1. This site uses cookies. By continuing to use this site, you are agreeing to our use of cookies. Learn More.
  2. We've had very few donations over the year. I'm going to be short soon as some personal things are keeping me from putting up the money. If you have something small to contribute it's greatly appreciated. Please put your screen name as well so that I can give you credit. Click here: Donations
    Dismiss Notice

Paying Cash for a House: Gnarly or Stupid?

Discussion in 'Tilted Life and Sexuality' started by Plan9, Aug 27, 2011.

  1. Plan9

    Plan9 Rock 'n Roll

    Location:
    Earth
    Howdy. I'm Plan9. And I'm thinking about paying cash for a house. Let's say between $200k and $250k is my price range.

    Is this even a good idea? Why or why not? I need an adult. Anyway, this is what I've come up with so far...

    School of Thought 1:

    Pay cash. Negotiate the shit out of everything because I'm waving a giant pile of money in their face. Shave down the total price, have them include inspections, repairs, closing cost, etc. No mortgage worries. Money I would be spending on a mortgage for the next 15-30 years can go back to paying taxes / insurance and replenishing my surprise sex'd house fund account (ya know, for buying that Ferrari I'm going to need when I start having a midlife crisis). Problem with this tactic would be the rollercoaster effect of hanging onto $250k in an account and then liquidating it in like 19 minutes. I would still plan to be able to max out my IRA each year and I'd have my emergency fund set aside for bugging out to MexiCanada, of course.

    School of Thought 2:

    Instead of buying it outright, just drop a good chunk of money on a down payment. Invest the rest of the money somewhere else (Apple stock, anybody?). Have a smaller mortgage, maybe do a 15 year. This seems so much more balanced and logical than just paying cash straight up but I can't help but hate the idea of having a monthly payment. Like a motorcycle or the pants I'm wearing, I just want to buy it and be done with it. Yeah, I know I'm a horrible simpleton and that School of Thought 2 is likely the best course of action for long term reasons but... doesn't anybody pay cash?

    ...

    Other factors:

    - I'm single.
    - I have an outstanding credit score.
    - I have no vices or hobbies.
    - My job pays really well.

    ...

    Okay, TFP question time:

    If money wasn't an issue, would you pay cash for a house?

    What pros and cons have I missed? I'm a total cherry here.
     
  2. Borla

    Borla Moderator Staff Member

    I would put enough money down to ensure the best interest rate possible and avoid paying mortgage insurance, and that's it.

    1) Current mortgage rates are extremely low. You are probably looking at around 4%. That's basically free money.
    2) If you have $200k+ of liquid assets there are many relatively conservative and safe ways to earn far more than 4% on it.
    3) Mortgage interest is tax deductible. Depending on your tax bracket that means a big chunk of it you get right back in a reduction of your tax bill.
    4) If something catastrophic happens (disability, severe longterm illness, job loss, family emergency) that means you have to move, you don't have as much of your personal wealth tied up in a home that may or may not be able to be sold for what you bought it for.

    Do the straight math. You will cost yourself thousands of dollars if you pay cash vs. getting a 15-20yr mortgage for 70-80% of the value of the home and invest the rest wisely. Consider the side benefits if you were to have to move for an unexpected reason and couldn't sell the house right away. IMO, the path that makes the most sense for 90% of the people in your position is clear.
     
    • Like Like x 1
  3. uncle phil

    uncle phil Moderator Emeritus (and sorely missed) Staff Member Donor

    Location:
    pasco county
    nothing wrong with paying cash for a house but in your income bracket, you need some form of tax write-off for which mortgage interest would qualify. you might want to talk with a trusted tax accountant/advisor before making the big decision...
     
  4. What Borla said. The rates for mortgages are so low now you should put just enough down to get the best rate then invest the rest. Your investment should out perform the interest you would have saved by paying cash. Plus you'll have a reserve to fall back on should you need it.
     
  5. streak_56

    streak_56 I'm doing something, going somewhere...

    Location:
    C eh N eh D eh....
    Personally, I would outright buy the house, only because interest on a mortgage is retarded in my mind....
     
  6. Zen

    Zen Very Tilted

    Location:
    London
    As I read what your saying, it strikes me that you're not choosing between a stoopid idea and a sensible idea. Both of them are workable, and you have the income to move forward either way. And it's not life or death.

    The other thing that gets me is that you WANT to do that outright buy. And that Want/got scenario you've run through a few times and you know how important that is to you.

    Doing the numbers, you're likely to make your money work for you better if you get a mortgage, though how long that rate will last cannot be predicted.

    Weigh that against how much you are willing to pay for that 'All MINE ... DOne Deal' feeling. Like a puppy, it won't be just for Christmas.

    Every morning time you leave YOUR house, you 'll know it's Your House you'll be coming back to. Every time you walk in and out that front door ... how many times is that? You'll have that feeling.. that KNowing.

    Double check that with ... OK ... you got your motorcycle outright? How has it felt getting on and off it, or whenever you MOST 'knew' it is yours? Now imagine you'd got it on monthly payments. How would your conditional ownership have felt? "Yaaay, I've only got another two years to pay off and then it will be All Mine"

    Now think about the house. The money calculations here make sense. You probably will be tying up money which could be working better for you. Weigh that against waking up every morning, and going to bed every evening, knowing you never need to think about paying for this house again.

    Now weight that alongside that other point ... Tax Write Offs ... apparently, with you income, you will need tax write offs, and a mortgage would be tax deductible. (do you have any other deductible expenditures, or could you find some?)

    Calculate that tax. You are weighing a feeling ... a daily knowing of your ownership. What would walking around YOUR bedroom, having a .. bath in YOUR bathroom everyday mean to you? there's the feeling of full ownership, there's the 'knowing' it, Even when you are not feeling it, and finally there is what All that lumped together Means to you. The sum total worth of that 'It's All Mine' feeling.

    "Howdy, I'm Plan 9. I own my house, my bike and my pants. Lock Stock and barrel. And my money is not in a high interest account, however, I'm earning well, though I'm paying a bit more tax than if I had got a mortgage. Am I OK with this?"

    Good luck as you make your best decision.
     
  7. Strange Famous

    Strange Famous it depends on who is looking...

    Location:
    Ipswich, UK
    It depends if its an investment of a home I guess.

    For most people its both.
     
  8. Charlatan

    Charlatan sous les pavés, la plage

    Location:
    Temasek
    What kind of interest can you get if you put that money in an investment vs. what are the interest rates on a mortgage.

    If you can make more by putting that money to work (ie the investment rate minus the mortgage rate is still a plus) then you should do what Borla suggests and put a significant deposit down (one that avoids insurance and other penalties).

    Don't forget that a house is also a potential investment. Further economic crashes aside, the value of the house should increase over time as well.
     
  9. Baraka_Guru

    Baraka_Guru Möderätor Staff Member

    Location:
    Toronto
    Is this a home or an investment?

    If it's a home (you plan to keep it for more than 10 years, or, better, you plan to keep it for good), then consider the above option of adequate down payment plus cheap mortgage. Use whatever cash you have left over to invest for a return that exceeds the interest expense of your mortgage (which should be fairly easy over the long term).

    If it's an investment (you plan on improving it, then flipping it inside of five years, say), buy it outright, use your awesome cash flow to improve its value, then look at selling it when the housing market recovers (even a bit). You should make a decent return in two to five years' time (theoretically), though that might be a bit of a gamble in this economy.

    In my opinion? A house as an investment is a bit risky in this economy. You could be caught holding onto an asset you might want to unload but can't.

    A house as a home? Credit is really cheap. Take advantage while you can, especially if you have job security.

    Ultimately, you should decide what this is. Your home shouldn't be an investment; it should be your home.
     
  10. Plan9

    Plan9 Rock 'n Roll

    Location:
    Earth
    Pfft, no such thing as job security in the US, BahGoo.

    ...

    Thanks for all the response, everybody. It helps put things in perspective. I had read a lot of what you were all saying from various articles online but reading it here makes Thought Process 2 seem smarter. I do need professional help here, though. Gotta talk to an adult and figure out the numbers.

    ...

    Baraka_Guru,

    Investment or lily pad? Mmm, that's my problem... do I stay or do I go?

    Here's my thought process: Renting is a total money toilet, especially where currently I live ($1500 a month). Awful. I want to move away from Richie McYuppie land and get a house if for no other reason than I can afford it and its not a money toilet. I can either pay cash for it outright (I can easily buy a house in my price range in three years) or do the good minimum and have a half-size mortgage (as in the original post). I probably won't stay there forever so buying a house and flipping it later would make sense to me given that, for all I know, I could be forced to move somewhere for work anyway. Roughly how much of a down payment do I need to put on a $250k house to get a good deal? $100k? $75k? Hell, I'm going to have the money before I know what to do with it. I think my problem is that my primitive reptilian brain is trying to compare a house to buying a vehicle and I know it doesn't work like that. Vehicles always lose value, aren't locked to a particular place, etc. Mmm, definitely need to do more research.

    ...

    So, yeah, I need to get out of the renting trap. It's just a matter of how I do it.

    Time to head back into the Google fray and answer these questions.
     
  11. Baraka_Guru

    Baraka_Guru Möderätor Staff Member

    Location:
    Toronto
    Plan9, speak to a mortgage broker. Let him or her know what your cash situation is and ask about the kinds of deals you can get at certain down payments. You will start seeing good breaks at 20% or 25% down, I think. They will let you know the least you'll need to do for the best deals.

    Also, let them know your possible time frame(s) with regard for terms... (i.e., do you want a cheaper 1-, 2- or 5-year term vs. the longer 10-year fixed rates?)

    If you have the cash or the cash flow to pay down the mortgage fast, you might end up paying far less than you'd think possible.
     
    • Like Like x 1
  12. Xazy Vertical

    You should talk to your accountant.

    The question really comes down to whether it is worth it due to the tax savings on the interest.

    Also consider while saving up this money did you have a good return on the investment annually, or did you have very low return. You have to be able to calculate what your return was, subtract taxes, also look at that the variable that to tax savings with the interest.

    Also consider if you will have an emergency reserve, after emptying the bank, if not then you should take the mortgage.
     
  13. Borla

    Borla Moderator Staff Member

    Sound advice. I'd also add in, just as importantly, that if you are liquid enough to have six figures in cash available to you, you should be consulting a financial planner at least occasionally. If not, you are probably costing yourself thousands of dollars a year, if not tens of thousands. As BG said, talk to a mortgage broker (better yet, consult 2-3 to make sure you don't happen to get a bad/biased one). Find out what your mortgage options are. Then go consult 2-3 financial advisors, sharing the mortgage options with them. A good financial advisor will ask you what your goals are, ask about your future earnings potential, find out what is important to you, and give you sound advice as to how best to manage your assets.

    My $.02 is that, unless the warm fuzzy feeling of having a piece of paper saying the deed is paid for is worth five-figures extra for over the course of a few years to you, you are probably going to be best off using some of the money on a sizable down payment, keeping a healthy savings account, investing the balance (most of it conservatively), and getting a low interest mortgage.
     
  14. Baraka_Guru

    Baraka_Guru Möderätor Staff Member

    Location:
    Toronto
    Always find out how the broker/advisor is paid.
     
    • Like Like x 1
  15. RogueGypsy

    RogueGypsy Vertical

    There's some good advice in this thread. You just need to sit down with an adviser and work the numbers. If you can earn an interest rate higher than the mortgage rate, get a loan and invest the rest. If the mortgage rate is higher than earned interest rate, pay cash.

    In your situation, which seems to be pretty fluid, where you're traveling a lot or may get transferred. A $250k anchor seems like a strange purchase. Just sayin'.

    If it were me, I'd start reading the paper and calling banks for auction lists. I don't know what area you're in, but banks are sitting on a PILE of foreclosures that you can pick up 1/2 price or better right now. You might be able to get your house for cash and still have a pile to invest. Maybe think outside the box a little. In a time when most are cash poor, if your sitting on a stack, you have a unique negotiating position.

    Look at Duplexes, Triplexes and apartment buildings. If you may not be around very often, it's nice to have close neighbors to watch over your place and no lawn to mow.

    Or just go full on Dirk Pitt and buy a hanger on rural or private airstrip.

    Hell, you can still buy private train cars too. Take your home with you when you move. Or a surplus C-124, that would be the ticket!

    On the other hand, if your just looking for a place to invest a large chunk of cash, maybe open The Bank of Planet9. At $250k I think you'd rank in the top 10 for liquid assets.

    ..
     
  16. spindles

    spindles Very Tilted

    Location:
    Sydney, Australia
    My only thought - compound interest is a killer - if you can avoid it, then my advice is do so. Even tax breaks don't *make* you money - they only minimise the money you lose - you don't come out in front from this.

    edit - this is from someone who lives in a country where interest rates are significantly higher than in the US AND where interest costs on your principal place of residence aren't tax deductible, so the advice does need a grain of salt added.
     
  17. cynthetiq

    cynthetiq Administrator Staff Member Donor

    Location:
    New York City
    And that is why man foreign investors in the US purchase the property outright. They don't get the tax benefit anyways, so why pay more for the home via interest.

    streak_56 it is retarded, until you start to look long and see things like 2011 dollars versus 2041 dollars. Paying something in the future with today's locked in dollar price is not retarded in any way. In fact it's more retarded to pay in the future dollars because they are worth much much more.
     
  18. streak_56

    streak_56 I'm doing something, going somewhere...

    Location:
    C eh N eh D eh....
    improper use of retarded?
     
  19. cynthetiq

    cynthetiq Administrator Staff Member Donor

    Location:
    New York City
    Not really, but the intention is that you believe it's not a wise thing to do. In many ways purchasing something with today's dollar is not a better idea when compared to what a dollar bought "in the old days." This is why the calculators for adjusted for inflation help you see that it costs more to pay with today's dollar than yesterday's.
     
  20. streak_56

    streak_56 I'm doing something, going somewhere...

    Location:
    C eh N eh D eh....
    My intention with the statement was (to remove the retarded tag) to say, that the money paid in interest now, since he has the full amount, would be a waste, as the money he would save in interest could be used to invest into something that would have a higher return....