixed-rate mortgage was 3.16 percent. Those are great rates.

Instead of investing a big chunk of your cash in a home, it might make more sense to take that same money and make a different investment that will generate bigger returns. You can then apply for a mortgage loan with the shortest possible term and enjoy interest rates that are still at near-historic lows.

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