Paying cash for your home is a bad idea for these 4 reasons

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It might get you up the wealth ladder, but how much will it cost?

Key Point

• As mortgage rates soar, more people are buying with cash.
• Paying cash for a home locks a large amount of money in an illiquid asset.
• Even if you end up refinancing when interest rates drop, it’s smarter to pay a solid down payment and sign on for a mortgage.

After interest rates bottomed out during the first phase of the COVID-19 pandemic, the mortgage chickens are finally back in their roost. In October 2021, the average interest rate on his 30-year fixed rate mortgage in the US was just 2.99%. At the time of writing this, it is 6.66%. Oh. With such an increase, combined with fierce competition in many housing markets and a shortage of homes available to all who want to buy, it’s no wonder many people are providing cash for a home. Is it a good idea to take out a mortgage and refrain from buying with cash (if you can afford it)? maybe not.

1. A house is not a liquid asset

Although it’s commonly believed that owning a home is the only key to wealth in this country (spoiler alert: it’s not the only way), a home is as liquid as a savings or investment account. not a valuable asset. Liquid assets are possessions that can be easily and quickly converted into cash. A home you own doesn’t fall under this designation because of all the hoops you have to jump to sell it. If so, you’re in real trouble if an emergency arises and you need a lot of money. You can try to sell your home, but there’s no guarantee you’ll find a qualified buyer anytime soon. Even if you did, if the buyer used a mortgage to buy your home, you’ll have to wait until the sale is complete, which will likely take 30-45 days.

2. You may not have the money to fix it…

Another problem with paying cash for a home is that you may not be able to afford the repairs. Ideally, you would never buy a home (for cash or otherwise) without performing a home inspection. However, a home inspection doesn’t reveal everything. Weeks or months after you move into your home, you may need to replace your air conditioner or water heater. If you paid cash to buy a home and didn’t have enough savings, you may have to go into debt to fund expensive home repairs.

3. … or renovation

If you spend all your money on buying a home, you may not have enough money for fun renovations. Perhaps your new home is to the bone, but your kitchen is a bit dated and you love to cook and entertain. You may have to wait a while and save up for kitchen renovation costs. Of course, this isn’t a tragedy, but if you’ve been renting a house all your adult life and are excited about making your home the perfect home for you, it might be a little disappointing.

4. Payment may be required

If you’re adamant about buying a home with cash and avoiding the high interest rates on your mortgage, you may have to settle for a home you can buy with cash. Living beyond your means and trying to buy more than you can comfortably afford is a bad idea, but a mortgage may help you get a more expensive home. If your mortgage calculator shows you can comfortably buy a $300,000 home with a mortgage, based on your income and other bills, even if your cash reserves are up to $200,000, you really love it. You may be missing an opportunity to purchase something else. money.

what to do instead

Buying a home on a mortgage is never a tragedy. Billionaire investor Warren even Buffett is a fan of his traditional 30-year fixed-rate mortgage. Also, if you can’t stand the idea that he will have to keep making mortgage payments for 30 years, opt for a 15-year mortgage, or use a mortgage lender that offers more flexibility in loan terms. can do. A 20% down payment is recommended, but if you have a lot of cash on hand, you can make a larger down payment without spending all your money on a home purchase. In fact, a higher down payment makes you a more attractive buyer for both home sellers and mortgage lenders. And if you’re stuck with a higher interest rate than you’d like, you can refinance when interest rates drop.

Buying with cash might seem like a good idea if you can afford it, but these reasons should make you think twice.