Mortgage Rates Are Up. Should You Pay Cash for a Home?

You might save money, but you're taking on a big risk.

There's a reason the demand for homes hasn't been quite as strong this year as it was in 2021. In 2021, mortgage rates sat at nice, affordable levels. But they rose sharply in the course of 2022. And at this point, you're likely looking at more than twice the interest rate on a mortgage than you would've faced had you purchased a home in late 2021.

Given that home prices are also still up on a national level, that's forced a lot of would-be buyers to pull out of the market. But what if you're still in a strong position to buy a home? Better yet, what if you're actually able to pay cash for a home?

Maybe you received an inheritance and are sitting on a few hundred thousand dollars. Or maybe you're just a really diligent saver, and you've been steadily socking money away in your savings account for years. It could even be that you can buy a home outright in cash because you're looking to purchase one in a fairly low-cost part of the country.

But is paying cash for a home a good idea right now? Here's why it may not be.

You're taking a big risk by parting with that cash

Buying a home in cash means not having to deal with the process of applying for a mortgage, and not having to pay loads of interest on one. You'll also get out of paying closing costs, which are the various fees mortgage lenders charge to finalize a home loan.

If you have the cash to part with, the idea of skipping the mortgage may be appealing given where borrowing rates are at today. But that doesn't mean that paying cash for a home is your best bet.

When you empty out your savings to swing a home purchase, you leave yourself vulnerable. Granted, you may not be depleting your savings entirely so much as removing a large chunk to swing a home purchase. But even so, let's say you're buying a home for $250,000. You might have another $50,000 left over for emergencies, which leaves you in a really great spot in theory.

But what if you own a small business that struggles in the coming years and ends up folding because you can't get a loan to salvage it? Had you not parted with $250,000 to buy a home, you might've been able to save your business.

And if you're thinking, "Well, I can always sell my home if need be to free up cash," remember that finding a buyer isn't guaranteed. Neither is getting a good price for your home.

There are other ways to put your cash to work

Mortgage rates may be high right now. But they could come down over time. Meanwhile, if you buy a home in cash, the money you're spending is money you can't invest and grow into a larger sum. That could mean missing out on different financial goals.

On the other hand, let's say you take out a mortgage with a higher interest rate today, only borrowing rates drop in two years. At that point, you can always refinance your mortgage to a less expensive loan. And then you'll still have all that cash to invest with.

All told, it's easy to see why you may be inclined to buy a home in cash if the option exists. But think carefully before moving forward with that decision.