I'm buying a house, do I pay cash?

[AltaRed]

Perhaps so JG, but the average person is not willing to play that game and sleep well at nights. It would be interesting for the original poster to drop back in here and make an observation or two of what has transpired.

[sgeeeee]

Quote:

Originally Posted by bpp Hi SG, As I understand it, you have a mortgage that you could pay off tomorrow if you had to, right?* I think that puts a different spin on things;* there isn't much sleep-at-night factor in such a case. Bpp

Yes. But I don't really follow the sleep-at-night argument. The original poster says he has enought to pay off. He can get a mortgage and invest the money. Or he can pay off and not have the money invested. If the interest rate is low and his investments do well (over the period of the loan) he comes out ahead by having a mortgage. If the interest rate is high and his investment return is low, he comes out ahead by paying it off up front. What is the probability of either of these cases? It depends on the interest rate he can get, his investment style and performance, and the period of the loan. Taxes need to be considered although the effect is small. The ratio of the mortgage value to total portfolio value plays a role. If you run the numbers (using FIRECALC) for various specific cases, sometimes keeping a mortgage produces the highest probability of producing a safe portfolio and coming out ahead financially. Sometimes paying off the house is safer and produces the most likely financial advantage. I sleep best at night when I play the odds. Someone else sleeps best at night when they have no mortgage.

Actually, we've had this discussion so often on this board that I'm about to fall asleep right now.

[grumpy]

We downsized after we retired and paid cash for the new house. We had already paid off the mortgage on the old house (we had refi-ed with a 10 yr. fixed rate) several years before retirement and did not want a mortgage on the new house. That mortgage was the ONLY debt we EVER had. I always paid cash for cars and when I could pay cash for a house I did. Always slept well at night.

Grumpy

[MRGALT2U]

Quote:

Originally Posted by () Its not nonsense at all, imo. If you're borrowing money for investing at a rate and term that creates a cost that is not exceeded by the expected return on the investment, then you're speculating and good luck with that.* If you're using historical reference data for the expected return that doesnt match up well with a reasonable expectation for the conditions during your arbitrage, you're speculating again. Mortgages are tough.* Taking the emotional "I wanna sleep at night/hate debt" piece out, most people change residences in 7 years or less.* In short periods like that, investment returns have frequently been lower than the prevailing average mortgage rates. If you have plenty of money and a long term horizon, and/or dont plan to move, and you can hang in there during a long term down/sideways market without flinching...go for it. The only case I can see for a no-brainer is if you can borrow at a rate while getting a sure-thing return on your money that exceeds the investment cost for the period of investment expected.* I dont know about you folks, but I cant get the rates needed to make that no-brainer deal work for me. Taxes obviously have a major effect on this.

I *was not talking about "no brainers". *But, saying that "borrowing money
to *invest" is a bad idea is just plain wrong. *I don't see how anyone
with real world experience would say such a thing. *Gosh, it's almost
anti-capitalistic.

JG

[MRGALT2U]

Quote:

Originally Posted by ((^+^)) SG Yes.* But I don't really follow the sleep-at-night argument.* The original poster says he has enought to pay off.* He can get a mortgage and invest the money.* Or he can pay off and not have the money invested.* If the interest rate is low and his investments do well (over the period of the loan) he comes out ahead by having a mortgage.* If the interest rate is high and his investment return is low, he comes out ahead by paying it off up front.* What is the probability of either of these cases?* It depends on the interest rate he can get, his investment style and performance, and the period of the loan.* Taxes need to be considered although the effect is small.* The ratio of the mortgage value to total portfolio value plays a role.* If you run the numbers (using FIRECALC) for various specific cases, sometimes keeping a mortgage produces the highest probability of producing a safe portfolio and coming out ahead financially.* Sometimes paying off the house is safer and produces the most likely financial advantage.* I sleep best at night when I play the odds.* Someone else sleeps best at night when they have no mortgage.* Actually, we've had this discussion so often on this board that I'm about to fall asleep right now.* *

Me too!

JG

[AltaRed]

Quote:

Originally Posted by grumpy We downsized after we retired and paid cash for the new house.* We had already paid off the mortgage* on the old house (we had refi-ed with a 10 yr. fixed rate) several years before retirement and did not want a mortgage on the new house.* That mortgage was the ONLY debt we EVER had.* I always paid cash for cars and when I could pay cash for a house I did.* Always slept well at night. * *Grumpy

Likewise. *And all that cash that wasn't being spent on interest was invested. It worked magic for DW and I with a portfolio that started in 1990 after mortgage payout and that could now spin off almost twice as much income as my upcoming DB pension simply sitting 100% in CDs. I wouldn't be convinced any other way.

[MRGALT2U]

Quote:

Originally Posted by AltaRed Perhaps so JG, but the average person is not willing to play that game and sleep well at nights.* It would be interesting for the original poster to drop back in here and make an observation or two of what has transpired.

While we are waiting....

As briefly as I can state it.............eventually (pretty soon actually)
we'll all be dead. Sleeping well is important. So is enjoying your days
(limited) and not worrying too much. Most of what you worry about won't ever
happen anyway.

JG

[sgeeeee]

Quote:

Originally Posted by AltaRed Likewise. *And all that cash that wasn't being spent on interest was invested. It worked magic for DW and I with a portfolio that started in 1990 after mortgage payout and that could now spin off almost twice as much income as my upcoming DB pension simply sitting 100% in CDs. I wouldn't be convinced any other way.

AR, You are no doubt doing the right thing for you. You clearly fear debt risk and would be skittish with money invested for a long-term target. But your statements above are just faulty logic and incomplete accounting. People who want to gain a more realistic quantitative idea of the mortgage/payoff decision should run some simulations and examine the numbers.

[MRGALT2U]

Quote:

Originally Posted by ((^+^)) SG AR,* You are no doubt doing the right thing for you.* You clearly fear debt risk and would be skittish with money invested for a long-term target.* But your statements above are just faulty logic and incomplete accounting.* People who want to gain a more realistic quantitative idea of the mortgage/payoff decision should run some simulations and examine the numbers.* *

Serious number crunching has saved my butt more times than I can count.
Being lazy, I don't always do as much as I should. However, as a general
rule, the more I put into it (up front) the better the end results. Kind of like life its own self...........

JG

[Sundance Kid]

And the final answer to the poster's question, is----- ? :

I'm in a similar situation, (see my first post, retired, contemplating relocation.)

Except, I'm doing it backwards. I won't live, where I live now, for the next 10 to 20 years. I need to upgrade, instead of downsize. I don't need BIGGER, I need BETTER.

I'm living cheap, right now. Not by necessity but, by circumstance. If I want to move to a location of my choice, should I take out a new 30 year mortgage, at my age 65, wife will be 62. She is still working, I'm "retired."

Should I pay cash for a new home or finance the purchase?

Now I'm sure, there are some of you that have been in a similar situation. Not everyone has been able to sell a property and make 400K+. Some have made considerably less and perhaps broke even. So what, did ya do?

I think! I have the financial resources, to do damn near anything, I wanna do.

I'm not looking to buy a $400,000 home. I'm looking at $150,000 to $200,000, in an area that I really like.

I'd appreciate your input and I'm sorry to jump in on the backside of the original posters question.

Thanks to all, I need some advice!!

[Nords]

Quote:

Originally Posted by Sundance Kid Should I pay cash for a new home or finance the purchase?

Guys, I'm not trying to shut down the new poster's questions, but if you weren't around when SG & TH & I duked this out before then kindly read the links to the other threads. A lot of your questions are hashed out there in great detail.

This isn't as simple as "sleep at night" vs "play the markets". Home sales & mortgages are an extremely illiquid transaction with high costs, so the length of time in the home is a factor. Paying a 5% mortgage while you own bonds paying less than 5% is also a loser, so investment allocation is a factor. Having a source of cash flow (like a defined benefit pension) is a big reassurance that you'll have some source of mortgage-paying funds.

If you're buying a house when you're 60 and financing it with a 30-year mortgage, there's a very good chance that one of you will still be alive when the mortgage wraps up. In fact, it might even be better to refinance when you're in your 80s and let your executor pay it off... holding the cash in your portfolio is probably a better deal than a reverse mortgage. I don't know, I'd have to do the math.

Spouse and I are holding a 30-year mortgage at 5.375% and that chunk of our retirement portfolio is invested in a small-cap value ETF (IJS). Thanks to Hawaii's home prices, it's a pretty big chunk and it defintely improves the portfolio's survivability. The ETF is doing gangbusters in our first year of this arbitrage, which is sure enhancing my nightime sleep but however is statistically irrelevant. We feel that we can easily handle this risk with my defined-benefit pension, our high-equity retirement portfolio, and our plans to stay in this house for the rest of our lives. So it's no big deal to be paying a mortgage until I'm 74 years old.

We think we're trained professionals. Run the math before you try this at home with your own retirement money.

But if you've chosen to sleep better at night, then don't attempt to distort the mathematics to fit your emotions.

[ready to go]

Thank you for the great input. Tax implications are important, financial security is the bigger concern. After closing on the purchase of the new house, we should still have about $90K remaining from the sale of the SoCal house. The deeper question is that if I pay cash for the house, will I need the money later? Only time will answer that.

I should provide a bit more data involving my RE plans. DW and I are both 48 and are ready to move from SoCal to an area with a lower cost of living and a slower pace. Excluding the money for a house, we have enough in investments that we should be able to live comfortably on less than a 4% SWR. Health insurance is the primary concern. DW plans on working. I’m planning on telecommuting…with a cut in salary. At some point, I hope to find the comfort level to cut the cord and stop working entirely.

[cute fuzzy bunny]

Ready to go...

with that description, i'd pay off the house. From what you say, you dont need the extra money. Although since you'll hae an income stream, if you feel more comfortable with a bigger portfolio and the idea of six figure debt doesnt give you any concern, you could keep a mortgage going with your income should your investments hit a hole in the ground.

Consider also that after paying off the mortgage you have more choices...you can retain the same investment mix...you can tilt it towards lower volatility/lower investment risk because you dont need to take the risk...or you can take on more risk/volatility and shoot for higher returns over the long term as if you hit a bad investment period you dont need to take high withdrawals to cover the mortgage.

In my case, with my wife still working a few days a week, making enough money to pay the bills, and without any standing debt, i've tilted our portfolio to almost 100% equity. Over the long haul my returns should be substantially higher than a middling portfolio. I consider our home to be our "bond holding". Its 'creating' whatever the mortgage interest rate is and providing ballast and stability to our net worth just like a bond would.

Also take very close looks at the tax situation; with a mortgage you'll need higher income/withdrawals to make the payments, although you may get a tax deduction of the mortgage interest.

By not having any debt and 'managing' my wifes moderate income, we've paid little to no taxes for the last 4 years. Its a better feeling than not having a mortgage...

If you dont get a mortgage, get a no-cost home equity line of credit for 100-200k. Wont cost you anything if you dont use it, but a nice way to tap into that equity if you do need to make a large capital expenditure or need some steady cash.

[Sundance Kid]

Sorry, didn't mean to beat a dead horse.

[BearlyWorking]

Interesting topic.

I'm new so I went back through the historical posts in this area and did some of the math. With the recent bubble, many people (like me) are looking for options to equalize asset mixes. It strikes me that this is a possible way to do that without selling your home.

It does need the right financial circumstances and the willingness/need to take a risk.

I wonder how this approach would work with rental real estate?

mike

[Dreamer]

We bought our house in 1986 and we are still living here. We paid our house off in a little less than 10 years. I don't know whether is was the smart thing to do or not, but I do sleep better at night and we probably would not have been disciplined enough to invest the difference. We save, but we also blow too much money at times! Of course, that can be why I am still working!

Dreamer