Simple question: If I have the cash to buy a home, is there any good reason to take out a mortgage?
Simple question: If I have the cash to buy a home, is there any good reason to take out a mortgage?
nope
As long as you are left with enough to live on, no. mortgage prices are going up kiddies. Gone in many areas are the 3.625% rate on a 15 year fixed with no points.
A small amount of positive credit history? If you have managed to save that much, you probably don't have a problem with credit though.
hatchback wrote:
Simple question: If I have the cash to buy a home, is there any good reason to take out a mortgage?
Probably not. If buying the home is going to reduce your disposable cash to some level that won't allow for any emergencies and would force you to take out a home equity loan, it might end up not being as profitable as you thought it would, but if this is a remote possibility, you should go for it.
The answer is "it depends."
I live in an area where real estate values are fairly stable. Values go up very slightly every year. Never saw the bubble or the crash. We moved to a new home and paid cash. But, mainly because we are established financially. It amounted to spending 20% of our investment portfolio on housing. I don't think I would have done it if I wasn't established or had fears of our housing market crashing.
If you are young and starting out, without a lot of money in the bank, I'd say take a loan.
One reason to consider is what could you do with the money instead. If you're going to make more with the money elsewhere than whatever interest you're being charged (plus tax considerations) then it's worth thinking through.
Your personal risk tolerance and attitude towards debt come into play too. Personally, my wife and I could pay off our mortgage today but we'd rather have the $150k invested elsewhere and continue to pay the bank 4.375% interest.
Isn't mortgage interest tax deductible? Might that be a good enough reason?
hatchback wrote:
Simple question: If I have the cash to buy a home, is there any good reason to take out a mortgage?
BEFORE paying cash for a home you must be doing these things:
1) Emergency fund of 3-6 months of expenses.
2) Become completely debt free (except for the house)
3) 15% of your income continuing to go into retirement accounts (order is 401k to match and then Roth IRA if you qualify and then back to 401k. Use 403b or other vehicles if your job indicates you have to). Funds should be made up mostly of stocks with more and more bonds as you get closer to retirement.
3) NOW, you want to buy a house with cash, then do so.
NEVER decide to NOT pay off a house because of tax benefits of having a mortgage. You save MUCH more by not having a mortgage payment than any amount of tax savings you could get.
Once you are completely debt free AND you have a paid for house, you can set aside a TON of money for investing, entertainment, etc.
I do not mind if you'd rather invest the money (above and beyond the 15% you should already be doing and just pay the house down over time), but if you're already investing 15%, why not just go ahead and buy a house with cash? Complete freedom, and it frees up a ton of cash.
NoFatty wrote:Probably not. If buying the home is going to reduce your disposable cash to some level that won't allow for any emergencies and would force you to take out a home equity loan, it might end up not being as profitable as you thought it would, but if this is a remote possibility, you should go for it.
It is a remote possibility. My wife and I have been renting for a while and just putting away cash. All of a sudden I realized that we have enough to buy a house.
We don't have any other investments besides the standard 401k contributions. My thought was that maybe this would be putting too much money in one place. On the other hand, without rent or mortgage, we could start building a diverse portfolio fairly quickly.
My sense is that the housing market is stable where I live (not California--a Southern state, medium sized city.)
Flagpole wrote:BEFORE paying cash for a home you must be doing these things:
1) Emergency fund of 3-6 months of expenses.
We would still have a year of expenses.
2) Become completely debt free (except for the house)
We own our cars. (Paid cash.) I use a credit card for the cash back, but pay it off every month.
3) 15% of your income continuing to go into retirement accounts (order is 401k to match and then Roth IRA if you qualify and then back to 401k. Use 403b or other vehicles if your job indicates you have to). Funds should be made up mostly of stocks with more and more bonds as you get closer to retirement.
We do this. I am just now learning how to invest, but it is growing decently.
Complete freedom, and it frees up a ton of cash.
That would feel good.
Brother, you are in position to pay for your house with cash...go do it! What a cool spot to be in.Not sure what you normally give toward housing, but my mortgage (not including taxes and insurance) is about $850 a month. That's $10,200 a year. That's money to either have a couple nice trips with a year, OR to invest and have an even bigger pile for retirement or an even earlier retirement or to save up for something big you really want.
hatchback wrote:
Flagpole wrote:BEFORE paying cash for a home you must be doing these things:1) Emergency fund of 3-6 months of expenses.
We would still have a year of expenses.
2) Become completely debt free (except for the house)
We own our cars. (Paid cash.) I use a credit card for the cash back, but pay it off every month.
3) 15% of your income continuing to go into retirement accounts (order is 401k to match and then Roth IRA if you qualify and then back to 401k. Use 403b or other vehicles if your job indicates you have to). Funds should be made up mostly of stocks with more and more bonds as you get closer to retirement.
We do this. I am just now learning how to invest, but it is growing decently.
Complete freedom, and it frees up a ton of cash.
That would feel good.
Yeah, we were paying a thousand a month in rent. Keeping that money sounds pretty cool to me.
Thanks for the advice.
jfdr wrote:
Isn't mortgage interest tax deductible? Might that be a good enough reason?
For example, you pay 1000 in interest but only get 250 back. Doesnt sound good to me.
hatchback wrote:
Simple question: If I have the cash to buy a home, is there any good reason to take out a mortgage?
The answer isn't as simple as the question, but taking out a mortgage can be, in effect, a leveraged investment which could work out to your advantage. Suppose for example that you put 20% down on a house at 4% interest and the house's value appreciates at 2% per year. Since you only "own" 1/5 of the house but stand to realize the appreciation on the whole value of the house you're effectively getting about 5*2% appreciation - 4% interest payment = 6% annual rate of return on your down payment initially. I'm ignoring closing costs, tax writeoffs, and such that complicate the calculation, but that't the general idea. This is all speculative given that it hinges on how the property appreciates, but it often works out in your favor.
If you do this, rather than just making out a check for whatever amount of money you are paying, get it in 100 dollar bills in a briefcase. That would be SO much cooler.
hatchback wrote:
Yeah, we were paying a thousand a month in rent. Keeping that money sounds pretty cool to me.
Thanks for the advice.
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.
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!)
A house is a cheap (rate), highly leveraged investment - one of the few you can make. You almost definitely will get a better return on your money somewhere other than by paying cash for a home.
Does taking out a mortgage introduce an extra element of risk. Absolutely. But in finance, the more payoff you want, the more risk you need to take. And the risk of taking out a mortgage, in the situation you've described, is about as low as it can be.
sunfire wrote:
One reason to consider is what could you do with the money instead. If you're going to make more with the money elsewhere than whatever interest you're being charged (plus tax considerations) then it's worth thinking through.
Your personal risk tolerance and attitude towards debt come into play too. Personally, my wife and I could pay off our mortgage today but we'd rather have the $150k invested elsewhere and continue to pay the bank 4.375% interest.
Good answer.