My financial advisor says I shouldn't pay 100% cash for a house. Is it better to take out a mortgage and invest in the S&P 500 instead?

If you have a lot of money and are considering buying a property, you might be tempted to pay for the house in one lump sum. After all, not having a mortgage seems like a good idea.

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But the reality is that it’s not always a good idea to buy your home with cash, for a number of reasons. Before you write a big check for your real estate investment, you need to consider the opportunity costs of tying up your money this way.

The Disadvantages of Buying a Home with Cash

The biggest disadvantage of buying a home with cash is that you can’t invest the money you put into the home.

The return on investment (ROI) for a cash payment is the interest you save on your mortgage. Even if rates are still near their all-time highs, your ROI would still be around 6.93% (the average 52-week interest rate for a 30-year mortgage as of September 12, 2024). Meanwhile, the S&P 500 has produced an average annual return of 10% since its inception nearly 70 years ago, offering a potentially higher ROI if you invest in the stock market.

There are other factors to consider as well.

If you itemize your deductions, you can get a tax break on your mortgage interest, which allows the government to subsidize the purchase of your home. Plus, your monthly housing payments decrease each year due to inflation, which reduces the value of the money you use to make your housing payments.

You also have the option to refinance your mortgage if rates drop. With the current typical rate of 6.93% still well above pre-pandemic averages, there’s a good chance you could eventually get a cheaper loan. If so, it would reduce the ROI of paying cash for a home.

Finally, by paying cash for a home, you would be tying up your money in an asset that would be difficult to get out of. You could sell stocks if you needed to, but selling your home to access its equity would be a much more expensive and complicated proposition.

Higher returns, better tax advantages and fixed payments that decrease with inflation are all great reasons to invest rather than pay cash for a home.

Learn more: Young, wealthy Americans are shunning the stock market storm – here are the alternative assets they’re betting on instead

Is there any reason to pay cash for a house?

Investing and taking out a mortgage is often the best choice to maximize your returns, but money isn’t just about math. If you feel more comfortable not having to make a monthly payment or you think a cash offer would put you in a more competitive position in the real estate market, those are valid reasons to buy the home outright.

The same goes if you can’t qualify for a mortgage at a reasonable rate. Let’s say you have bad credit and your borrowing rate is around 8.00%. If you don’t itemize and report your tax savings, your chances of getting a higher return on your investment in the market are reduced. Remember, the market doesn’t provide guaranteed returns, unlike paying off your mortgage.

Ultimately, you need to consider your financial situation and goals. However, you should never withdraw money from your retirement account to buy a home. Doing so could result in penalties before you turn 59 1/2, and you won’t be able to live out of your home as a retiree.

If you have extra cash outside of your retirement accounts and don’t want to take on debt, or if you’re having trouble getting a mortgage, an all-cash offer may make sense. However, for most people, keep your money invested and enjoy the many benefits that mortgages provide.

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This article is provided for informational purposes only and should not be construed as advice. It is provided without warranty of any kind.