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Old 02-21-2012, 08:29 PM   #21
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I paid for my last two houses with cash and it was so freeing not to have a mortgage but I do agree with the interest rate arguments . If I had the option of the rock bottom rates that are available now I would consider a mortgage .
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Old 02-21-2012, 10:03 PM   #22
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Originally Posted by ziggy29 View Post
Tell that to people who were convinced to buy more home than they could afford in a bubble area. Or to kids who were told college was the ticket to a secure future, and now they flip burgers with $100K in student loan debt that can't be discharged by bankruptcy (or even death if there are assets to recover).
I think debt aversion might have served them very well, at least in hindsight.
Some of us are wired to minimize the chances of falling short of what we need. These are not the same. This is why people use tools like FIRECalc. Yes, a 100/0 AA for a 40-year-old might maximize the average-case portfolio at age 65, but it also may "fail" more often than a 70/30 or 60/40 AA. And for the person seeking security more than uber-riches, that's important.
I don't see anything "smart" about taking a lot more risk than you *need* to take if it ruins your quality of life in the process.
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Here's another way to look at this. Let's say someone has far more in assets than they will ever need and they are looking at what they should do with a large chunk of those assets.
One family may decide that since they don't need to take excessive risks with their capital, they will keep it all in very safe stuff that allows them to not worry about market swings.
A second family might reason that they can put a large portion of it in *very* risky investments, knowing that if it goes to zero they still have sufficient assets to live on... so they are willing to "let it ride" and don't worry about market fluctuations.
Neither is wrong. Both are behaving responsibly according to their own means, assets and risk tolerance.
Heck, we don't even need to go to the uber-wealthy. Let's consider a retired pensioner with significant personal savings. Maybe they have a COLA'd pension which, with SS, gives them $80K a year in COLA'd income... and they have $50K in expenses. What do they do with their personal savings? Some would decide they don't *have* to play the market so they keep their assets in CDs and savings. Others would decide they can follow an aggressive asset allocation, since they don't expect to need to touch their personal assets for current income in their lifetimes, so they let it all ride in the stock market. Again, neither is wrong as both are potentially responsible choices relative to their circumstances and risk tolerances.
Ah, so this isn't about the mortgage at all, it's about asset allocation.

I think there's a middle ground somewhere between "Jim Cramer" and "Dave Ramsey".
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Old 02-22-2012, 05:37 PM   #23
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I am very interested in all of your answers to this thread as it may apply to me. I think that you come out ahead if you pay cash for the home rather than take a mortgage. By taking a mortgage there is less available to save and your target number is higher given your overall expenses will be higher.

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Old 02-22-2012, 05:52 PM   #24
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Do people really keep enough cash around to buy houses? Or do people cash out investments?

I can't imagine having enough uninvested cash sitting around to buy a house.

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Pay cash to get the house
Old 02-22-2012, 06:15 PM   #25
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Pay cash to get the house

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I think that you come out ahead if you pay cash for the home rather than take a mortgage. torres9
Right now in Southern California, we have bidding wars, again. Cash gets the house! We are considering pooling money with her in-laws to get a house for DD, since a full offer with mortgage does not get it done.

OTOH when preparing for ER, prepaying mortgage makes sense, as much as maxing out 401k. Building up the assets for FI. How can anyone say, that they are truly FI if they have car, boat and vacation home loans?
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Old 02-22-2012, 06:33 PM   #26
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Do people really keep enough cash around to buy houses? Or do people cash out investments?

I can't imagine having enough uninvested cash sitting around to buy a house.

Amethyst
I finally cashed the last of my employee options out a few months ago. Left it in cash thinking we might buy a place in Arizona which we just did. We will still have plenty of cash left but more in our "normal" range. Perhaps we are not typical?
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Old 02-22-2012, 08:27 PM   #27
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Pay cash if you can, for peace of mind. Borrow at historically low rates if you don't mind debt.
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Old 02-22-2012, 09:44 PM   #28
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The houses I buy you pretty much have to use cash.

Though there's nothing stopping me from taking a mortgage out after it's all rehabbed.
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Old 02-23-2012, 08:50 AM   #29
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Originally Posted by torres9 View Post
I am very interested in all of your answers to this thread as it may apply to me. I think that you come out ahead if you pay cash for the home rather than take a mortgage.
OK, you think this. But what is the basis for that? Just because?

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By taking a mortgage there is less available to save and your target number is higher given your overall expenses will be higher.

torres9
So many pro-payoff people simply ignore one side of the equation. Don't you see that with the mortgage, you already have that portfolio 'saved'? If I take out a $100K mortgage, I have $100K extra in my portfolio, NOW. How long is it going to take you to 'save' that $100K?

Show me a FIRECALC run, with reasonable assumptions that puts you ahead by paying cash over 30 years. How come I have yet to see one presented by any pro-pay-off person, yet we keep hearing about the financial advantages of a pre-pay?

-ERD50
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Old 02-23-2012, 10:17 AM   #30
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Originally Posted by Amethyst View Post
Do people really keep enough cash around to buy houses? Or do people cash out investments?

I can't imagine having enough uninvested cash sitting around to buy a house.

Amethyst
Yes, we do. Our AA is to hold 20% in cash, and that 20% is enough to buy 2 small houses or one moderately sized one (and still keep enough in our emergency fund). I did exactly that in November 2011 when I found my 2nd rental. Having the ability to move quickly was a big advantage for me...I got a house listed for $76k for $58k...with one of the big reasons being that I had cash and did not need any loan approvals. Plus I was able to close in 7 days after offer was accepted.

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Originally Posted by ziggy29 View Post
Tell that to people who were convinced to buy more home than they could afford in a bubble area.

I think debt aversion might have served them very well, at least in hindsight.

I consider myself more on the side of the debt-averse, but I also recognize it as a personal preference because I place a high value on the secure feeling of being debt-free. I don't think others are irresponsible because they have a different tolerance for debt (assuming they aren't clearly overextending).

What's smart about people constantly stressing about the volatility of their investments when they don't NEED the volatility of riskier investments to realize their financial goals? Not everyone is wired to seek maximizing expected portfolio growth. Some of us are wired to minimize the chances of falling short of what we need. These are not the same. This is why people use tools like FIRECalc. Yes, a 100/0 AA for a 40-year-old might maximize the average-case portfolio at age 65, but it also may "fail" more often than a 70/30 or 60/40 AA. And for the person seeking security more than uber-riches, that's important.

I don't see anything "smart" about taking a lot more risk than you *need* to take if it ruins your quality of life in the process.
+1...agree. And I would add that to me, going into debt for an education (mind you, one that has a positive NPV) is different than going into debt for vacation to Mexico or a pair of expensive Italian shoes. One is nearer to an investment, the others not so much.

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Originally Posted by Nords View Post
Ah, so this isn't about the mortgage at all, it's about asset allocation.

I think there's a middle ground somewhere between "Jim Cramer" and "Dave Ramsey".
I'm more towards the Dave Ramsey side...although I admit I'll take a 0% loan from Ford on my car and then pay it off with the money that was earning 3% elsewhere.

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Originally Posted by ERD50 View Post
Show me a FIRECALC run, with reasonable assumptions that puts you ahead by paying cash over 30 years. How come I have yet to see one presented by any pro-pay-off person, yet we keep hearing about the financial advantages of a pre-pay?

-ERD50
I agree with you over the long run. Sometimes in the short-run things are different. As I mentioned above, I paid cash for a rental home recently. Could have taken a mortgage. However, mortgages on rentals are not such low interest...around 6-8% in my area. I could use a HELOC at an even lower rate, but that's an adjustable rate...so what happens if you buy PLANNING on that HELOC rate of 4%, and in 3 years it resets to 8%.

I supposed you could then pay it off with the cash you have in hand...but that would imply that you did not invest the cash for a higher return...which was the entire reason you would have done this in the first place.

I have enough money in the market in other areas (my 401k), so in my other savings buckets I'm shooting for lower volatility and moving my AA towards real estate.

This is a good discussion by the way...like reading all the views!
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Old 02-23-2012, 11:17 AM   #31
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If you had a large amount of cash from the sale of one house would you pay for the next house in cash? I think I would to reduce my need for income. I loose the potential investment gains from the money I lock up in the house, but there's no mortgage interest to pay and without a mortgage I'll need a lot less income and hence will have a lower tax bill.
The lump sum argument is a little different than whether you would use monthly income to accelerate a mortgage or invest it.

This has been our experience: In mid-2008 we sold a house for a large profit. We invested $400K of that profit in income producing investments (dividends, preferred stocks, bonds) that kick off 7-8%. We take $2600 out of that account each month and used it to pay a $400K mortgage at 4.65%, with enough left over to pay property taxes.

Even during the markets ups and downs, we've been fairly steady as she goes (some banks dropped dividends but there were also great bargains to be found so it worked out). Last year we refinanced into a 20-year mortgage at 3.875%. So now our payments are a little higher (@ 2400 instead of $2200), but the pot is growing a little. So long as the amount in the pot roughly equals the mortgage, we know we can pay it off at any time. Yes, there is risk involved, so you do have to be able for the ups and down. But so far we've weathered the downturn at the end of 2008/early 2009 and came out ok.

The choice we had in 2008 was to take 400K and sink it into bricks and mortar, and then it was gone. Yes, we would have no mortgage to pay if we bought the house outright - but we don't have a mortgage to pay now either, as the dividends pay it. We expect that at the end of 20 years, there should be something left in the pot, and if it's still kicking off $2K+ a month, that's income we could use when we are 70.

Another issue is that we are self-employed and use 33% of our house as office/studio space. So 33% of our mortgage interest reduces not only our 25% federal and 5% state tax, but also our 15% self-employment tax. So it's an even more valuable tax deduction for us.
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