Mortgage Rates Are Sky-High. Here’s Why You’re Still Better Off Financing a Home Purchase Than Paying in Cash

In late 2023, when mortgage lenders were charging well above 7% to put a 30-year home loan in place, many prospective buyers began to lose hope. Thankfully, though, mortgage rates have come down a bit since then. As of this writing, the average rate on a 30-year mortgage loan is 6.64%.

But let’s face it — that’s still a lot of interest to be paying on a mortgage, especially given that just a few years ago, it was possible to put a 30-year loan in place at under 3%. So if you’re sitting on a pile of cash, you may be thinking of just buying a home outright rather than financing one and paying interest on a loan.

It’s a good idea in theory. But it also might backfire on you.

When you leave yourself short on funds

Homes are considered a pretty illiquid asset. What this means is that it can take a long time to convert a home into cash.

Stocks, by contrast, are liquid. You can sell shares at any time, take the money, and run.

Any time you put money into an illiquid asset, you take a risk. Should you need money in a pinch, you may not be able to liquidate that asset quickly.

If you put all of your money into the purchase of a home, you risk struggling financially if your circumstances change shortly after. Let’s say you buy a house later this year in cash but then expectedly lose your job in early 2025. At that point, you may not have enough money left over to pay your bills — including your new mortgage — while you look for work.

When you miss out on other lucrative opportunities

At a time when mortgage rates are high, buying a home in cash could save you a lot of money on interest. Let’s say you’re buying a $300,000 home in cash. If you were to instead put down 20% and finance the rest over 30 years at a fixed interest rate of 6.64%, you’d end up spending a total of $313,859 in interest over the life of your loan. That’s more than your home’s purchase price itself.

That said, over the past 50 years, the stock market has averaged an annual 10% return. If you were to invest $240,000 (the amount of your home minus a 20% down payment) in stocks over a 30-year period and generate that same return, you’d end up with a portfolio worth almost $4.2 million. So even when you account for around $300,000 in interest spending, you’re still coming out almost $4 million ahead.

Given today’s mortgage rates, it’s easy to see why paying cash for a home is appealing if you have the money. But rather than focus solely on the benefit of buying a home in cash, think about what you’d be giving up — flexibility/access to your money, and the potential to come out financially by virtue of investing.