Buying a house with cash? (1 Viewer)

[Peter-PP]

What are the pros and cons of buying a house with cash? The house will be brand new so I don't have to worry about repairs and fixing which I know nothing about. I'm not ruling out older homes, I may fall in love with one, the right one. I do like the old, old Victorian type homes that I see a lot here in New England.

Thanks in advance!

 

[Scott Merryfield]

The pro is no house payment, and therefore no interest payments. However, with current low interest rates and the fact that mortgage interest is tax deductible, you will have a lot of your capital tied up in equity in the house, so it will be unavailable for other investments. Depending on your tax bracket, a 6% mortgage will have an after tax rate of somewhere around 4%. Now, if you can find someplace to invest that cash for a greater than 4% return on investment after taxes, then you are actually losing money by paying cash for the house.

 

[LewB]

First of all, congratulations on having such a tough decision to make
A lot of the decision has to do with what you feel comfortable with. If you want the security of knowing that the house is yours, then that's what's right for you.
If having a mortgage doesn't bother you, then take the mortgage . Put enough of a down-payment on it to avoid PMI, and pay the taxes yourself instead of using escrow. That will minimize your costs, as will a 15 or even 10 year mortgage. Keep in mind that if you take a 30 year mortgage you will pay roughly 3x the actual amount of the mortgage thanks to the interest. You can then take the rest of the funds you have and buy furnishings or make investments with it. I believe that is what's called 'leverage'. The more money you have, the more the bank is willing to lend you. You then can invest what you have and make more money. Money comes to money and all that.
Good luck !

 

[Eric_L]

There are two sides to a F+C home. The financial side and the emotional side.

From the Financial perspective it makes little sense to have a F+C house at these interest rates. Given the current rate environment and economic condition the opportunities for cash are far greater than those allowed by converting it to home equity. The liquidity is an important consideration as well. The home appreciates at the same rate mortgage or no. For even the most conservative (yet realistic) of investors this can make sense.

However.... emotion and logic seldom meet. (In fact they are often at polar opposites - particulary regarding financial matters)

The emotional benefits of a F+C house can be very attractive. Just as the emotional benefits of owning a Corvette or Town Car are attractive compared to a more sensible car. If you can afford it and you want it - get it. Be it a car, a fur coat,a F+C home or any other luxury. Never deny yourself a luxury that you want and can afford. (you are in a HT forum, afterall!)

Think of a F+C home not as an investment, but as a luxury (comparable to your HT or luxury car) and the decision will be easier.

I personally plan on having a mortgage until the day I die of old age. My portfolio has already demonstrated itself to be 'bulletproof' and I'll be a monkey's uncle if I give that up just so I can have a piece of paper. I'd rather have the growth+income it generates (which has been generous)

If you do opt for the same option as me, make sure your portfolio is reasonable - not ridiculous. Being 'in the biz' about 75% of portfolios I see are not reasonable at all. Do a google on 'Asset Allocation' for advice on that.

 

[Joseph DeMartino]

Depends on your over-all situation, as others have noted. With my income and expenses the last few years it hasn't made any sense for me to itemize, so the mortgage interest deduction that usually gets mentioned first has really been a non-issue. (And with mortgage rates low, interest payments especially in the early years are also going to be low, so unless a person has a lot of other deductions, the standard deduction will offer a better deal - which makes the MID moot.)

Regards,

Joe

 

[Garrett Lundy]

Having had previous experience with building new houses and remodeling older houses. I can give you my honest opinion that buying an "old" house is never as good as it first sounds. What are you going to do with a house that has one bathroom, and a 10' by 10' kitchen? (rough generalization of course).

I'd build new, then make it look old if you want.

 

[SteveA]

Another reason to take a mortgage, even if you don't need one, is to maintain your credit rating. No credit is not much better than bad credit in the eyes of lenders.

 

[Eric_L]

Nailed that one! Even a typical house built in 1980 has enough maintenance to make you crazy.

 

[Ryan Wishton]

Well, I would personally want to pay it off in full... This would be more for personal security though...

I might take out a small mortgage for credit purposes...

If you feel really uncomfortable about a mortage, pay it off...

 

[Keith Mickunas]

If you own your house outright, how important is your credit anymore? Why would you be borrowing money if you already got enough to pay cash for a house? Plus if you do need to borrow money, it should be fairly easy to get a home equity loan.

 

[SteveA]

I don't think closing the door on any future borrowing is a good idea. You never know when you might want to borrow money. Suppose Mr. Free-and-Clear decides to start a business? A good credit rating will be vital.

Another thing to remember is that if you take out a home equity loan with a less-than-perfect credit score, you'll probably pay a higher rate.

 

[Scott Merryfield]

I doubt that anyone who holds a clear title on a house would have any trouble obtaining another type of loan. Credit lenders do not just look at past loans, but also at any assets that you care to disclose to them.

 

[Peter-PP]

Thanks for the replies!

I just turned 40 and not getting any younger, so I really hate the thought of paying mortgage the next 15 or 30 years. I just don't want that headache and any stress and that is one of the reasons I want to purchase a brand new home in the country on at least an acre or more so I don't have to deal with neighbors from hell and watch my movies at any time of day or night.

 

[ChadM]

Peter,

I am a CPA, please borrow the money! Why give someone money if you do not have to (especially at today's rates)!Having the money to pay it off if you want and actually having it paid for are essentially the same thing.

There are so many other better things to invest in, even if you are risk averse.

 

[Tim Abbott]

I will echo this sentiment as well. If you understand the investments available to you in addition to the way money works, you will be better off investing the cash and carrying a mortgage.

Something that cannot be quantified with numbers is your comfort in carrying a mortgage. Some people that I talk to, regardless of how educated or smart they are, just hate the idea of debt. If you are the type to lay awake at night worrying about the mortgage payment and the outstanding balance, then it is tough to make a case for carrying a mortgage. That is something that you will have to decide for yourself.


Here is my shameless plug...I do work for a mortgage company that lends in Maine, and I would be happy to run through several financial scenarios with you if you are interested. Please feel free to drop me an email.

Good Luck!!
Tim

 

[SteveA]

Really? I was turned down for credit a few times in my younger years for "insufficient credit file" as they like to call it. Maybe things have changed in the last 12-13 years.

 

[Scott Merryfield]

Lenders consider a person's ability to pay back when approving a loan. A young person just out of school with a short employment history and no prior history of paying off debt will have difficulty in obtaining a loan. However, someone in his forties who has enough money to consider paying cash for a home is not the same thing. Generally such a person has already established a credit history through credit cards, auto loans, etc. Such a person will also usually have a lengthy employment history.

It's all about the risk to the lender.

 

[Vince Maskeeper]

Guys,

I had a sort of side comment to tack onto this discussion- but i wondered how do you learn this stuff?. I'm wondering if there are some professionals here (I assume Eric is), or if you guys have just picked up knowledge of portfolio management and whatnot along the way.

I'd like to learn more, I'm just finishing school and trying to get financial affairs in order--- but i don't know where to start. I took a personal finance class here at school, but the majority of it was a waste of time (the teacher was an insurance salesman who spent most times talking in anecdotes and discussing material we would cover "down the line" which never seemed to really arrive.

Again- it seems there are some reasonably knowledgeable people here- and I wondered if you guys picked it up from hiring your own planners, if you were working in something along theses lines, or if you just pursued the knowledge on your own.

-vince

 

[Eric_L]

Vince-
I'm 'in the biz' pro for about twelve years. It does not come overnight.. There are actually three different issues at play here - 1) Mortgages 2) Investments and 3) credit ratings.

A good place to start would be a book called 'The Wealthy barber" by David Chilton
Amazon Plug

It is actually a light read on financial planning. Most folks I've given it to have enjoyed it.

After that there are other good reads, but it gives a good foundation.

One thing to KIM - finance is NOTHING like hair styling. By that I mean that if you pursue a bad financial course you will likely not know it for years - unlike a bad haircut that you'd notice MUCH sooner.

Funny thing is - more people think they can do their own finances than cut their own hair. With stakes that high I can't imagine why anyone would settle for a self-imposed hack-job. (on either!)

 

[Scott Merryfield]

Vince,

We employ the services of a financial planner, and I ask lots of questions during our meetings, trying to better undestand the different strategies being considered so that we can make sound decisions. No course of action is taken without being thoroughly discussed and understood. Our planners also provide suggested readings for those clients who are interested.

When we first began our meetings, I felt like I was back in kindergarten -- there was so much I didn't understand. Over the years, though, I've become much more knowledgable, but still would not want to go it alone. As we get older, our situation continues to grow in complexity.


Wise words, Eric. Deciding to engage a financial/tax planner about 10 years ago was probably the wisest financial decision we have ever made. Our situation was becoming too complex for us to handle alone, and I sleep a lot better at night knowing a professional I trust is helping to guide us.