Paying Cash vs Getting a Mortgage: The Surprising Math
If you CAN pay cash for a house, should you? The answer is not as obvious as you think.
Paying cash eliminates mortgage interest, which feels like saving hundreds of thousands of dollars. But the math tells a more nuanced story when you consider opportunity cost.
The Cash Argument
A $300,000 home with a 30-year mortgage at 6.5% costs $382,000 in total interest. Paying cash saves that entire amount. You also save on closing costs (no origination fee), get lower insurance rates, and can close faster (attractive to sellers).
The Mortgage Argument
That $300,000 invested in the S&P 500 at a historical 10% average return grows to $5.2 million in 30 years. Even after paying $382,000 in mortgage interest, you are $4.5 million ahead. The mortgage interest tax deduction further reduces the effective cost of borrowing.
The Right Answer
If you will invest the difference: mortgage wins mathematically. If you will spend the difference: pay cash. If peace of mind matters more than optimization: pay cash. Most people do not invest the difference — they spend it — making cash the better practical choice for many buyers.