Buy house in cash, or mortgage?

[Anubis]

Pay most of it and mortgage $360 for 30 years, just because.

yea do this just to annoy the bank

 

[dank69]

One of my biggest fear is having a mortgage. That would mean I screwed up.

Making more money means you screwed up? Makes sense.

 

[HardcoreRobot]

provided income was steady, id prob put 20%, take a 15 yr mortgage and invest the difference. can always pay it down later.

Over 15 years I think i could get a better return in the market than 3.25% or whatever ridiculously low rate 15 years are these days.

 

[fleshconsumed]

Tax deduction is only helpful if you itemize. Depending on the amount, it might not help you if it's below the standard deduction.

The standard single filer deduction is $6,100. The property taxes are also tax deductible. Unless you have taken a really small mortgage and your taxes are really low, more than likely the combination of the two is going to push you way over the $6,100. As you pay off the mortgage and the interest amount (the only amount deductible) decreases, your tax advantage over taking standard deduction is going to decrease and at some point potentially completely disappear. However, if it is going to disappear it is not going to happen until the last 5 or so years of your mortgage, and in some places with high property taxes, that tax advantage is never going to go away because they pay more than $6100 in taxes.

 

[MrDudeMan]

Buying it outright is a tremendous waste of money. Instead of buying one house outright, I bought four with mortgages and rented three of them. The end result is still essentially no monthly payment, but now I'm earning WAY more than the mortgage costs and I still have more to buy another house. Even if you don't want to purchase rental property, putting that much cash in a house is still a waste of money. You could easily outperform current mortgage rates without even trying. I'm going to do 12.5% this year on the money I invested in real estate and it will only increase from this point forward.

LEVERAGE. If you don't understand that word, look it up. My scenario of buying multiple houses instead of one is a perfect application. I'll end up making way, way more money off of my original investment compared to if I would have simply paid off my primary residence. It's not even close at 5 years and the divergence only accelerates.

People who say peace of mind is worth the enormous opportunity cost are letting emotions dictate their actions. It makes absolutely no sense to pay for a house outright unless you have so much money that it would trivially change your portfolio.

One of my biggest fear is having a mortgage. That would mean I screwed up.

Do not take advice from people like this. I had my first mortgage when I was 20 and it was just about the least scary thing I've ever done. There are only two reasons to be afraid of a mortgage: you either don't understand it or you have no idea how to manage finances... or both I suppose.

 

[T9D]

Buy it with cash. Then get a home equity loan if you want. It's super easy to get one and the closing costs are really low. You can then basically have all that money available to use from the account whenever you want if you find something to invest in. Or buy a rental with it or whatever.

 

[MrDudeMan]

Mortgage rates so low and like 50% of responders here say cash. LOL

This was also my first reaction. Putting down 100% is just... lol. What a stupid move.

 

[ponyo]

The standard single filer deduction is $6,100. The property taxes are also tax deductible. Unless you have taken a really small mortgage and your taxes are really low, more than likely the combination of the two is going to push you way over the $6,100. As you pay off the mortgage and the interest amount (the only amount deductible) decreases, your tax advantage over taking standard deduction is going to decrease and at some point potentially completely disappear. However, if it is going to disappear it is not going to happen until the last 5 or so years of your mortgage, and in some places with high property taxes, that tax advantage is never going to go away because they pay more than $6100 in taxes.

And for joint is $12,200. I'm not saying it's not helpful. But for some, it might not help them at all.

 

[MrDudeMan]

Buy it with cash. Then get a home equity loan if you want. It's super easy to get one and the closing costs are really low. You can then basically have all that money available to use from the account whenever you want if you find something to invest in. Or buy a rental with it or whatever.

This is also lol. So, instead of just investing the cash, you're going to pay off the house, borrow against it at a higher rate, and then invest it. Genius.

 

[T9D]

This is also lol. So, instead of just investing the cash, you're going to pay off the house, borrow against it at a higher rate, and then invest it. Genius.

Don't be an arse.

It works well because in between investments you can also put the money back into the account and have it paid off, thus paying nothing on it. But the money is always available when you need it. You are also in no hurry to invest because you aren't paying for a mortgage. People tend to make mistakes in investing and losing a lot because they hurry to invest to much.

This is what I do and it works very well. I don't want to live a high stress lifestyle. If I want to just relax in between investments I can do that. Pay off the equity loan to zero and take a break and enjoy life. With a mortgage still going I've have to find a place to invest sooner or I'm just losing even more money. I'm also able to carefully plan my next investment and wait out the market if I need to for better deals. Without having a mortgage payment piling up.

It does work because I do it. Look I've done both. And it's about how you want to live your life. There is something extremely attractive to in just simply not having a mortgage at all or even investing in it if you want. It's just a personal choice how he wants to live his life. So stop with this black and white crap.

 

[MrDudeMan]

Don't be an arse.

It works well because in between investments you can also put the money back into the account and have it paid off, thus paying nothing on it. But the money is always available when you need it. You are also in no hurry to invest because you aren't paying for a mortgage. People tend to make mistakes in investing and losing a lot because they hurry to invest to much.

This is what I do and it works very well. I don't want to live a high stress lifestyle. If I want to just relax in between investments I can do that. Pay off the equity loan to zero and take a break and enjoy life. With a mortgage still going I've have to find a place to invest sooner or I'm just losing even more money. I'm also able to carefully plan my next investment and wait out the market if I need to for better deals.

It does work because I do it. Look I've done both. And it's about how you want to live your life. So stop with this black and white crap.

It's very black and white. It also doesn't matter if you recognize that because it's still true.

What you just recommended is very stupid as an investment strategy. HELOCs aren't given at the same rate as a mortgage, so if you're going to invest then it is absolutely idiotic to borrow it in the form of a HELOC when you had the cash in the first place. If you didn't have the money up front and want to get access to it for some reason, that's a totally different story, but that's also not what this thread is about.

Say you have 100k and you want to buy a house and invest. Buy a 100k house outright, then borrow 80k in the form of a HELOC. A mortgage would have cost 3.5%, but a HELOC will cost at least 4% and probably more like 4.5%. So, in one scenario you're borrowing 80k at 3.5% and in the other scenario you're borrowing at 4.5%. That's how simple this is in terms of investing. If you need the HELOC several years later for X, Y, and Z reasons, then fine, borrow against the house. That's completely different.

 

[DrPizza]

Based on a subjective cost-based analysis of the area I would probably end up putting down enough to avoid PMI and using a 30 year for the remainder. Using bi-weekly payments would add an additional monthly payment a year and reduce the interest payments over the course of the loan, which statistically I'm not likely to have longer than 3-5 years before moving again either way.

Overall, it's fiscally illogical to spend any more than you have to if you are getting PMI anyway, so the difference between that 3-5% and the 20% are irrelevant. So, avoid PMI or pay the bare minimum if you can't.

I would invest the rest. Relying on equity has shown to be outdated and untenable in our current economy.

I agree, mostly - financially, as long as you can earn more than the interest rate on the house, you're generally better off investing the rest. What I disagree on is the point of paying biweekly and making extra payments. That seems contradictory to getting the mortgage in the first place. I.e., is no different in logic than making the equivalent of a monthly payment every day, and paying off the entire loan in one year to save interest. So long as your investments are growing quicker than your interest, it doesn't make sense to transfer assets to the mortgage to reduce that interest.

It would also depend on how old you are and how averse you are to risk. The higher the potential interest that you earn, the higher the risk. Thus, for some older people, it may only make sense to invest in lower risk investments that don't quite, or barely beat the interest rate, only because the itemized deduction instead of a standard deduction is sufficient to make up the difference. In that case, as the portion of the payments that goes toward principle rather than interest increases, at some point, it's possible that the benefits of the tax deduction, plus investment earnings aren't significant enough to offset the mortgage interest, at which point you'd pay off the loan.

 

[senseamp]

That's less than a down payment here in the Silicon Valley. Would pay cash and not even think about it.

 

[soulcougher73]

Cash.

I paid off my house (had 5 year loan) that I use as a rental property last December. It is so nice knowing that if I lost my job or anything I had a place to live that I could easily pay the taxes + bills on a McDonalds minimum wage salary. The peace of mind was well worth it. Now I take that rent money and invest it in stocks. I can sell the house if I run into trouble, and not be in any trouble at all. And then of course pull my money out of stocks.

There is no way I'd ever choose to pick a mortgage in the future if I had the means to avoid it.

This all day every Day

 

[ponyo]

This was also my first reaction. Putting down 100% is just... lol. What a stupid move.

Says a guy who's leveraged up to his eyeball in debt. Leverage is a dangerous game. When times are good, it's great because of the compounding effect. But when shit hits the fan, your ass will be out on the street. If I want a rental property, I'll just buy it with straight cash. Just like wall st. I'm not going to finance rental. But I haven't bothered because I don't want to deal with the headache of being a landlord.

I paid off my house more than 5 years ago and have been completely debt free for more than 4 years. The only reason I wasn't completely debt free prior to paying off my house was I had 0% 3yr Corvette loan I had to wait to pay off. I've substantial cash and liquid investments. If I have to get a mortgage, it would mean I screwed up badly somewhere or something horrible has happened in my life that wiped me out financially. I've tried to lower and eliminate that chance as much as possible. But there's always a chance for freak accident so that's my biggest worry. There's no bigger fear than being poor after being rich.

 

[MrDudeMan]

I agree, mostly - financially, as long as you can earn more than the interest rate on the house, you're generally better off investing the rest. What I disagree on is the point of paying biweekly and making extra payments. That seems contradictory to getting the mortgage in the first place. I.e., is no different in logic than making the equivalent of a monthly payment every day, and paying off the entire loan in one year to save interest. So long as your investments are growing quicker than your interest, it doesn't make sense to transfer assets to the mortgage to reduce that interest.

After you've purchased the house, every dollar should be redirected somewhere other than the mortgage in this scenario. It's a pretty trivial difference either way, though, in terms of the actual realized gain when compared to investing that cash somewhere else. It's a second or third order component.

It would also depend on how old you are and how averse you are to risk. The higher the potential interest that you earn, the higher the risk. Thus, for some older people, it may only make sense to invest in lower risk investments that don't quite, or barely beat the interest rate, only because the itemized deduction instead of a standard deduction is sufficient to make up the difference. In that case, as the portion of the payments that goes toward principle rather than interest increases, at some point, it's possible that the benefits of the tax deduction, plus investment earnings aren't significant enough to offset the mortgage interest, at which point you'd pay off the loan.

That's true in some scenarios, but it depends what the investment is. If someone else is paying the mortgage in a rental, for example, then it makes sense to keep the mortgage as long as possible.

With 20k invested in a 100k house that rents for 1k/month, the realized earnings are based on the initial 20k regardless of what it costs to maintain the property and loan. In that scenario, the monthly payment is $380 (30y @ 4$), taxes and insurance would be roughly $225, and then you're done. The remaining $395/mo is earned and depreciation shelters quite a bit of it. Over the course of a year, you made $4.7k from rent and another $1.4k from principal reduction. That's 30% return in the first year on 20k minus taxes, which will probably reduce it to 25%. I'm renting three houses at ratios similar to this, but I also paid more money up front for repairs. The calculation is ideal, but even cutting it by 70% - an arbitrarily huge number - still puts it way, way above the cost of the mortgage. Once you add asset appreciation (which is still based on the original 20k) and increased rent (roughly 1.8% per year), it gets better and better.

 

[Golgatha]

All I have to say is it's nice to know I can meet my family's basic needs on about $30k a year in a severe pinch. I have the cash flow to pay cash for nice vacations, I can save for my dream vehicle for nearly as long as I want, and I can generally buy toys costing less than $1,000 without batting an eye; all the while continuing to take what excess I have and throw it into the stock market or up my Roth paycheck percentage.

My vote, buy the house with cash or finance (15 year loan only) the portion that leaves you with enough liquid assets to cover your basic needs for a year.

 

[MrDudeMan]

Says a guy who's leveraged up to his eyeball in debt. Leverage is a dangerous game. When times are good, it's great because of the compounding effect. But when shit hits the fan, your ass will be out on the street. If I want a rental property, I'll just buy it with straight cash. Just like wall st. I'm not going to finance rental. But I haven't bothered because I don't want to deal with the headache of being a landlord.

I paid off my house more than 5 years ago and have been completely debt free for more than 4 years. The only reason I wasn't completely debt free prior to paying off my house was I had 0% 3yr Corvette loan I had to wait to pay off. I've substantial cash and liquid investments. If I have to get a mortgage, it would mean I screwed up badly somewhere or something horrible has happened in my life that wiped me out financially. I've tried to lower and eliminate that chance as much as possible. But there's always a chance for freak accident so that's my biggest worry. There's no bigger fear than being poor after being rich.

I understand you're afraid of it and it's because you meet at least one of the conditions I mentioned. Just like wall street? Are you not aware that Wall Street leverages to excess? You clearly don't understand this as well as you think you do.

Once I put the houses on the market, I had people beating my door down to rent them. If I have a tenant bail for some reason, there are 20 more behind them who want the house. If I was leveraging my nest egg to buy duck calls, then maybe you'd have a point, but I'm not, so you don't. Nowhere in my post did I recommend that a person overextend to the point of extreme risk. I specifically stated I have money left over and I plan to hang onto it for quite a while until I build back up from buying several properties. Risk can be managed if you don't have an irrational fear of it.

 

[SearchMaster]

It depends entirely on your personality.

Mathematically, there's no question - invest the cash and take out the mortgage. However, the financial security of not owing any money (and the freedom that provides) is tangible and valuable to some people as well. Some people accept the ups and downs of the stock market as long as the overall return is high enough; some people don't like that roller coaster and prefer to stick with lower and safer investments.

It's not a question that can be answered by anyone but you really. If you would sleep better at night without a mortgage, there's your answer.

 

[Golgatha]

Also, I have a friend who did the "leverage" thing and has 3 rental properties and a mortgage. He's the same age as me. Sounds like a great idea until you have a vacant property or two for a few months, have to replace an air conditioner, property values go down, tenants trash one of the properties, or you lose a job. Not to mention the headache of keeping up with all that mess. To each their own, but I don't need that stress and so far I seem to be doing much better financially than my friend has.

 

[Childs]

Straight cash homey.

KT

Damn you. I was gonna use a Randy Moss gif an everything.

 

[Golgatha]

It depends entirely on your personality.

Mathematically, there's no question - invest the cash and take out the mortgage. However, the financial security of not owing any money (and the freedom that provides) is tangible and valuable to some people as well. Some people accept the ups and downs of the stock market as long as the overall return is high enough; some people don't like that roller coaster and prefer to stick with lower and safer investments.

It's not a question that can be answered by anyone but you really. If you would sleep better at night without a mortgage, there's your answer.

My advice. Don't put any money in the stock market you can't afford to lose or at least not touch for 10+ years. Having high cash flow and the freedom to manage that cash flow between fun, giving, and investing is a great thing you really can't describe the feeling of; but it's a great feeling to be sure.

 

[MrDudeMan]

vacant property or two for a few months

This isn't a big deal if you approach the situation with caution. With the money I didn't invest or dump in my house, I could pay for all three mortgages for almost a year including my own house with no other income. I didn't recommend that people get into this and drain their bank account to $0.00.

have to replace an air conditioner

Repairs happen and certainly eat into profit, but it's not a big enough deal to matter. A new AC unit for one of my houses (I know because I replaced it before I put it on the market) was $1800 as the house is only 1300 sq ft. It's statistically unlikely to experience a major repair more than once every 24 months, so there's more than enough time to make up any losses plus a healthy margin.

property values go down

Completely irrelevant unless you're trying to sell. As long as you're still renting it, the value makes no difference as rent is set based on square footage and the cash flow is what's important.

tenants trash one of the properties

The security deposit and insurance can offset this, but it is a risk.

or you lose a job

Irrelevant. The rentals are self-sustaining.

Not to mention the headache of keeping up with all that mess.

Subjective. It's almost no effort once the occupants move in. A well written lease also goes a long way here.

To each their own, but I don't need that stress and so far I seem to be doing much better financially than my friend has.

That doesn't say anything about the concept, only his implementation. It's higher risk, yes, but it's also higher reward. That has to come with some kind of cost obviously.

 

[Red Squirrel]

I'd buy it outright, it's one less monthly payment to have to worry about. I hate having any kind of debt, I don't care what the interest is at, I just want to pay it off as fast as I can so I don't have any kind of payments. Typically I don't hold any other debt than my mortgage though. I see the mortgage as being like paying for rent and while some people will be paying that forever, I know eventually I wont have to. Sometimes if something comes up I have to put it on the credit line though, but I try to put every spare penny towards paying that off before buying anything I don't need.

 

[Tweak155]

I think a lot of people put more value in the peace of mind that comes with having no mortgage.

This is pretty much why I did it. Hard to put a value on the peace of mind you will have.

It's not like the extra money you earn from investments comes for free. It can take some work (likely not much compared to the profits), but moreso any mental strain you might experience as the ups and downs come.

Whenever possible, I will almost always choose no bill. Only times I did not are on 0% credit cards (no real mental strain there...), 2.75% I got on my first house and the 1.84% I got on my previous car (which I have since traded in and paid next car in full).

I have no debt outside of a 0% card I let rotate for the obvious reason.