July 20, 2024

My Friend Bought a Home in Cash to Avoid an Expensive Mortgage Rate. Here’s Why She Regrets It

In 2020 and 2021, mortgage lenders slashed their rates to drum up business in the wake of economic turmoil fueled by the pandemic. But by mid-2022, when my good friend had started to look for a house to buy, mortgage rates were already much higher.

That summer, borrowers who needed a 30-year mortgage loan were looking at rates of above 5%. Seeing as how rates climbed to almost 8% at one point last year, and they’re well into the 6% range now, those mid-2022 rates don’t seem so bad.

But my friend wasn’t interested in paying over 5% to borrow for a home. And frankly, she didn’t have to.

My friend didn’t decide to purchase a home on a whim. Rather, it was something she planned and saved for over many years.

Not only did she have cash in a savings account to put toward a home purchase, but she was able to liquidate some investments to free up additional cash. She figured that by making a cash offer, she’d not only avoid having to pay a higher mortgage rate, but also, give herself an edge over the competition at a time when inventory was very limited.

After losing out on more than one home as a cash buyer, my friend was eventually successful in purchasing a home. And she did, indeed, pay for that home in cash. But that’s a decision she now regrets.

When you leave yourself short on cash to keep up with homeownership

My friend didn’t empty her savings completely to buy her home — she’s savvier than that. However, she spent the majority of her savings on her home purchase.

At the time she became a homeowner, she still had an emergency fund with enough money to cover almost six months of bills. The problem, though, is that her bills began to rise immediately after she moved into her house.

First, the air conditioning stopped working — not a good thing during the heat of summer. Next, she discovered some issues with her plumbing.

When winter rolled around, she realized her heating system needed a major overhaul, to the point where replacing it became her best bet. And she’s faced countless additional problems due to having bought an older home that, unfortunately, wasn’t so well maintained by its previous owner.

All told, my friend has been in her home for less than 18 months, and she’s already pretty much drained her savings. If something major were to go wrong at this point, she’d be looking at having to borrow money to cover the cost. And that’s a cruddy situation to be in, because chances are, if she does have to borrow, she’ll be looking at a much higher interest rate than the interest rate she would’ve paid on a mortgage signed in mid-2022.

Lesson learned

My friend can’t go back in time and undo her cash purchase. And these days, she’s doing everything she can to build her emergency savings back up for when the next home disaster strikes. All told, though, she regrets putting so much money into her home that she’s now left with limited cash reserves.

When you buy a home, you never know what hidden problems may be lurking. This holds true even if your home undergoes a thorough inspection, which my friend had.

Be careful about buying a home in cash. It can be tempting to do so at a time like this, when mortgage rates remain elevated. But if you spend almost all of your savings on a home, you may be left to scramble once you move in.

Of course, being a cash buyer can put you at an advantage when you’re facing competition for the home you want. But there are other ways to get around that.

You could be flexible with your closing date so your seller is more inclined to work with you. Or, you could make an offer that’s over your seller’s asking price to potentially avoid a bidding war in the first place.

Hopefully, my friend will build back her savings over time. But right now, she’s in a stressful situation. So if you’re contemplating a home purchase in cash, think very carefully before moving forward.

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