3 Reasons I Wouldn't Pay Cash for a Home

Let's be honest: While I intend to buy a house next year, and have just met my savings goal to make it happen, I'm not capable of paying cash for the entire purchase. Instead, I'll be shopping around with the best mortgage lenders and financing my home purchase (except for my down payment).

But in some alternate universe where I have more money to throw at a home purchase, I still wouldn't buy a house outright in cash. Here's why -- as well as you might want to think twice, too.

1. A home is not a liquid asset

You may have heard of assets (the things you own, like cash, stock shares, or property) being referred to as "liquid." What does that mean, though? Liquid assets can easily be converted to cash, such as money you have in a checking or savings account, as well as stocks, bonds, and other marketable securities. While you may lose money in the process of converting stock shares to cash (if you have to sell at a time when values are down, for example), it's a fairly straightforward process to turn these into money if you need it.

A home, on the other hand, is not a liquid asset. Your ability to sell a house to convert that asset to cash is not guaranteed, nor is it guaranteed to happen as quickly as you might hope if you're really in need of money. Using the current market as an example, a lot of potential home buyers have been priced out, and mortgages are expensive enough that current homeowners might be reluctant to give up their current low mortgage rate to buy your home with a rate double what they have now.

Sinking all your cash into a home purchase, rather than buying with a mortgage, could put you in a real bind if you need money quickly and have no other sizable assets beyond your home.

2. I could likely earn a higher return by investing

This point is much less effective given that mortgage rates are at their highest level in over 20 years, but it still bears discussing. The stock market has returned an average of 10% annually over the last 50 years (as measured by the performance of the S&P 500 index). The longer you can leave money in the market, the more likely you are to earn a nice return on your investments. Meanwhile, as of this writing, the average rate on a 30-year fixed-rate mortgage loan is about 8%, according to Freddie Mac.

There was a much more dramatic difference between interest rates on mortgage loans and the average stock market return a few years ago when the start of COVID-19 brought mortgage rates plummeting to 3%. But you can still likely earn more by investing than you'd save by buying a home outright with cash. And since you're more likely to earn that 10% return the longer you can leave the money invested, it's worthwhile to pay off a mortgage over 15 or 30 years, while your extra money is growing in an IRA account for your future over that period.

3. I might not have money left over

The final reason I wouldn't pay cash for a home purchase is that I wouldn't want to tie all my money up. Owning a home is expensive, and the cost of the home itself is really the bare minimum you'll pay. Even after you pay for the house, you'll still owe homeowners insurance premiums, property taxes, and potentially homeowners association fees if you buy in an HOA-managed neighborhood.

Plus, there's the cost of maintenance and repairs. You can't expect a home to never need any intervention from you -- appliances and home systems break, and when you're the owner, it's on you to maintain them. My colleague Maurie Backman wrote about a friend of hers who ended up in a bad spot after paying cash for a home -- she was left without adequate savings and risks ending up in debt as a result.

Do you really have to commit to 30 years of payments?

No, not at all! You have options for the type of mortgage you want to take on, in addition to the lender you use. Some people opt for a 15-year mortgage rather than a 30-year one; this is a great way to save on interest costs if you can manage the higher monthly payments. The rates for 15-year loans are often lower than for 30-year loans, and you'll be paying interest for fewer years.

Another option, if you have the cash to buy a home outright, would be to make a larger down payment -- why not put 50% down, get a mortgage for the rest, and consider opening a brokerage account to invest your extra cash? While you're at it, put a good chunk into a high-yield savings account for an emergency fund -- something is bound to break at home sooner or later.

Sinking all your spare cash into a home purchase could have you scrambling for cash for emergencies and missing out on the chance to invest and earn a higher return. Consider all your options for buying a home, and make the decision that's right for you and your finances.