Mortgage Rates Are Super High Today. How Much Will Paying Cash for a Home Save You?

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Skipping a mortgage could save you money on interest, but there’s a drawback to going this route. Here’s what you need to consider when buying a home. 

Mortgage lenders don’t write the loans out of the goodness of their hearts. Rather, they write those loans to make money.

The higher the interest rate on your mortgage, the more your monthly payments will amount to — and the more money you’ll lose to interest in total through the years. So at a time like this, when mortgage rates are high, you may be tempted to pay cash for a home if you can swing it.

Going this route could save you a bundle. But that doesn’t automatically mean that buying a home in cash is the right choice.

How much can you save by paying cash for a home?

The average interest rate on a 30-year mortgage is 7.29%, as of this writing, according to Freddie Mac. And as of October, the median existing home sale price was $391,800, according to the National Association of Realtors.

So let’s say you have a choice. You could put down 20% on a $391,800 home and mortgage the rest at 7.29%, or you could pay cash for that home outright. (Of course, many of us are nowhere close to being in a position to plunk down almost $400,000 for a home outright. But remember, for the purpose of this discussion, we’re assuming that you, dear reader, are potentially in that boat.)

If you were to put down 20% and take out a $313,400 mortgage at 7.29% for 30 years, you’d have a monthly payment of $2,148 for principal and interest. You’d also be looking at — wait for it — an astounding $459,842 in interest over the life of your loan. That’s more than the purchase price of your home!

When you think about it that way, paying cash for a home sounds like a smart move. And it could be. But you’ll need to consider the drawback of buying a home in cash before parting with all that money.

Don’t leave yourself in the lurch

At a time when mortgage rates are high, paying cash for a home could result in a lot of savings. But unless you have a lot of cash at your disposal, buying a home outright can also be risky.

Unlike stocks you own in your brokerage account, homes are not a very liquid asset. This means it’s not so easy to quickly sell a home for money. It can take months for the transaction to go through. As such, when you pay cash for a home, you tie up a lot of money in a single asset that you might struggle to unload.

Imagine you have $400,000 in cash and you spend almost $392,000 of it on a home. If you need to cover a $15,000 roof repair a few months later, well, you can’t, because your money is tied up in your home.

Or, let’s say you have $500,000 in cash and spend about $392,000 to buy your home outright. That’s less risky. But what if your financial situation changes and you suddenly need access to more money than you have left?

Therein lies the danger of paying cash for a home. So while it may be tempting to do so to avoid losing loads of money to interest, do consider the repercussions. And if you are going to pay cash for a home, make sure to leave yourself with enough money to cover at least three full months of living expenses, plus a little extra for potential repairs.

Remember that you can refinance

The idea of paying almost $460,000 in interest on a $391,800 home might seem ridiculous. But remember, mortgages can be refinanced as borrowing rates drop. So if you’re someone who’s reading this piece out of curiosity knowing full well that paying cash for a home just isn’t in the cards for you, also know that you’re not necessarily doomed to spend a fortune in interest if you finance your home.

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