3 reasons why buying a house in cash can be a bad idea, even if you can afford it
You could hurt your efforts to build your net worth.
- Buying a house with cash may seem desirable if you can afford it, as you can avoid paying mortgage interest.
- Unfortunately, a house is a very illiquid investment and you will tie up a lot of money.
- You will also limit your return on investment, which could lead to a huge opportunity cost.
If you have the money to buy a home, it’s probably tempting to pay for the property directly rather than deal with a mortgage lender. While this may seem like a good idea at first glance since you can avoid the hassle of applying for a loan and save on interest, the reality is that it’s probably not the right financial decision in most cases. situations.
So why wouldn’t you want to buy a house with cash if you have the money? Here are three big reasons.
1. You might be missing out on a better ROI
If you pay for a house with cash instead of taking out a mortgage, the return on the big investment you’ve made is limited to the mortgage interest you’ve saved. Since mortgage rates are around 5% for a 30-year fixed rate mortgage and have been much lower in recent years, your return on investment is limited.
Investing in an index fund that tracks the S&P 500 is likely to produce average annual returns of around 10% over time based on historical performance – and you would be taking somewhat limited risk with this investment (compared to a single stock) because you own a small stake in about 500 of the largest companies in the United States.
By comparing the return on investment of avoiding a mortgage versus investing in other things, it’s easy to see the huge opportunity cost associated with paying cash for a home. If you have a limited amount of money, tying up that much in a home instead of investing it could really limit your ability to build wealth. It could leave you with a smaller net worth and with a lot of regrets.
2. You will tie up a lot of money in an illiquid investment
When you pay cash for a home, you’re tying up hundreds of thousands of dollars in an investment that can be time consuming and expensive to sell. This could be a big problem if you need quick access to your money.
Of course, you can always take out a mortgage on your home later, but that takes time and money for closing costs that you might not have if you face an emergency.
Rather than tying up a lot of your money in an illiquid investment, you might be better off getting a mortgage and keeping more money in your savings and in the stock market, where you can access it. more easily without huge costs.
3. You’ll miss out on potential tax breaks
Finally, if you forgo taking out a mortgage, you will miss out on the mortgage interest deduction available to you on mortgages up to $750,000 if you itemize your tax return. This deduction is valuable and allows you to get a government grant to help pay for your home.
For all of these reasons, most people are better off borrowing to buy a home after putting down a reasonable down payment. It’s what billionaires, including Mark Zuckerberg and Warren Buffett, have done, so you might want to follow their lead.
A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage
Chances are, interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.
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