Finance house or pay cash?

[Lazarus]

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


Ha

+1

 

[Desire2Retire]

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.

 

[photoguy]

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.

 

[haha]

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

 

[ShortInSeattle]

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

 

[Meadbh]

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.

 

[MooreBonds]

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!