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Why a mortgage, if you can pay cash?
I'm pretty much a lurker on this board and the MM board (sometimes I chime in).
Here's my question: Why would you want a mortgage IF you can pay cash for a home? My DH and I are saving to pay cash for a house, however it may take a few more years. We don't need a house right now, so we are willing and able to wait a little.
This is what doesn't make sense to me: (This is just an example.) Why would you want a 30 year mortgage on a $200K house (with a 20% down payment and interest rate of 4.2%)? Your principle and interest would be $782.43 a month for 30 years. You end up paying a total of nearly $282K at the end of your 30 years. That seems like a lot of extra money you're spending on a $160K mortgage. That's nearly 122K in interest alone and that seems insane to me. If I just pay the 200K upfront. I don't have any extra interest to pay and I could do a lot with the extra $122K.
For the record, I understand this is not an option for everyone. I'm just wondering what those reasons would be IF you could pay cash and maybe someone could give me a little more information about mortgages. Sorry if this is a bit confusing.
Re: Why a mortgage, if you can pay cash?
Paying cash for a house is not a goal of ours by any means. If it's your goal, good luck. Cash offers (even if lower) could beat out an offer contingent on financing.
Because with loan interest rates so low, one can make more money than one will lose by investing the money elsewhere. For example, if a person has the cash available to pay for a $300K house, she could instead take $200K of that money (leaving the 20% down payment and a healthy liquid savings reserve) and make a long-term investment in something that will yield 8% annual return. The 8% earned outweighs the 4% being paid on the mortgage loan.
Also, most people don't stay in their homes for thirty years, so it doesn't make sense to sink that much money into the house only to turn around and sell it 7-10 years later. Yes, in a steady market the seller will get their money back, but she would have gained far less than if she had invested the money elsewhere for that period.
You would need to do the math on whether the tax benefits and low interest rate is worth giving up. I would also include 15 vs 30 years of paying it off. Then also do the math about how much you could make on investments.
I would suspect having a small mortgage would be better. Also, being liquid and not having your cash tied up on one single investment would be better. Just look at how many people lost their retirement when the housing market crashed.
For the record, I'm not saying anyone's advice is wrong. I just have more questions because this is such a huge financial decision. I'm trying to be open-minded and see other points of view. So thank you, and please challenge my thinking if you think it will be a smarter decision in the long run.
Next question: Since interest rates are so low, what investments offer a 6%-8% return? A house like any other investment is still an investment. If I lose the money I invested in another account I've got nothing to show for it. If the value of my home goes down (which is still very possible where I live, since home prices continue to fall in Michigan) I still have a roof over my head if I paid cash. Other information: Our savings for our future home is separate from our emergency fund, retirement funds, other investment and everyday bills.
We are paying cash for our home. The money is from my the money my grandfather is leaving me (he's still here
) I'm paying him monthly with no interest applied.
That being said, we were able to get the price down 3% based on the fact that it was a cash deal and there weren't any lenders to deal with.
I didn't intend my comment to be snarky and if it came out that way I'm sorry. I live in a fairly low cost of living area and don't intend on paying cash for a house (possibly an investment house) but none that I'd live in
. I'm not sure that any investment right now earns 6-8% but over a long period of time, thats the average rate of return in the market. You'd want to consult a financial advisor for help. You will have times when your investments lose value and times when they gain a lot. Its hard to time the market to pull out at the height and buy at the lowest but if you ride it out longterm you shouldn't lose.
Oh gosh no! Haha! I didn't want to sound like I was being snarly! I just want to arm myself with as much information as possible. My DH and I have never financed anything (except my SL) since we've been together. We like to do our research on everything and pay cash. (Which sometimes takes more time but it's worth it for us.) I just didn't know if there were investments that had that much of a return out there that I hadn't heard about. It is possible, but DH made a choice with our financial advisor to keep our investments very conservative. So please keep all the comments coming!!! You have no idea how much I appreciate it!
ETA: I was more or less responding to part of all the comments here. Jen you were just to first to respond so it was easiest to "quote">
Why we chose a mortgage:
-Tax deduction of interest expense
-Didn't want to put all of our cash into a house - we put 30% down, and then kept the rest of our investments diversified
-Wanted to build good credit history
-We did do a 30 year mortgage, but are paying extra each month so we are really paying it off in 15 years.
-Taxes and insurance are paid through mortgage escrow
Not sure about that 6-8% number. I've read more articles suggesting that housing offers more realistically a 3% return when adjusted for upkeep and other expenses. That's pretty modest when the stock market averages around 9% return over the long run.
Best frame of mind for all concerned -- It's a home, not an investment.
First thank you VERY much for the impute, but would you mind going a little further to explain a little more? If I'm too nosey, just say I'd rather keep that personal. I totally understand. I'm in no way trying to be snarly so PLEASE don't think that. What works for works for you. I just want to have as much information as possible because it's such a huge decision.
-Tax deduction of interest expense
Did it equal out to be more or less from total interest paid in the long run?
-Didn't want to put all of our cash into a house - we put 30% down, and then kept the rest of our investments diversified.
Our retirement, e-fund and other investments are separate. I look at it as if we are putting every last cent we have, or close to it, into buying the house, then we can't afford it. My question is with keeping all of your retirement, investments and e-fund separate, and still having the money on top of that to buy the house with cash, would you still get a mortgage?
-Wanted to build good credit history
That's a personal preference and I respect that. But we already buy everything with cash, so I don't get wrapped up into what my credit is. I only check if for mistakes and any possible fraud. So this doesn't apply.
-We did do a 30 year mortgage, but are paying extra each month so we are really paying it off in 15 years.
Are you still paying the same amount of interest? Are there any pre-payment penalties?
-Taxes and insurance are paid through mortgage escrow
This one throws me through a loop. What does it mean exactly?
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I just want to say thank you for all the comments! They are very insightful. Please keep them coming. Once again, in NO way do I want anything I post to sound snarly, but the more and more I type, I keep saying to myself, "well that sounds b*tchy".
My husband (more so than me, but I have to admit it's kind of rubbed off onto me over the years) is VERY tight. If you put coal in his a$$, two weeks later a diamond would pop out. But seriously he looks at it if he can't pay cash for it, or put it on a credit card and pay the balance off at the end of the month, then we can't afford it. He and I have been looking at home ownership the same way.
Our FA said recently home ownership is a bad investment. Especially in our area where he believes the housing market will continue to fall for the next few years. And I believe him, because he's been right about everything else in the past.
-Tax deduction of interest expense
Did it equal out to be more or less from total interest paid in the long run?
I'm not sure I understand this question. If the total amount of interest I pay in a year is $10,000, then when I file my taxes that $10,000 is deducted from my gross income and is not subject to my normal tax rate.
-We did do a 30 year mortgage, but are paying extra each month so we are really paying it off in 15 years.
Are you still paying the same amount of interest? Are there any pre-payment penalties?
No, you do not pay the same amount of interest. You need to look at an amortization schedule. Bankrate.com has a good one. If you add to the principal each month then your balance decreases that much faster, and the interest is calculated on the amount owed so it will decrease as well. Most mortgages do not have prepayment penalties, but that is something you would need to make sure of if you go this route.
-Taxes and insurance are paid through mortgage escrow
This one throws me through a loop. What does it mean exactly?
If the total of my taxes and insurance for a year is $2400, then that amount is divided into a monthly figure and added to my payment. If my principal and interest is $1000, then I would pay a total of $1200 if I was including amounts for escrow. Then when the annual bills for those are due, the bills are sent to my mortgage company and paid directly by them.
Sorry if my question confused you. I'm not an accountant, so I don't know all the tax laws with mortgages. Bottom line, when it all comes out are you paying any more than your principle with that 10K deduction?
This confuses me more. You make a mortgage payment every month. At the end of the year you get a statement that shows how much mortgage interest you paid during that year. If you itemize your deductions on your income taxes, the mortgage interest is a deductible item. It has no effect on the principal balance of your mortgage loan, but can reduce the amount of income taxes you pay.
Not sure I understand your question either - but I think you are asking if the net effect of the deduction is greater than the interest you are paying on the principle - and it depends on your tax rate and your interest rate, but no, I doubt it would.
If you had cash to pay for an entire house, and still have savings/investments/retirement seperate, and you don't care about building credit, then no, I don't think that a mortgage is going to do anything for you. And don't worry, I'm not offended by your questions. I'm an accountant and a conservative one financially.
But I don't think some mortgage debt is a bad thing if you use it responsibilty. How you choose to conduct your life financially is a very personal choice - my DH and I have plenty in savings, but we do choose have a mortgage and we do use credit cards (and pay off monthly). We have friends that are 'cash only' type of people - they don't carry credit cards, they save up for all purchases in cash, buy cars with cash, etc. And that works for them. And our system works for us. As long as you are being financially responsible, I say go for whatever you want
My hubby is a financial advisor and we don't have a mortgage. I think it depends on your comfort level. i'm fine with having a small mortgage but with the economy the way it is my DH sleeps better at night with no debt. If he gets laid off and we don't have a mortgage then we'll be ok. Some people are ok with small amounts of debt, others like my husband hate owing to anyone.
Good luck.
We live in the highest COL in our state. It's not quite on par with say NYC but it's still quite high. Would that change your mind?
It's all about risk. We now have a paid off house. We accelerated the payments, because I wanted the peace of mind at that time.
We are moving and upgrading in house and we are going to have a mortgage. We could pay cash, but when I did some calculations, the investments only need to get a 3% return to break even (that's after considering taxes, mortgage interest, deductions, etc). I believe we can easily get more than 3% especially that the market is down right now (best time to invest).
The above situation is based on having the money at the front end. If you have to save first, then it's a different story. You then have to consider the money going to renting and the potential cost of houses by the time you have enough savings to buy one in cash. If prices NEVER goes up again, then there may not be that much difference financially at the end. It depends on a lot of factors.
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