3 Downsides to Buying a Home in Cash

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KEY POINTS

  • Offering cash for a home could give you an edge in today's tight real estate market.
  • There are benefits to buying a home in cash, but there are big drawbacks you should know about, too.

Tempted to make a cash offer on a home? Read this first.

Recently, a reasonably priced starter home hit the market in the neighborhood my friend had been looking at for months. To give herself an edge over other buyers, she made a cash offer -- and the seller accepted.

It's a tactic a lot of buyers are employing in today's tight housing market. Because real estate inventory has been so limited, it's been difficult for buyers to get offers accepted. But sellers tend to favor cash offers because they commonly lead to a faster closing, and they eliminate the risk of a deal falling through due to a buyer's inability to get a mortgage.

But, tempting as it may be to make a cash offer on a home, there are some serious disadvantages. Here are a few pitfalls you might encounter if you move forward with a cash offer.

1. You can't get your money back right away

When your money is in stocks and you need cash, you can sell shares and get cash right away. But homes aren't nearly as liquid.

Even in today's housing market, where buyer demand is sky-high, you can't simply sell your home in a day to scrounge up cash. And in a normal housing market, houses can sit on the market for weeks or months before getting an offer.

2. You might end up with unhealthy debt if you spend too much of your cash

Before my friend bought her home in cash, I told her to leave herself with enough money to not only cover a full year's worth of living costs, but also, a good $25,000 on top of that to cover home repairs (she's buying an older home, so she has to anticipate some near-term repairs). She followed my advice, so I'm not worried about her. But a lot of people who buy homes in cash deplete their bank accounts in doing so, leaving themselves ill-prepared for other financial needs.

Imagine you spend the bulk of your cash on a home purchase, then land in a situation where you need money. Since you can't simply sell a home overnight, you could end up taking on credit card debt -- which is usually very expensive -- just to meet your needs.

3. You might miss out on other investments

The money you tie up in a home purchase is money you can't use for other things. And that could mean missing out on opportunities to invest.

Imagine that instead of putting $500,000 into a home, you put $400,000 of that into the stock market. If your investment generates an average annual return of 8% (a bit below the stock market's average) over the next 20 years, you'll end up with $1.86 million.

Buying a home in cash does mean saving money on mortgage interest. But you may be better off paying that interest and earning a higher overall return by investing that cash.

In today's real estate market, some experts say cash is king. But before you fork over a pile of cash, consider the downsides.

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