Buying House - Cash or Mortgage - What Would You Do?

[stephenson]

Hi All,

We currently live in a nice home we bought after leaving megacorp and downsizing in another state - this house was always intended to be a holding pattern house - until we could decide.

Spouse and I are buying a “new” house (think about $X), now. It is in the same general area, and what we, uh … she wants.

We have a small mortgage on our current home. The current home is about half the value ($0.5X) of the new house.

Assets:
- $1.2X in MMF/cash
- $0.2X in CDs
- $3.5X in joint investments (stocks, stock/bond mutual funds, ETFs)
- $2X in several single family rental properties
- $4X in IRAs (not drawing, yet)

Income:
- military pension at $0.05X/year
- mega corp pension at $0.07X/year
- mega corp NQP at $0.2X/year for another 7 years
- rental income of $0.1X/year
- dividends from joint assets are going to cash at about $0.15X/year

Social Security at 70 is in four years and will be about $0.1X

The QUESTION - given the above circumstances, would you:
1. Buy outright
2. 30 year loan - and, with what downpayment
3. 15 year loan - and, with what downpayment

Thoughts?

 

[pb4uski]

If you buy outright, will your asset allocation change? IOW, would $0.5x of MM/cash just be replaced by and additional $0.5x home equity?

If so, then I would lean towards no mortgage as I suspect that the mortgage interst rate would exceed what you are earning on cash.

OTOH, if the $0.5x would come from selling stock, I would say go with the mortgage since it is likely that those stocks would outperform what you would pay in mortgage interest over a 15 year or longer period.

 

[stephenson]

Good point - I should have added something related to our burn rate.

If we bought outright, it would take $1.0X of the $1.2X cash/MMF, leaving $0.2X in cash. And, even thought we would spend more on taxes, insurance, power, etc with the more expensive house, our cash reserves would build up more slowly. But, based on even the higher burn rate, we would still be building cash, so the cash component of the current asset allocation, would, over time increase - until the next major purchase.

We would not sell any equities to buy the house. Would not touch IRA.

 

[Bamaman]

We moved back in the Fall, and finally got our last house cleaned out enough to put it on the market last week. 3rd looker is very interested and we're expecting an offer.

I'll be glad to get that albatross off my back. Although we have no AL property taxes because my wife's disabled, if we had taxes, they'd be $350 a month. And homeowner's insurance is about $250 per month. Utilities have been running $300 a month or so. Fortunately we paid cash for the house, but if we had a payment we'd be in a serious cash flow problem.

Everyone talks about the low interest charges and getting mortgages so they can invest more. I just don't like having a house payment hanging over my head. I consider having the house paid for in ER and "ace in the hole." I'll always have a nice place to live.

Now if I can just figure out what to do with 3 extra bedroom suites and all this "stuff" that won't fit in our "new" 3900 square foot home.

 

[pb4uski]

Good point - I should have added something related to our burn rate.

If we bought outright, it would take $1.0X of the $1.2X cash/MMF, leaving $0.2X in cash. And, even thought we would spend more on taxes, insurance, power, etc with the more expensive house, our cash reserves would build up more slowly. But, based on even the higher burn rate, we would still be building cash, so the cash component of the current asset allocation, would, over time increase - until the next major purchase.

We would not sell any equities to buy the house. Would not touch IRA.

So in that case you would be trading not earning interest on cash of ~1.7% for not paying 3%+ in mortgage interest... easy decision.

But while you'll take out $1.0x to buy won't you be adding $0.5x when you sell the current home? So the net decrease in cash is $0.5x (assuming your existing mortgage is negligible).

 

[stephenson]

Darn, another good point ... and, something I should have noted.

We were actually planning to simply rent the “old” house ... old house had $0.25X mortgage. Likely rent income around $0.43X.

 

[novaman]

How much of X do you need to live off of, or in other words what is your Expected WR for your day to day living?

 

[stephenson]

Our spend rate, including travel, is about 0.2-0.3X or so ... with house payment (50% down payment) would increase to about 0.4X or so.

We would still be saving a bit, and if I follow my model pattern, income at 0.57X - 0.4X = around 0.13X, maybe round down to still having an additional 10% of the price of the new house per year, over and above new total spend rate including the new mortgage, available to invest.

 

[bushpilot]

Pay cash, be free.

 

[ExFlyBoy5]

On another note, when you pay cash for a house, closing costs gets much cheaper and closing itself is easier. If you are in a situation where it's a seller's market, you can gain an edge as a cash buyer since it doesn't require all the BS that lenders require (and can make closing on time a huge pain) which can be quite attractive to a seller.

Our last two houses were paid for in cash and I wouldn't do a mortgage again unless there is a very, VERY compelling reason.

 

[fosterscik]

Just went through this myself. I didn't want to sell my existing (mortgage free) house before a new one was constructed. We have an old cat who does not like change. For me the problem was tax minimization.
We could have:
1) Paid cash using Roth money - but that would deplete most of our tax free stash and we couldn't replace the Roths (unless the existing house sold very quickly).
2) Paid cash using IRAs, but taxes would have been pushed into the 32 or even 35% bracket, IRMAA charges would apply, lots of reasons not to do that.
3) Paid cash using after tax money - probably the best cash option paying 15% on the taxbale gains.
4) Get a mortgage.

We did (4). We had no problem getting a 30 year, 80% mortgage, even though we had 1 tiny pension and are living off our investments. We only had to show 3 months of withdrawals to demonstrate "income". The 20% down came from after-tax investments.
Once our existing house sells we can either pay down the mortgage or invest the proceeds. We'll see but I suspect I will invest and carry the mortgage.

 

[statsman]

Spouse and I are buying a “new” house ...

Wasn't sure if "new" meant a new build or just a different house. If the latter, then the following wouldn't help you much.

On another note, when you pay cash for a house, closing costs gets much cheaper and closing itself is easier. If you are in a situation where it's a seller's market, you can gain an edge as a cash buyer since it doesn't require all the BS that lenders require (and can make closing on time a huge pain) which can be quite attractive to a seller.

Our last two houses were paid for in cash and I wouldn't do a mortgage again unless there is a very, VERY compelling reason.

When we moved from CA to TX in late 2018, we ended up with more than enough cash from the CA house sale to purchase the TX house outright (much to the anger of some native Texans).

We ended up in a new housing area, and not having to deal with a lender did speed up and ease the closing process. In addition, we were able to get a 5% cash discount on the base price of the house plus a 10% cash discount on any design features we added. This pretty much convinced us to go with a cash deal than a mortgage.

 

[stephenson]

Thank you to all for great comments - it was also helpful food for thought.

Here's what we decided to do:
- 30% down
- 15 year at 3.125 zero points
- VA loan that does not require a VA funding fee as I have sufficient disability from VA due to a couple of injuries while in the military
- lender has eliminated their origination fee
- lender is rebating almost $6000 of closing costs (the usual stuff) which means total cost above the actual loan amount is related to prepaid (mainly amortization of insurance and taxes)

My real estate agent and I both told the mortgage broker (Synovus) that I could buy with cash and would only borrow if the terms were very, very good - not sure if this is related, but this has been the only time I have ever received any consideration during a real estate loan transaction. Anyone else had this happen?

It's interesting to hear the two basic perspectives expressed so much better than I am able to express.

I had been holding enough cash from our downsizing and move 2.5 years ago to buy a house in this price range, but given this will be our home for several years, I can now reallocate the 70% I'm not going to spend - will go about half into something like HYG or SHYG, and a quarter into tax free money market fund to buy equities or ITOT on market dips, and perhaps look for another small rental with the last quarter.

Thanks to everyone, again.