Buy Your Home with Cash not Loans
|Buying a House with Cash
In an ideal world, if your parents had brains, your parents would have saved up for the day you become an adult and fork over a nice nest egg for you to go forth and have a much better life than they did. Some where alone the way this tradition, which dates back almost 10,000 years, got completely lost in the U.S. Yes, ever since ancient times, the father would either fork over money so that his daughter could have a good life, dowry, or fork over money so his son could have a good life, a sort of coming of age gift. Even the poorest people did this. They all had the good sense that the next generation should have a better life than the last.
It is my contention you should never ever take out a loan, under any circumstances, not for education, nor car, nor a home. To prove this, I presented a comparative analysis of someone who saved for the same time as someone who took out a mortgage. Please note that the person who takes out the mortgage overpays for the same house to the tune of anywhere from 30% – 100%. Not only that, the math gets worse when you account for dollar value over the time period of the mortgage. Accounting for that you reach nose bleed heights of 200% for the same house. Even worse accounting for dollar value versus gold, you start to get into ridiculous loses on a mortgage.
I present to you the discussion we had on this subject: On a side note, everyone that responds in the discussion have a vested interest in you not paying cash for a home. That is to say, they are either brokers themselves, lenders and none of them are actual financial advisers with a fiduciary responsibility for you to earn money.
It is my theory that if I start now and account for dollar value / mortgage / interest / taxes / loan costs associated with the transaction itself / interest on those additional fees that saving to pay cash for a house = to the time that I would have stayed in the house, I will always come out ahead. Assuming 10 years, 15 years, 30 years. Even with moderate interest rate on savings of 4%
Unless you are rich the chance of your paying cash for a house anytime soon is doubtful. As far as your theory. You have to decide whether you need the tax right offs from the interests paid on the mortgage against your personal income tax liability or do you want all the free equity in your house. It is usually a trade off. I paid cash for my house, but took out a HELOC to offset some of my tax liability. That is an option as well. It is best to talk with a personal financial adviser or investment attorney to see which path best fits your situation.
Not that I’m against buying with cash…but some other items to consider – Did you account for the rent you’re paying to live somewhere else? Appreciation lost by not owning a home? What if rents go up? Etc.
You “took out a HELOC to offset some of my tax liability” ? are you joking? that is the stupidest advice I have ever read!
First off, the tax write off on mortgage interest only applies if you itemize your deductions; by itemizing you give up the standard deduction which for a married couple is what 12,000? so unless your heloc interest is over the standard deduction, or you have a bunch of other deductions to itemize, you won’t save a penny anyways. Even if it bigger, which is a heck of a big heloc, you will only benefit to the amount that it exceeds the standard deduction. In other words, $15,000 in mortgage interest for a married couple is likely to lead to a tax deduction of only 2 or 3 thousand more;
Second off, it is a write off, not a tax deduction, So even if your interest on the mortgage is more than the standard deduction, it will only save you about 1/3 of that amount.
Pretty brilliant, spending $15,000 a year on interest to save $1000 or so on taxes!!!
Maybe this is something that isn’t considered. Everyone immediately jumps on the “what about how much you’re spending in rent while you’re saving for that house.” Not to sound negative or anything, but there are a thousands of other scenarios and options where you are not spending a dime to live: you’re a minor; under someone else’s care; living in a paid for house that is not your own.
There are still quite a big chunk of Americans, don’t have the percentage because absolutely noone is interested in knowing nor revealing it, that pay cash for all major purchases and they are not rich.
I’ve never bought a car with a loan. I’m far from rich.
Also, parents now and since parenting was invented, have saved up for children and when they become adults bequeath the nest egg to them or purchase whatever the goal was for the nest egg: i.e. home, car, education.
So assuming that you’re not some schlept that fell from the sky and just started saving today, if you saved the exact amount for the same amount of years, cash in hand, vs paying the mortgage for that amount of time, wins every time correct?
Saving $3,000 every month for 15 years is = 540,000 without interest, without compounded interest.
I certainly admire your financial discipline and conservatism.
However, let me reply with an observation:
Just 2 years ago, I was getting 5.5% on my money in short term bonds.
today, you could get a 30 year fixed mortgage at 4.5%.
I have the money to pay cash for my home, but I would rather buy with 20% down, lock up a long term low interest loan, and keep my resources for other investment that, in just a few years, will likely pay me much more than the lack of a mortgage would save me.
Whatever you decide, best of luck!
|Buying a House with Cash
As Mr R implied; the cost of buying and maintaining is the same in either case; and the transaction costs are the same in either case. The only difference is the cost of the money.
And my opinion is that you are right “most of the time”; that you cannot invest the money you borrow at better rates than the *mortgage interest rate*.
That if you have a mortgage, the highest interest you can usually “earn”, is to pay off that debt and not pay that interest, unless of course you have high interest credit card debt, that really needs to be paid off first. But, if you can borrow at 4.375% for 30 year fixed, and invest at between 5% and 15%, you may be better off. Still, you need to subtract out from your return on investment any tax liability including capital gains tax, unless you use a tax exempt investment (such as government bonds).
Sure, you could say that you need to do that for your house too; but you would need to do that in either case; and if you aren’t selling, there is no capital gains to be paid; and if you die, the tax base is re-based to the time of death for your estate and heirs.
But, I have known many people that thought they could invest the equity better than having a home free and clear; and the investment went sour, and their job went sour (often due to health going sour…), and they end up loosing their home, or end up working extra hard to make the payments to stay in the home, or sell the home to live somewhere else but still with cash coming out of their pocket…
If you have paid off the home, that is a “security” that gives you many freedoms not available to those that have to make loan payments. To me, it is worth any of that extra interest you couldn’t make on that so called “can’t loose” investment. Besides, all the money that you would have budgeted for mortgage payments each month can go into that high return investment if you ever find it.
The real issue for people saving to buy a house in the past is that inflation rates (especially of housing) outstripped any interest on the savings, and thus the savings was always a net loss in attempting to reach the purchasing goal. But that is not the case presently; prices are falling, not rising. And even when they stop falling, they will stay fairly flat and likely not keep up with inflation. Thus there is plenty of time to save money if one doesn’t have sufficient cash presently.
Presently, if you buy, the interest rates are such that you pay for the house twice if you have a standard mortgage for the purchase. In the past, you paid for it 3 times. But one must consider the time value of your “cash” too. The problem is that interest rates for bank deposits and inflation, and other investments… is not constant with time; so one must make some kind of assumptions when doing the math. But I would presently assume about 3% annual “time value” of your cash, as compared to the average of 5% 30 year fixed mortgage interest rate presently; and with that, the only ones that it makes sense to borrow is the single people that have other deductions (large charitable contributions, or medical expenses exceeding 7% of income), making over $373k per year, which puts their tax rate for the money they will “deduct” at 35% for federal and 9.55% for state (of California), which puts the return on anything over the “standard deduction” of $5700 at 44.55%.
So, assuming that interest payments are substantially above $5700 annual (as a person making over $373k per year is probably buying a much bigger house than most of us would buy), the adjusted cost of the mortgage is 5% x (1-44.55%)= 2.78%, which is slightly less than your 3% “time value of money” for your cash, thus worthwhile to them.
NOT worthwhile to those that only get less than 25% back from the Federal Government and less than 4.25% back from the state, especially as one barely gets above the “standard deduction” if at all.
The members of NAR that don’t understand this obviously are not the ones you should be getting any financial advice from.
There are definite advantages to paying cash for a house, but it does take a long time to do that in most markets. It also takes financial discipline that is hard to come by for most people. Roberto mentioned something to consider also which is lost opportunity cost on the money that is lock in what amounts to a fixed rate investment. That money is not free to invest in other things and you realize no gain until you sell.
I am not a gambler, but I can see the benefit of conservatively borrowing money for a mortgage at 5% and investing the conserved money at 8-10% even with the mortgage interest that I pay. You have to do what you feel is best and weigh the benefits of each. For me, it made more sense to put a little more than 20% down and pay extra on my mortgage every month to pay it off sooner with less total interest.
“That money is not free to invest in other things and you realize no gain until you sell.” –
Correct; but the money that would have gone to mortgage payments each month is free to invest. But as that is spread out over time, it takes even more diligence to invest wisely and avoid frivolous spending.
Still, paying cash, or accelerating payments to remove the debt liability is an “insurance” that one will have a place to live, even with minimal income should something happen, or if one wants to consider changing professions… That insurance is worth something. To me, that is as important as health insurance, or fire insurance, or automobile insurance.
|You’ve Been Had
As you can see, none of them even explored the value of money, the costs involved in a mortgage, and the idea of paying cash is as foreign to them as drinking water at the beach.
One person did hint that it’s peace of mind, but that person still thought it was a losing proposition to pay cash rather than taking out a loan. He equated it with being nearly life threateningly important, but it never rose to the level of good sense and good math with him.
People do not need to be feared into doing the right thing, they need to see that the math is on my side, based on reality. Noone likes to present to them the real math involved. While everyone can agree that paying $10,000 cash for a house that was $80,000 just two years ago is a steal, they shy away when you say pay $100,000 cash regardless of the circumstances. I’m here to tell you, taking out a loan for $150,000 for a home is a losing proposition, mathematically speaking. And, when calculating ALL the costs, people don’t consider nor tell you all the costs involved.
Lenders like to tell you about how you can take out a mortgage at a low low rate and invest the rest at a much higher interest rate. What they are not telling you is that ALL investment is gambling. The entire world is crashing down around us due to investments: Greece, Portugal, Spain, U.S. Yet, they want to imply that investment is the way to go instead of buying a house at nearly half the cost of what someone else payed for it, and the complete security that, no matter what, you will have your home.
They’ve got one hand in your pocket and are trying to give you advice on finance. The same person has zero financial acumen themselves, yet are trying to tell you how to invest your money. A house as always been a losing proposition. While it isn’t as blatant as buying a new car, it depreciates just the same. It was never an investment. Income generating property is an investment. But, that has everything to do with income generation and nothing to do with the fact that it is real estate. Put a different dress on it and it’s a loser just as everything else is.
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