Paying Cash for a House: Gnarly or Stupid?

Yes, that's the best option to do. There's a couple of things that are an issue with that. Many get the idea of the savings/investment and then don't follow through with that intention, thus the still lose. Someone with the willpower makes that better.

He could still do both because the money he gets back as a tax refund can be utilized for such savings/investment plans. It has been a good method for me to amass more dollars that would have just gone out the window on stupid little items.

 

It's tricky in Canada, but there is a way to use a home equity line of credit (HELOC) and other tools to make your mortgage tax-deductible. The mechanism: in Canada, investments are tax-deductible, so a HELOC drawing from your mortgage payments can be used to make investments that will in turn be used to pay down the mortgage. If it sounds like a lot of work, it is, but there are full services out there that will do this for homeowners. You can quite possibly pay down your mortgage in half the time.

 

The problem really is being able to pay cash for a house. It really is not an easy thing to amass enough funds to pay cash. After that it still is better to pay with today's money than tomorrow's money. That alone is still a better deal than the idea of the weight of a mortgage. In other words, come time when you decide you'd like to marry and raise children, being able to buy a large enough home for the future family is challenging if not impossible to pick up a property for cash that isn't a total shithole, in a shithole neighborhood, or have shitty schools.

 

It also depends on the wider housing market. He could buy it today but see its value drop 25% in five years' time. Compare that to inflation.

This is why I was wondering if he was after a home or an investment.

 

I'm going through the same questions. I'm looking to buy a house in my new home town. But, I do investing all the time, and I like liquidity, which leaves me in a position to take advantage of opportunity. If I had $500k in cash or liquid investments, I might pay $250k cash for the house. Not so if I had "only" $250k, which would leave me naked of cash. I could pay 25 to 30% down, and take the rest on a ten or fifteen year mortgage. My credit score is 829. I've got a 30 day lock on 3.375% on a fifteen year mortgage. I'll put the balance in "semi-liquid" five year CDs at 2 - 2.25% which leave me a net cost of less than 1% to keep my liquidity. And I can always pay the mortgage early without penalty, if I choose.
The real estate agent that I'm working with sees no advantage to a cash offer. Most of the homeowners that are in a distress situation owe so much to the bank that they are constrained by their mortgage, so they can't make a buyer any better deal for cash. She claims that a pre approval (not prequalified) letter from a lender is every bit as good as a cash offer. Though a cash offer could close more quickly. She also commented that buyers (and seller's agents) are impressed with a large earnest money deposit when making an offer to buy.

I agree, and I don't owe nobody nuthin' except for the mortgage on my house in Boston. BUT... I would carry some debt to preserve my liquidity, and pay down the debt as I was able. I'll probably take a mortgage on the home I buy in Lincoln, and I MAY pay it off when the house in Boston sells.

Lindy

 

liquidity. yes, that's it.

having to sell your owned house in an emergency due to medical expenses or dire need... you're not going to get the price you want for it nor will you be able to usually sell it in the timeframe required for the emergency.

I like being liquid. It gives me options. Owning my own home outright would be nice, but having choices when fan gets hit with shit makes for more restful nights during those times.

 

Yes, there have been foreclosures without a mortgage. Google Jason Grodensky's story. He paid cash and was still foreclosed upon. He's not the only one, just the most widely reported. Although things got straightened out in the end it appears, he dealt with a massive legal/financial headache over it. You can also lose your house due to HOA issues, tax issues, eminent domain, etc. Granted, those are the minority of cases, but they still happen.

And you three are missing a MASSIVE piece of the puzzle if you think it's just a matter of "tax write off versus compound interest".

Let's pencil it out in the scenario Plan9 has given. He has $250k in cash, and wants to purchase a $250k home. He has a steady income and decent credit. I'm guessing either 25% or 28% tax bracket. I'll try not to list pros or cons that could be had in both scenarios (i.e. he's not renting, or he might not be able to sell for a long time if he has to relocate).

Plan A : Pay Cash
He spends his $250k on his $250k house. He has no mortgage, owns his home outright, and has the warm fuzzy feeling that accompanies that. His savings/investment accounts are $250k lighter.

Pros:
No monthly mortgage to worry about paying
No money lost paying interest

Cons:
$250k reduction in liquid investments
The value of that $250k now rests entirely on what the real estate market does, and his ability to resell the house if/when he needs to in the timeframe he needs to.

Plan B : Put 20% down and mortgage the rest (for the sake of argument we'll use the last mortgage offer I got in the mail, 3.9% fixed for 20 years).

He spends $50k on a down payment. He gets a 20 yr fixed mortgage on the remaining $200k, at 3.9% interest. He keeps the $200k leftover in savings/investments.

Pros:
He earns interest on that $200k. The average return on the S&P 500 over the last 20 years has been about 11-11.5%. But let's say he wants to be really conservative so he hedges his money in less volatile investments and nets a 7.5% return annually.

He writes off a huge chunk of his mortgage payment because it is interest.

If the real estate market shoots through the roof, he can pay his mortgage off at any time and gain the investment value as it rides up. If the real estate market tanks he only suffers the loss of equity he's built so far. He also has the option of walking away at any time (unethical in all but extreme cases in my mind, but an option many have taken in recent years) and only losing his equity.

He is building his credit history/good credit.

Cons:
He has a monthly mortgage payment.

He is paying interest on a loan he didn't HAVE to take.

Now, let's do the math. Here are the basic things we need to calculate our decision on: Starting cash of $250k. Home purchase of $250k. A 20 year mortgage at 3.9% (realistic in today's market). Investments at 7.5% (conservative investments). Federal taxes at 28% (figuring income falls between $80-170k).

Over the course of 20 years, paying as scheduled, he would pay $88,347.52 in mortgage interest. After writing off 28% of it, he'll pay $63,610.21.

His $200k investment would earn him $222,412.93 over that same 20 years.

In his scenario, $158,802.72 is gained by having a mortgage. And that's using extremely conservative math, and not accounting for the massive flexibility he would have in managing his investments if the $200k was free to move around instead of being wrapped up in a house that may or may not gain value or be able to be sold when he wants to!

 

As I clearly stated, the S&P 500 Average over the last 20 years is well over 1.5x that 7.5%. Treasury Bills today are basically the same interest rate as a mortgage (and you can write off 28% of the mortgage interest). Finding a way to safely and consistently earn 7.5% on that sum of money should be incredibly easy with sound financial advice. I'd personally be disappointed to earn less than 10-12%, but I wanted to be extremely cautious in that scenario.

If you can't find a way to invest $200k to fall somewhere in the middle you are doing something very wrong or the entire financial system as we know it is collapsing so far that mortgaging or not mortgaging is a moot point. Even if you want to be the financial equivilant of being too scared to leave your house for fear you might get hit by a bus (invest 100% in T-bills), you are still ahead by investing the $200k instead of paying cash for the home.

 

I bought a foreclosure home 2 years ago. I did not pay cash for it and wasn't interested in paying any more than 20% down. It's rented and it pays for itself in all costs.

Foreclosures are good, REOs (bank owned) are better since you get to see the house before you buy it.

 

we payed cash for a foreclosure in florida back in january...

we've gutted it, bought all new appliances, and will begin the total refurbishing as soon as we get back down there in october. the house sold in 2006 for four times the amount we payed for it in january of 2011. we plan on living in it and have already liquidated one property in florida and will sell the other as soon as we move in the new place (three bidders already in the wings). we have a small home-equity loan on the place here in new york for a tax write-off...

cash is good, but you've got to think of tax write-offs otherwise the government will rape you...