Can You Afford to Buy a Home in Cash? Here's Why You Probably Shouldn't

Think carefully before tying up your cash in a home purchase.

The housing market is very competitive right now. If you're buying a home and you have enough money in your bank account, you may be tempted to make an all-cash offer. Doing so might give you a leg up on buyers who have to secure financing.

But before you decide to pay for your home in cash, consider why tying up hundreds of thousands of dollars in a home purchase might not be the best move.

Here are the downsides of paying cash for a home

First and foremost, mortgage interest rates are really low right now. They've come up a bit since the record lows we saw during the height of the COVID-19 pandemic. But it's still possible to get a fixed-rate mortgage with a lower rate than at almost any other point in recent history.

With rates so low (and interest costs tax deductible if you itemize), there's a huge opportunity cost to paying for a house in cash. You could end up using money that you'd be better off putting toward other debts at much higher rates, such as credit card debt. Or you could lose the chance to earn a better return on your funds if you invested in the stock market, where it's reasonable to expect at least 7% to 8% average annual returns.

You'll also be tying up a lot of cash. If you face unexpected expenses or find other financial opportunities, you may not have the money to cover them because you've put so much into your house.

What about refinancing?

Now, theoretically, you could pay cash for a home to have a better chance of getting an offer accepted and then secure a mortgage refinance loan to get the money back out of your home. But this isn't always going to be a good approach.

See, refinance rates can be higher than the interest rates on a new loan. So you might make your mortgage more expensive by refinancing rather than just borrowing to buy the house in the first place.

While the difference in interest rates isn't huge, the fact is that when you're borrowing a lot of money over a long time, even small differences in rates can have a huge impact. You could end up paying tens of thousands more over the life of the loan because you refinanced instead of borrowing initially.

There's also a risk that the home won't appraise for enough to refinance to get all of the money you want out of it. And that's an especially big challenge with today's hot housing market. You could find that more money is trapped in the house than you're comfortable with if your refinance loan is much smaller than the amount you paid up front.

So take some time to consider these downsides before you decide to pay cash for a house. You may just decide that the small advantage a cash offer could create in home bidding wars isn't worth the major negative consequences that paying cash could have.