buy a home with cash?

There could be one very good reason. You would rather spend or invest the cash on something else.

But that aside, putting equity into a home is maybe the one financial decision that is never, ever a bad idea. Its insurance, its an investment, and its your ultimate dream all wrapped up into one.

My wife and I paid cash for ours (small house, nice neighborhood) in 1989, and have never regretted it. It's a very peaceful feeling to have it paid for. There's enough other stresses in life without adding to it (we both despise debt).

leverage this wrote:

But in finance, the more payoff you want, the more risk you need to take

This guy is ill informed. This sentence could be corrected "But in finance, the more risk you take, the more volatility you'll get around your assets return." I'm not advising one way or the other, but risk means volatility, which can make your reward greater, but it can increase your possibility of loss as well, and if you take out a mortgage, you'll be locking in some loss every month by paying interest.

But that aside, putting equity into a home is maybe the one financial decision that is never, ever a bad idea. Its insurance, its an investment, and its your ultimate dream all wrapped up into one.

AND

My wife and I paid cash for ours (small house, nice neighborhood) in 1989, and have never regretted it. It's a very peaceful feeling to have it paid for. There's enough other stresses in life without adding to it (we both despise debt).

If owning your house outright will help you sleep better at night, by all means do it. But -financially- it is not a particularly savvy investment.

And I also disagree that owning your house eliminates all risk, though it may feel that way. For one thing, the less equity you have in your home, the easier it is to walk away in any one of a million bad scenarios. So that's something else to worry about: a huge chunk of your equity in this one largely illiquid, susceptible to burning down/devaluation/flooding/nuclear attack asset.

Internet Sargent Slaughter wrote:

leverage this wrote:

But in finance, the more payoff you want, the more risk you need to take

This guy is ill informed. This sentence could be corrected "But in finance, the more risk you take, the more volatility you'll get around your assets return." I'm not advising one way or the other, but risk means volatility, which can make your reward greater, but it can increase your possibility of loss as well, and if you take out a mortgage, you'll be locking in some loss every month by paying interest.

I don't believe our statements are incompatible. I said "greater payoff requires greater risk," which is not at all the same as saying "risk guarantees payoff."

Go back to your CFA Level I.

No seems to be talking about length of loan. Consider a 15 year mortgage as a possibility, as it creates equity quickly, yet provides tax write off. Other thing to consider is length of stay. If you are planning in staying in property no longer than say 5 years, then full purchase may be the best solution, since indications are there will not be a boom in housing prices in the short term.

We too paid all cash for a small house in a nice neighborhood a few years ago.

We love it. We live in the bulk our savings, instead of having them perpetually in an account. Our house is our money. We decorate our money, clean it and have people over to enjoy it with us.

We should have done it sooner.

We have one low interest, relatively small car loan to keep credit active. We also have one credit card we run everything through for the miles, that is paid to a zero balance on pay day, every two weeks.

Most everyone we know has more stuff, more house, more cars, more bills and more worries. The big house mortgage payers are a nervous group.

opportunity cost wrote:

If owning your house outright will help you sleep better at night, by all means do it. But -financially- it is not a particularly savvy investment.

And I also disagree that owning your house eliminates all risk, though it may feel that way. For one thing, the less equity you have in your home, the easier it is to walk away in any one of a million bad scenarios. So that's something else to worry about: a huge chunk of your equity in this one largely illiquid, susceptible to burning down/devaluation/flooding/nuclear attack asset.

I agree with this. I live in CA and it seems way too risky to me to have so much of my personal wealth tied up in an asset that could be destroyed in an earthquake at any time.

Homes in my neighborhood are still selling in the $600 - $700K range, so we are talking about a lot of money (for me) at stake. Also, earthquake insurance is so expensive that it does not make financial sense.

I sleep better at night knowing that my wealth is diversified and more liquid, even with the debt of a mortgage.

In California, a significant portion of a house's value(at least the one's your talking about - 600K or more)is in the land, not the building. Unless a catastrophic event occurs that makes the land useless you won't lose your entire investment. Just rebuild for 200K. Yeah, ya lost 200K but not 600K or more.

A little more detail. When we purchased our house, mortgage rates were around 10%, plus a couple of points, which made buying it outright very easy for us to agree to do.

I'm not sure if we would have made the same decision with 4.5 or 5% mortgage rates to work with.

I would not buy today in california unless the price is less than 15% of you net worth. The value of the land is dropping too. Around Newport Beach where I live, many stores, auto dealerships, and shopping centers are having hard time and there are tons of forclosed homes. My brother lives up Norcal in Los Altos and it's the same deal. Now is not the time to buy unless you have to have it. The homes market has yet to bottom out.

In California, a significant portion of a house's value(at least the one's your talking about - 600K or more)is in the land, not the building. Unless a catastrophic event occurs that makes the land useless you won't lose your entire investment. Just rebuild for 200K. Yeah, ya lost 200K but not 600K or more.

Money is very cheap now.

If you can lock in a 4% thirty year mortgage and get to write off the interest you pay, it makes pretty good sense to borrow the dough

The property tax thing is a good suggestion. You don't have to have a mansion to pay a lot in property taxes. I pay $3500 a year, and we don't live in a mansion. There are other similar towns around here where the same priced house would cost me half that. I can move to Arizona and many many other states and pay less than a third of that.

hatchback wrote:

all-in costs wrote:

One minor suggestion, is to check into the property taxes before you pick an area to buy in. Where we live, the various suburban towns/cities have drastically different property tax rates. Some of the "nicer" areas would have me paying almost as much in property tax for an average house as I currently pay in rent. And prop tax is just as bad as rent because even mortgage-free, it never goes away.

I think it's something most 1st-time homebuyers don't pay much attention to.

Thanks for that. I actually didn't think about that at first, but a friend mentioned to always ask about that and of course insurance.

I think property taxes for the houses we are looking at are on the order of $1000 a year. (We are not talking about a mansion, here!)

hatchback wrote:My sense is that the housing market is stable where I live (not California--a Southern state, medium sized city.)

You're probably correct if you're not in Georgia (mainly Atlanta), Florida, or North Carolina (mainly Charlotte). That said, be very careful. There are lots of foreclosures still out there just waiting to move through the system, especially in those areas I listed.

Seems like you have a good head on your shoulders and will be fine with whatever you choose.

By all means, buy the house outright! Especially now that the bubble has burst, there is hardly any reason not to do so. You have a liquid emergency fund. You will have homeowners insurance in case of disaster. In a terrible pinch, you can access your equity. In the meantime, not only do you have a risk-free investment (not only the rate you would have paid on the mortgage, but also any appreciation), you also have about $1000 monthly in economic freedom. You can save that, spend it, invest it however you like--but you get the freedom to decide. And over time, as rents go up (and incomes go up to match), you'll be able to put the difference in your pocket. I've known lots of people who were house-poor, but never known anybody with a paid-off home who couldn't make ends meet. (Even retirees with nothing but Social Security can avoid eating Alpo if they have a paid-off home.)

Nice Neighborhood wrote:

The big house mortgage payers are a nervous group.

You would be a FOOL to go chase a little "investment" income by mortgaging a house. A lot of investors can't even make money let alone try to profit off of the spread between a mortgage and other investments.

Pay CASH for the house and set up an equity line that you could draw on if you needed to. I did that years ago and now own 14 houses that I paid cash for.

Correct me if I'm wrong, but you're buying a house for a place to live, right? Then pay cash. Should prices continue to fall (which they may) or if something happens to cut your income, you don't have to worry about losing your home. Most people who buy a home with a mortgage do so because they don't have the money to pay cash. Millions of those people have lost or will lose their homes to foreclosure. Your home should NEVER be treated as an investment or an ATM to pay for other things.

You've also been told some things on this thread that are either incorrect or of dubious value.

You can't walk away from a mortgage without repercussions. If the bank forecloses and can't sell the house for what you owe, they can usually come after you for the difference.

Yes, a mortgage leveraged investment will make $ faster than a cash investment, but it also loses money faster. Because of the mortgage interest you must pay the downside is actually worse than the upside is good. The smaller the downpayment the more likely you will lose all (or even more) of your initial investment.

Property taxes are irrelevant in the cash vs. mortgage decision. They only matter when comparing different properties.

To those who said you must take greater risk for the opportunity of greater gains, sorry but that's not true. For example, the long term return for the stock market is 8-9% while it is 5-6% for gold, but gold is much riskier. The long term return for CD's is about the same as gold's, but there's virtually no risk.

If I were you, I'd pay cash for the house. Put the $1,000 you were paying for rent, into an investment account. Educate yourself about investments, then start investing the money you're saving.

Good luck!

Blowing.Rock Master wrote:

If the bank forecloses and can't sell the house for what you owe, they can usually come after you for the difference.

In a word: no.

This may be true in theory, or in some region, but anyone who has read a newspaper in the last year knows that this is not true in practice. Hence "strategic defaulting."

Of course, defaulting hurts your credit rating. I'm not recommending it. But my point is, there's a very real risk to tying up a big chunk of your worth in a single asset, and owning a home outright does so much more than taking out a mortgage.

Yes, it is a house that I will be living in. If something immediately bad happens to me financially, then it would be possible to take out a line of credit against the house, right?

Or, sell the house and buy another house with a mortgage.

Or, sell the house and rent like I've been doing.

These don't seem like bad options.

Thank you for all the feedback, folks.