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Old 01-17-2013, 09:53 AM   #21
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The decision here is not lease vs buy, it is how to finance. The rental market in houston is even worse than the buying market, rents increased 16% last year and good properties were getting leased within hours of coming on the market (as I quickly learned). The rentals in our market had a price-to-rent ratio of <15 implying a bad deal for renters. The problem is all of the non-price-sensitive oil expats are increasing demand and the housing stock can't respond quickly enough because of poor urban planning, no zoning, and poor transportation infrastructure.

Anything could happen but I think there is a >50% chance we'll be here more than 5 years so want to buy (avoid rent increases, avoid having to move every year, be able to customize the space, etc.).
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Old 01-17-2013, 01:11 PM   #22
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This seems to be a similar question to the often asked "should I pay my mortgage off early" one. Basically that's what it is, right? A big total prepayment.

You might find perusing those threads to be useful as well.

In our case, we decided to put a healthy downpayment on our place, then invest the difference, realizing that we can always pay it off out of our portfolio if life changes. We didn't need to get a loan, but we preferred to leave that money as investments rather than paying in full.

We're betting that our money will do better in the market over the next 10-15 years plus than being used to pay down a low rate loan.

If one or both of us cannot work and low expenses becomes a bigger concern, we'll pay it off.

As the "should I prepay" threads will tell you, it's a hotly contested question. It seems to be a personality decision more than a financial one.

If you do decide to buy, I hope you'll consider limiting the price of your home to 2x your income or less. Big fat mcmansions can get in the way of early retirement goals, should that be your goal.

SIS
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Old 01-17-2013, 01:32 PM   #23
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If the market is truly heated, cash might be the only way to get your offer to the top of the pile.

I live near a super hot micro-market and work in the area. Redfin just named this micro market the 2nd hottest market in the country... Mira Mesa.

Which Neighborhoods Will Be the Hottest in 2013? | Redfin Blog

Friends are desperately trying to buy - (good investment opportunities because the tech center produces lots of potential high-income, renters.)
They are either offering all cash, or getting blown away by all cash offers.
One friend who just bought a 3/2 SFR paid all cash - then financed it as soon as it closed. He borrowed from his 401k to do this and was able to refund the 401k loan within a month. (Not recommending this).

Hot markets sometimes require cash offers... That doesn't mean you need to be mortgage free forever. I'm pretty sure there is some rule about putting financing in place within 30 days... forgot what the implication was if you don't get it done in time.
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Old 01-17-2013, 01:40 PM   #24
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Mortgage. With rates at and even below inflation, you are repaying with devalued dollars, thus a mortgage is essentially free money, and that's before considering any potential tax deductions.
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Old 01-17-2013, 01:50 PM   #25
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Originally Posted by ShortInSeattle View Post
In our case, we decided to put a healthy downpayment on our place, then invest the difference, realizing that we can always pay it off out of our portfolio if life changes. We didn't need to get a loan, but we preferred to leave that money as investments rather than paying in full.

We're betting that our money will do better in the market over the next 10-15 years plus than being used to pay down a low rate loan.

SIS
Several posters have given similar answers- take a loan, but use a large down payment.

What is the reasoning behind this strategy? As I see it, you are either going to have cash negotiating power, or not. A large dp has no effect on that. You are either going to have a mortgage and lien, or not. A large DP has no effect on that. As best I know, the only thing a larger DP gets you is sometimes a slightly better interest rate, and no requirement for mortgage insurance.

Hence, my reasoning is either use cash and get its advantages,, or make the minimum DP necessary to avoid mortgage insurance, usually 20%.

Could you tell me what other concerns you are seeing or responding to?

Ha
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Old 01-17-2013, 02:45 PM   #26
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Hence, my reasoning is either use cash and get its advantages,, or make the minimum DP necessary to avoid mortgage insurance, usually 20%.


Ha
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Old 01-17-2013, 06:17 PM   #27
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What is the reasoning behind this strategy? As I see it, you are either going to have cash negotiating power, or not. A large dp has no effect on that. You are either going to have a mortgage and lien, or not. A large DP has no effect on that. As best I know, the only thing a larger DP gets you is sometimes a slightly better interest rate, and no requirement for mortgage insurance.

Hence, my reasoning is either use cash and get its advantages,, or make the minimum DP necessary to avoid mortgage insurance, usually 20%.

Could you tell me what other concerns you are seeing or responding to
I can't speak for the others, but we are looking at buying a house and considering a similar strategy.

There's no "hard" reason why, but I look at it as a kind of "split the difference" approach. Maybe passive index investing is a good analogy: you choose to be average, acknowledging that you are deliberately giving up the chance for huge gains in exchange for not having to worry about equally huge losses.

The big factors that come to mind when considering mortgage or cash (or keep loan or pay-off early):
  • Monthly "nut" (i.e. cash flow). With the mortgage, obviously you need to come up with more money every month to make that payment. Without a mortgage, it's that much less cash flow you have to worry about. Consider three scenarios for a hypothetical couple: (1) 20% DP, big monthly mortgage payment, both husband and wife need to have their jobs in order to make the nut; (2) 100% DP (i.e. pay cash), neither partner needs a job to keep the house; (3) 50% DP, only one partner needs a job to make the payment.
  • Cash available for investments. Obviously with the mortgage, you are implicitly leveraging your real estate to invest more. And with today's super-low interest rates, I think it's fairly likely that a basic diversified investment portfolio will give better returns than the "returns" of paying down low-cost mortgage debt. A mortgage itself is a sort of investment if you think about it as inflation insurance. Inflation is great if you have a ton of debt. Again, three scenarios: (1) small DP, total investment leverage; (2) pay cash, the investments will have to wait; (3) meet you half-way.
  • Mortgage interest deduction (and also property tax deduction when thinking about rent versus buy). At least while this exists, for high earners, it is significant. I was playing with the NYT rent vs buy calculator. In most cases, you need a 10+ year ownership time to offset the costs of owning a home. But if you crank up your marginal tax rate to 35% or more, that window shrinks quite quickly.
  • The "sleep easy" factor. Rationally, I give the nod to leveraging the house and investing and getting the tax deduction. But I personally put more value on the "sleep easy" factor: as we (meaning me personally) have been looking at homes, and running the numbers, when I think about taking on debt, it just doesn't sit well with me. In my personal situation, I don't have enough cash to buy outright, unless I were to sell some investments. So again, I find the "meet you half way" solution appealing, because I can get my monthly nut (and overall debt obligation) down as much as possible.

That's my take anyway.
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Old 01-17-2013, 08:00 PM   #28
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What is the reasoning behind this strategy?
Maybe it's for the psychological benefit of the actor, to help with analysis paralysis (i can't decide which approach is better so I will split the difference). I think a similar issue occurs with DCA.
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Old 01-17-2013, 08:10 PM   #29
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Maybe it's for the psychological benefit of the actor, to help with analysis paralysis (i can't decide which approach is better so I will split the difference). I think a similar issue occurs with DCA.
I see. These kinds of things I tend to not undestand.

Ha
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Old 01-17-2013, 09:22 PM   #30
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Quote:
Originally Posted by haha View Post
Several posters have given similar answers- take a loan, but use a large down payment.

What is the reasoning behind this strategy? As I see it, you are either going to have cash negotiating power, or not. A large dp has no effect on that. You are either going to have a mortgage and lien, or not. A large DP has no effect on that. As best I know, the only thing a larger DP gets you is sometimes a slightly better interest rate, and no requirement for mortgage insurance.

Hence, my reasoning is either use cash and get its advantages,, or make the minimum DP necessary to avoid mortgage insurance, usually 20%.

Could you tell me what other concerns you are seeing or responding to?

Ha
You're right of course, that a minimum down payment would make sense if you wanted to maximize the "invest rather than prepay" notion. I get that. Adding to the down payment doesn't provide a negotiation advantage.

In our case we wanted to bring down the size of our monthly payment a bit, so that if either of us lost a job, one income could cover it comfortably. Probably just a psychological benefit, but it made sense at the time.

I'm not sure I'd make the same choice today.

SIS
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Old 01-17-2013, 10:00 PM   #31
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I think that if the OP has absolutely decided to buy, the best strategy would be as follows:

1. Decide how much you want to spend, and budget within the available cash
2. Get prequalified for a low interest mortgage
3. Shop for houses within your budget
4. Determine your best offer for the house you want, and make a cash offer of 10% less.

You might lose the first house, but there's no harm in trying and if they really want to sell they may bite.
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Old 01-18-2013, 10:12 PM   #32
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Remember that just because you make a "cash offer" on a house and don't make it contingent on financing doesn't mean you can't then opt to arrange financing prior to the closing date. Odds are, most people that are moving are moving to another home, and may not have a new home lined up yet....so while some people are ready to move (or already moved out), some might not be ready to close for another 2 months....giving you plenty of time to get financing ready.

Don't forget the relatively high property taxes in TX - would help 'offset' the lack of state income tax deduction, and then possibly make mortgage interest deductible.

Personally, would probably finance it if I could find a good 15 year rate, and invest the rest in a decently diversified mix of stocks.

And don't forget options like the PenFed 5 year 1.99% Home Equity Loan - zero closing costs!
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