Paying Cash for a House: Gnarly or Stupid?

But it only applies if you have enough itemized deductions to exceed the standard deduction. Even then, depending on your tax bracket, you may be paying the mortgage company $10,000 in interest to save $2,800 in taxes.

Lindy

 

You can't plan on exact duplication of historical returns. But if he can't, with the help of a financial advisor, get a 7.5% (or at least several points higher than the 3.9% mortgage he could get) return on conservative investment of $200k over 20 years it's going to be a near SHTF scenario anyway and mortgage or no mortgage is going to be a moot point because he's going to be trying to survive in a complete breakdown of society as we know it. Quite simply, if the financial structure in place today doesn't completely collapse, you are an idiot if you can't (with professional help) get much more than 3.9% out of that type of investment in 20 years.

And you are correct that your situation is different if you can't claim mortgage interest on taxes and your mortgage rate would be twice his. But he asked us to game plan his scenario. And in his scenario it will cost him a massive amount of money ($150-175k is a very conservative number) to pay cash over getting a mortgage. I broke down the math in great detail with real numbers from the real world. I have yet to see anyone with a sound argument against the formula I laid out.

And that's even without factoring in that he'd have almost his entire wealth locked up in the real estate market instead of completely diversified if he could invest it elsewhere. Rewind 5-6 years and think about anyone who paid cash for a house in Vegas, Phoenix, or those other areas where the housing market fell 30-50% almost overnight in some areas. I bet they wished they had mortgaged instead. And if the market went the other way, he'd still have a $200k mortgage on a $500k house, so he'd still have that equity to leverage even if he did mortgage it. It's having the best of both worlds.

 

As I've said all along, I'm looking at 20 year returns, as that is a reasonable mortgage length in his scenario. The 20 year return on the S&P 500 is above 11%. The 60 year average is above 7%. If, with the assistance of professional help, someone can't figure out how to leverage that into beating 3.9% minus a 28% tax write-off, they deserve to waste their own money.