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Mortgage or pay for house with cash?
Old 02-21-2012, 06:25 AM   #1
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Mortgage or pay for house with cash?

This is a variation on the "pay off mortgage" meme.

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.
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Old 02-21-2012, 06:26 AM   #2
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This must be "pay off the mortgage" week on the forum...
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Old 02-21-2012, 06:29 AM   #3
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This must be "pay off the mortgage" week on the forum...
Seems not everyone is suffering from a delay in the IRS refund..
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Old 02-21-2012, 09:37 AM   #4
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I don't see how this is any variation of the "pay off the mortgage" meme.
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Old 02-21-2012, 10:01 AM   #5
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I don't see how this is any variation of the "pay off the mortgage" meme.
Agreed. It's just another example of whether someone would rather to have an $X mortgage and $X in savings or investments, or if they'd rather have neither. Pretty much all the questions relating to whether one should get (or pay off) a mortgage come down to that. The rest is just details that need to be answered according to an individual's risk tolerance, debt aversion and analysis of the "spread" between what they expect to get in savings/investments and what mortgage rate they pay.
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Old 02-21-2012, 10:04 AM   #6
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This is a variation on the "pay off mortgage" meme.

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.
Well, I guess if you need income maybe that is best for you. The effective interest rate on my 30 year mortgage matches the yield of my portfolio so using the cash from my old house to pay for new didn't make sense. I am also willing to bet over the next 10 years the DOW is going to do better than housing.
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Old 02-21-2012, 10:06 AM   #7
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I am also willing to bet over the next 10 years the DOW is going to do better than housing.
On the other hand, if you think housing is going nowhere (or down), the old warning against financing a depreciating asset comes to mind. And it also seems to ignore the utility value of a house versus the utility of an equivalent-valued amount of stock. You can't live in a basket of index funds...
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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Old 02-21-2012, 10:07 AM   #8
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Agreed. It's just another example of whether someone would rather to have an $X mortgage and $X in savings or investments, or if they'd rather have neither. Pretty much all the questions relating to whether one should get (or pay off) a mortgage come down to that. The rest is just details that need to be answered according to an individual's risk tolerance, debt aversion and analysis of the "spread" between what they expect to get in savings/investments and what mortgage rate they pay.
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Old 02-21-2012, 10:21 AM   #9
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This whole thing about debt aversion in this country is overblown. That being said the only debt I have is the mortgage. I use it to my advantage. If some people have piece of mind or sleep better at night with their paid off mortgage then good for them. But that doesn't necessarily make it smart.
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Old 02-21-2012, 10:26 AM   #10
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This whole thing about debt aversion in this country is overblown.
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.

There is no one size fits all either way, and when there is an attitude that one size *does* fit all we start seeing this topic become almost political or religious in terms of the steadfast arguing by each side's respective adherents.

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).

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If some people have piece of mind or sleep better at night with their paid off mortgage then good for them. But that doesn't necessarily make it smart.
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.
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Old 02-21-2012, 10:31 AM   #11
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If some people have piece of mind...
Thank you for giving us a piece of yours...
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Old 02-21-2012, 10:34 AM   #12
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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.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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Old 02-21-2012, 10:37 AM   #13
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Originally Posted by nun View Post
This is a variation on the "pay off mortgage" meme.

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.
Might be good if you draw retirement income from an IRA or 401k where you'll pay income taxes. And if RMD's aren't forcing you to take that income anyway. Though rates are low enough that I'd like the loan anyway.

If someone had bought an over-priced home in 2006 with a mortgage, they would have had the option of a strategic default. If they bought with cash they were out the full amount of the loss.
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Old 02-21-2012, 11:17 AM   #14
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Originally Posted by ziggy29
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.
Your last paragraph describes me pretty much concerning living off pension income. Except for a few hundred bucks a month I dribble off into a vanguard fund most of my money goes into CD's and I Bonds. My reasoning is the only way my pension would ever not cover my expenses is if the pension system had money shortages which would have to come from a severe market loss, as that is where most of the pension money is at. No reason to double down on same investment as I am sure I would not be a better investor than my pension system is. I know a lot of people consider their pension as part of their " bond allocation", but I consider it the opposite since most of the systems money is in stocks. Needless to say, I am concentrating on paying down my mortgage.
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Old 02-21-2012, 11:31 AM   #15
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This whole thing about debt aversion in this country is overblown.....
Good news! No more worrying about debt here--that's been exported to Canada: Canada's personal debt levels alarm economists - chicagotribune.com

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The growth of household debt in Canada to levels approaching those seen in the United States before the 2008-09 crash seems to be keeping a lot of people awake, from central bankers to economists, lenders, real estate agents and the indebted consumers.
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Old 02-21-2012, 11:36 AM   #16
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That's great, eh?
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Old 02-21-2012, 12:00 PM   #17
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Well, I guess if you need income maybe that is best for you. The effective interest rate on my 30 year mortgage matches the yield of my portfolio so using the cash from my old house to pay for new didn't make sense. I am also willing to bet over the next 10 years the DOW is going to do better than housing.
Seems like there are some houses out there that are selling at 1970's prices. If you get one of those, it would seem to me that would be hard to beat, investment-wise. I'm not all that smart, but smart enough to know it's impossible to know which investments will turn out to be better 10 years out.
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Old 02-21-2012, 01:29 PM   #18
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Originally Posted by nun View Post
This is a variation on the "pay off mortgage" meme.

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.

I agree with a number of posts that this is the same as the "pay off mortgage" question from a financial point of view...

However, from an emotional point of view I see it differently... the first thing I would do is calculate the % of the cost has to my portfolio... if it were over 10% I would go for the loan... if it were very small, I would probably pay cash and save the expenses of a loan...

Also, if the interest rate is low (which is what I have), I will also take the loan. I do not believe that interest rates will remain low over the 30 years of my mortgage. I do not plan on paying it off early.
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Old 02-21-2012, 03:48 PM   #19
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Old 02-21-2012, 04:28 PM   #20
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I don't see how this is any variation of the "pay off the mortgage" meme.

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