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If I Have the Money to Purchase a Primary Residence, Does it Still Make Sense for Me
Old 12-21-2011, 08:58 AM   #1
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If I Have the Money to Purchase a Primary Residence, Does it Still Make Sense for Me

I am 41 and I have rented thus far. I would like to be able to retire early (as soon as possible), but probably within the next six to nine years is more likely. I will probably become a homeowner within the next year.

The cost of the home will represent about 35% of the money that I have thus far saved up for retirement. I have not factored in a small future defined benefit pension that I will start to receive at age 60 and I have not considered any future payments that I may receive from social security. If I paid cash for the home, of course a significant part of my current budget, and my retirement budget, will be reduced.

Per Turbo Tax, my effective federal tax rate for 2010 was 17.27%. Annual property taxes will be somewhere between $5,000 and $6,000 a year. I think that an itemized deduction, that includes both the property tax payment and the payment on the mortgage interest, would be greater than the standard deduction that I currently claim, since I do not itemize. On the other hand, if I pay cash for the property, I would not have to pay any mortgage interest at all, and that seems kind of attractive.

If I obtain the mortgage, the money that could be used to pay for the house could stay in other long term investments that have the possibility of greater long term return (but as you know, the stock market in the last ten years has not actually provided a great return). I also recognize that mortgage rates are the lowest they have been in a very long time, and I am not sure if that then weighs in favor of me acquiring a mortgage to pay for the home.

So, based on my situation, do you think it is better to pay cash for the home or to obtain a mortgage and make monthly mortgage payments? Thank you for your insight.
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Old 12-21-2011, 09:24 AM   #2
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What are you paying for rent? What is the cheapest place you can rent in your town? Are you moving once you retire?
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Old 12-21-2011, 10:05 AM   #3
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Hi rec7:

I would estimate the cheapest place I could rent in my town would be about $1,000 a month. Due to the location of family, friends and social activities, I do not plan on moving once I retire.
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Old 12-21-2011, 10:32 AM   #4
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So, based on my situation, do you think it is better to pay cash for the home or to obtain a mortgage and make monthly mortgage payments? Thank you for your insight.
My tax guy says the only people that take out debt are those who need it. We paid cash for our second house/property instead of throwing the money away in interest.
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Old 12-21-2011, 10:33 AM   #5
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In the current climate of negative real interest rates, a mortgage fits well, doubly so if you believe inflation will kick higher during the mortgage term, in which case you'll be repaying with inflated dollars.
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Old 12-21-2011, 10:36 AM   #6
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midnighter,
It's difficult to answer your questions without more facts. But... this is one of best times to buy a house in my lifetime. Prices are depressed and interest rates are so low, renting sometimes looks more expensive . Why? Because with inflation you should be paying it off with inflated dollars. Oh course this assumes no depression in the next 20-30 years. If your credit is good, I'd finance the house.
But I am curious, since you're 41yo and have always rented, what has pushed you to the point of buying a house? Even if you bought it outright, houses are a depreciating asset. Things break, roofs need to be replaced, and if you are married DW will want to spend more money to improve her nest. To me, a large part of owning your home is having the freedom to change it to your own tastes. (Example: man cave in the basement ) I'm just not convinced that home ownership is a financial decision as much as it is a life-style decision.
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Old 12-21-2011, 10:37 AM   #7
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So, based on my situation, do you think it is better to pay cash for the home or to obtain a mortgage and make monthly mortgage payments? Thank you for your insight.
The most important aspect of the mortgage is that you have 30 years of flexibility to decide whether to pay it off. If you buy the home then you lock up a large amount of cash in a huge illiquid asset. If you buy the home and then seek a mortgage you'll get less-favorable terms.

It's been over 50 years since an average homeowner has been able to borrow so cheaply and invest long. This is literally the opportunity of a lifetime. But there are significant asset-allocation issues around that decision, as well as how long you plan to stay in the home.

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Old 12-21-2011, 10:39 AM   #8
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When looking at expenses, consider if you would buy nicer than you would rent. For me, renting was much cheaper than owning a home has been, even had we bought the home with cash.

The reason is that while we wouldn't buy a 700sq ft. condo, we were happy to live in an apartment that size. The 1600sq ft. townhouse we purchased is a lot more expensive to live in, just by virtue of being bigger and in a nicer location.
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Old 12-21-2011, 11:17 AM   #9
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When looking at expenses, consider if you would buy nicer than you would rent. For me, renting was much cheaper than owning a home has been, even had we bought the home with cash.

The reason is that while we wouldn't buy a 700sq ft. condo, we were happy to live in an apartment that size. The 1600sq ft. townhouse we purchased is a lot more expensive to live in, just by virtue of being bigger and in a nicer location.
Good point pimp. The house would be nicer (and more costly) than a small one bedroom apartment.
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Old 12-21-2011, 11:23 AM   #10
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midnighter,
It's difficult to answer your questions without more facts. But... this is one of best times to buy a house in my lifetime. Prices are depressed and interest rates are so low, renting sometimes looks more expensive . Why? Because with inflation you should be paying it off with inflated dollars. Oh course this assumes no depression in the next 20-30 years. If your credit is good, I'd finance the house.
But I am curious, since you're 41yo and have always rented, what has pushed you to the point of buying a house? Even if you bought it outright, houses are a depreciating asset. Things break, roofs need to be replaced, and if you are married DW will want to spend more money to improve her nest. To me, a large part of owning your home is having the freedom to change it to your own tastes. (Example: man cave in the basement ) I'm just not convinced that home ownership is a financial decision as much as it is a life-style decision.
Thanks tightasadrum. My credit is good. Yes, houses are a depreciating asset and I will have to factor in maintenance costs on the house in my budget. The house is a home owned by a family member that I may purchase in the event of the death of the family member. If I purchased the home, it would continue to keep the house "within the family". But I have been looking at other homes in the area too.
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Old 12-21-2011, 11:32 AM   #11
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Good point pimp. The house would be nicer (and more costly) than a small one bedroom apartment.
This is really the question you need to answer for yourself before you go on. Would the utility of living in a larger/nicer residence be worth the expense to you?

Don't make the mistake of trying to make a rent or buy decision on an apples to oranges basis. If you're happy in the one bedroom apartment, then compare renting that apartment with buying a modest one bedroom condo. If you'd really like to have some additional space and amenities, then compare renting a single family home to buying a similar single family home. But, don't mix the two decisions.
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Old 12-21-2011, 11:38 AM   #12
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This is really the question you need to answer for yourself before you go on. Would the utility of living in a larger/nicer residence be worth the expense to you?

Don't make the mistake of trying to make a rent or buy decision on an apples to oranges basis. If you're happy in the one bedroom apartment, then compare renting that apartment with buying a modest one bedroom condo. If you'd really like to have some additional space and amenities, then compare renting a single family home to buying a similar single family home. But, don't mix the two decisions.
Good Point. I will like having a front and backyard. I will like having a little space between me and my neighbors, instead of sharing a wall. I will like having more control over the layout and design of my own home. I will like the opportunity of a pet. I won't love the maintenance part of home ownership, but I think I can deal with it. My own home would give me the possibility of a tenant too, if I wanted or needed a situation like that at some point in the future.
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Old 12-21-2011, 11:41 AM   #13
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midnighter777 I could ask you a million questions but I think this is a lot better.

http://michaelbluejay.com/house/rentvsbuy.html
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Old 12-21-2011, 12:25 PM   #14
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I won't love the maintenance part of home ownership, but I think I can deal with it.
That's something to consider.

In my case, I built an easy to maintain (small, single story, all brick, etc.) home and generally haven't minded doing most maintenance myself. It's been a bit like a part time job I can't be fired from. Cutting the grass and maintaining the landscaping, painting and other simple decorating chores, minor repairs, etc., etc., have been a part of my life for the 34 years we've lived here. DW pitches in too. It's saved a ton of money over hiring these things out.

If you don't think you can handle this stuff, or if you'd hate it, just be sure to factor in the expense of having someone else do it.

On the mortgage or not issue...... Don't fall for the silly rule of thumb that says it's always better to pay cash (when you can) than borrow. At today's low interest rates (talking about a near 3% 15 yr conventional mortgage), there might very well be an opportunity to have a mortgage be a financial advantage. Study the situation, make your own fact-based assumptions, understand the risks and rewards and make your own decision. Don't confuse "borrowing to buy something you otherwise couldn't" with making a financial decision to borrow at historically low rates despite the fact you could easily pay cash if you wanted.
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Old 12-21-2011, 12:40 PM   #15
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If you buy a house, in this market I'd suggest buying something that you could live in for the duration. I am thinking of a small, single story, easy maintenance house with an easy maintenance yard in a safe and convenient neighborhood for you. Then you are less likely to have to downsize as you grow older. In this market, that is comforting.

As for the mortgage vs paying in full, actually we have had many discussions on this topic. Here's one that took place prior to the housing crash. As Nords and youbet point out, things are changing and mortgage rates are very low.

Still, as a pay-off-the-mortgage fan, I like the simplicity and security that a paid off house contributes to my daily life. It may or may not be the most financially advantageous (I suspect it is very close), but having no mortgage debt at all contributes to my happiness and contentment in retirement.
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Old 12-21-2011, 06:07 PM   #16
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Still, as a pay-off-the-mortgage fan, I like the simplicity and security that a paid off house contributes to my daily life. It may or may not be the most financially advantageous (I suspect it is very close), but having no mortgage debt at all contributes to my happiness and contentment in retirement.
Unless paying for the house outright takes most of your money for FIRE. I think I get more peace of mind having extra savings and paying a cheap mortgage. But that is absolutely an individual decision.
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Old 12-21-2011, 06:32 PM   #17
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The most important aspect of the mortgage is that you have 30 years of flexibility to decide whether to pay it off. If you buy the home then you lock up a large amount of cash in a huge illiquid asset. If you buy the home and then seek a mortgage you'll get less-favorable terms.

It's been over 50 years since an average homeowner has been able to borrow so cheaply and invest long...
I count myself among people who do not like debts, but have to agree with this. You can always change your mind and pay off a mortgage later. That is if inflation and the interest rate are not going up in the next few years as most people think. Count me among those too!
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Old 12-21-2011, 07:08 PM   #18
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Since you are 6-9 years or more from RE and house prices are historically low as are interest rates, I would favor getting a 15 or 30 year fixed mortgage.

I am currently refinancing and my new rate on a 15 year will be 3.375%. Rather than paying cash, I'm implicitly betting that my investments (which are many times my mortgage) will generate a return that is greater than 3.375% over the next 15 years and as a result I will come out ahead. If they don't then the mortgage loan will probably be the least of my concerns!!

You might also want to compare the after-tax cost of owning (mortgage interest, property taxes, insurance, maintenance, etc) with the cost of renting a similar property, remembering two things; 1) rent will likely increase each year while the costs of owning will increase less or possibly decline and 2) the above assumes that the owned property doesn't appreciate or depreciate and over a long term it is likely that the property would increase in value.
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Old 12-22-2011, 07:02 AM   #19
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I always leverage real estate to the max when I buy it. That is get the lowest interest rate (fixed) with the lowest down payment (above the mortgage insurance cutoff) for the longest period. I believe this will give me the greatest flexibility during the life of the loan. Then you can always pay extra if that is where you decide to deploy your extra cash.

This has also put me in the position for several periods (1-3 years) where the CD interest rates are greater than the interest rate I pay the credit union. I believe this will happen again once the Fed stops propping up the banks. I also sign up for a HELOC so that I have the option to reduce the equity tied up in my house at a moments notice should I find a better way (and very safe) to deploy the money.

Rent vs own - I do not use this as a deciding factor. I own because I want to be in total control of where I live and my immediate surroundings.
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