Would you take out a mortgage or pay cash?

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Culture
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Would you take out a mortgage or pay cash?

Post by Culture » Fri Feb 10, 2012 5:15 pm

My wife and I are retiring in two years. In preparation, we are currently in the process of purchasing our retirement (post-kids/post-work) home. We are most likely going to spend about 9% of our gross assets on the house, up from 4% currently (investable assets plus current real estate value). With the remaining assets (90%) our withdrawal rate at our current standard of living is 2.3%. If we borrow, our withdrawal rate is 2.7% (we now have a mortgage). Our withdrawal rate using our estimated (best guess) post-retirement budget is 3.3% and 3.7% respectively without and with the mortgage.

Should I take out a mortgage? I am assuming I will take a 30 year fixed rate mortgage at 3.9%.

I am strongly leaning toward yes, and my wife strongly towards no. I want a mortgage because I feel it is much more likely than not I will be paying most of it back at moderately to severely inflated dollars, and I can afford the risk I am wrong. I also know that I will invest (wisely i think) the money that I do not spend on the house (i.e. the alternative to paying cash for the house is not blowing it on something else). I would also get a pretty good mortgage deduction which would lower the effective interest rate.

My wife just doesn't want a mortgage for psychological reasons. i.e. she likes the feeling of being debt free (I must admit that I do also).

What would you do in my situation, and why?

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Re: Would you take out a mortgage or pay cash?

Post by chaz » Fri Feb 10, 2012 5:17 pm

Keep your wife happy.
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Re: Would you take out a mortgage or pay cash?

Post by damjam » Fri Feb 10, 2012 5:21 pm

Keep your wife happy.
Words to live by. :P

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Re: Would you take out a mortgage or pay cash?

Post by chaz » Fri Feb 10, 2012 5:25 pm

damjam wrote:
Keep your wife happy.
Words to live by. :P
I'm still alive.
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Culture
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Re: Would you take out a mortgage or pay cash?

Post by Culture » Fri Feb 10, 2012 5:38 pm

I was anticipating some sort of very esoteric analysis involving yield curves, Macaulay duration, emerging market bond default rates and possibly even a reference to string theory. The Bogleheads have instead, like a laser, gone straight to the heart of the issue :-).

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Re: Would you take out a mortgage or pay cash?

Post by GregLee » Fri Feb 10, 2012 6:18 pm

Your financial analysis seems reasonable, to me. But when it came time to decide a similar issue for us, my wife didn't have a definite opinion, and I was all for paying a maximum amount down, to minimize the mortgage. We couldn't afford the entire price of the house. What our large down payment of $250k bought us was (1) a 10 year 6% mortgage, and (2) we didn't have to go to a bank, since the seller agreed to give us the mortgage directly. If we'd made a minimal down payment with a 30-year mortgage, maybe we'd be better off, now. I don't know. But we paid off that mortgage in 2004, and it sure has been nice the last few years, to have that over and done with. And of course you'd be getting a much nicer interest rate.

You might think of a compromise. A 10 year mortgage, say, and keeping more in your portfolio.
Greg, retired 8/10.

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Re: Would you take out a mortgage or pay cash?

Post by billjohnson » Fri Feb 10, 2012 6:23 pm

Culture wrote:30 year fixed rate mortgage at 3.9%.
This. Or maybe a 15 year fixed at 3%.

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Re: Would you take out a mortgage or pay cash?

Post by Maverick » Fri Feb 10, 2012 6:52 pm

Either way, it looks like you will be fine. Keep in mind, despite the higher withdrawal rate due to the mortgage, the mortgage payments will be fixed, so that portion of your expense will not need to rise with inflation. Moreover, given the low rates, it is an opportune time to borrow. That being said, there is a HUGE benefit to keeping your wife happy. So, if this might become a real issue - no mortgage. Good luck.

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Re: Would you take out a mortgage or pay cash?

Post by Hector » Fri Feb 10, 2012 6:52 pm

I would take mortgage if my wife is on the same boat

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Re: Would you take out a mortgage or pay cash?

Post by nisiprius » Fri Feb 10, 2012 10:24 pm

Image

Find me a boulder on which someone has carved "Take out a mortgage."
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Re: Would you take out a mortgage or pay cash?

Post by dharrythomas » Fri Feb 10, 2012 10:38 pm

I'd pay cash, it is much harder to get into financial difficulty if you don't owe money. I sleep better at night and the free cash flow feels wonderful.

We're in the process of paying off our second house early (job move).

I've also done stuff I didn't really want to just to keep the wife happy. I've found that while I CAN win almost any disagreement, it is seldom worth it, even when I'm right and ALL the facts support my position.

Good Luck

Harry

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Re: Would you take out a mortgage or pay cash?

Post by nonnie » Sat Feb 11, 2012 12:27 am

Culture wrote:I was anticipating some sort of very esoteric analysis involving yield curves, Macaulay duration, emerging market bond default rates and possibly even a reference to string theory. The Bogleheads have instead, like a laser, gone straight to the heart of the issue :-).
The heart of the issue is misogyny? I wish BHs could give advise without resorting to stereotypes. That said, read this article by Larry Swedroe--last time I checked he was still male:

http://www.investmentadvisornow.com/inv ... edroe.html

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Re: Would you take out a mortgage or pay cash?

Post by Noobvestor » Sat Feb 11, 2012 1:01 am

nonnie wrote:
Culture wrote:I was anticipating some sort of very esoteric analysis involving yield curves, Macaulay duration, emerging market bond default rates and possibly even a reference to string theory. The Bogleheads have instead, like a laser, gone straight to the heart of the issue :-).
The heart of the issue is misogyny? I wish BHs could give advise without resorting to stereotypes. That said, read this article by Larry Swedroe--last time I checked he was still male:

http://www.investmentadvisornow.com/inv ... edroe.html

Nonnie
Can you point out the misogyny? Or even sexism? To illustrate what I mean: can you replace 'wife' with 'husband' or 'life partner' and find that it doesn't work equally well? Or anything that implied a hatred for one's wife/partner? Maybe I missed something, but I saw nothing that couldn't be applied equally regardless of gender in the comments above the one you quoted - i.e. nothing sexist, let alone misogynistic.
mi·sog·y·ny noun \mə-ˈsä-jə-nē\ Definition of MISOGYNY : a hatred of women
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Re: Would you take out a mortgage or pay cash?

Post by BHCadet » Sat Feb 11, 2012 2:07 am

If I can afford it, I would pay cash.
Don't want to pay the interest and fees even they're deductible.

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Re: Would you take out a mortgage or pay cash?

Post by asset_chaos » Sat Feb 11, 2012 4:00 am

I'd rather have a small mortgage and be liquid than have no debt and be illiquid. If it took all my cash to buy the house, I'd take a mortgage of whatever size I felt comfortable with and keep cash on hand. It's all well and good to say that one can borrow against the mortgage-free house if necessary, but when push comes to shove, no bank may be willing to lend you money against the house when it's necessary to you to have cash.
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Re: Would you take out a mortgage or pay cash?

Post by livesoft » Sat Feb 11, 2012 5:01 am

I would look at cash-flow, taxable retirement account withdrawals, and tax returns to make a decision like this. If you have a mortgage, you will have higher monthly expenses by the amount of the mortgage payment. This will require higher withdrawals from some account somewhere.

With no mortgage, you will have lower ongoing expenses and possibly lower taxable income and even your social security benefits may not be taxed as much.

It will depend on some extent where the money comes from, your expenses, your SS benefits, and how you do Roth conversions.

But this is not just a "peace of mind" "be debt free" issue. Explore your future tax returns ... with and without a mortgage.
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Re: Would you take out a mortgage or pay cash?

Post by Harold » Sat Feb 11, 2012 10:44 am

Culture wrote:What would you do in my situation, and why?
If I were retirement age, wanted a house (or anything), and had the cash for it -- I'd just buy it, rather than paying someone else to borrow money I didn't need. (Only possible exception would be if I saw a true arbitrage opportunity.) But I'm not you, and I can already see the rationalization machinery in motion. You're gonna do what you wanna do.

A couple of fascinating behavioral finance items I see in your post:

1) No view of debt as a financial burden (if anything, you seem to be viewing debt as a financial positive)
2) No assessment of the shift in risk due to either approach
3) Confidence in your inflation guess over the consensus inflation guess of active and deep financial markets

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Re: Would you take out a mortgage or pay cash?

Post by nisiprius » Sat Feb 11, 2012 11:08 am

Nassim Nicholas Taleb comments--I heard this in a broadcast, don't have the exact quotation, I'm taking it out of context, and probably missing subtleties--that economists always like debt because in oversimplified models, it always increases efficiency-- and miss the fact that in the real world, it increases fragility.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Would you take out a mortgage or pay cash?

Post by Sbashore » Sat Feb 11, 2012 11:24 am

I faced the same situation. I ended up taking out a mortgage for all the reasons given. Having said that, my wife didn't have an issue with us having a mortgage in retirement. If she had a strong psychological aversion to a mortgage I would have paid cash and regarded it as a small price to pay for her being at ease.
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Re: Would you take out a mortgage or pay cash?

Post by livesoft » Sat Feb 11, 2012 12:05 pm

Not stated was the taxes to be paid on an additional 9% withdrawal from assets to pay for the house in-full. Perhaps a mortgage would allow a lower tax rate on the same net amount if withdrawn over a number of years to pay the mortgage.
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Re: Would you take out a mortgage or pay cash?

Post by Osmund Yep » Sat Feb 11, 2012 12:21 pm

Culture wrote:My wife and I are retiring in two years. In preparation, we are currently in the process of purchasing our retirement (post-kids/post-work) home. We are most likely going to spend about 9% of our gross assets on the house, up from 4% currently (investable assets plus current real estate value). With the remaining assets (90%) our withdrawal rate at our current standard of living is 2.3%. If we borrow, our withdrawal rate is 2.7% (we now have a mortgage). Our withdrawal rate using our estimated (best guess) post-retirement budget is 3.3% and 3.7% respectively without and with the mortgage.

Should I take out a mortgage? I am assuming I will take a 30 year fixed rate mortgage at 3.9%.

I am strongly leaning toward yes, and my wife strongly towards no. I want a mortgage because I feel it is much more likely than not I will be paying most of it back at moderately to severely inflated dollars, and I can afford the risk I am wrong. I also know that I will invest (wisely i think) the money that I do not spend on the house (i.e. the alternative to paying cash for the house is not blowing it on something else). I would also get a pretty good mortgage deduction which would lower the effective interest rate.

My wife just doesn't want a mortgage for psychological reasons. i.e. she likes the feeling of being debt free (I must admit that I do also).

What would you do in my situation, and why?
My wife and I faced a similar decision last year.

The Cliffs Notes version of the story:

Our primary business throws off a lot of cash; some of it goes back into building the business, and the rest has been invested into a number of rental properties. We now have established rental property management, are well insured and have asset protection measures in place. We're very comfortable projecting the net yield on our investment dollars.

We compared the savings of no mortgage on our primary residence plus the related psychological benefits against additional rental properties' net income streams. No great case was made, we ran the numbers and sat back regard the results. It was a no-brainer for both of us; the rental yields were so far and above any other use of our cash, that we agreed to buy more, as a much smaller investment in rental properties (vs. paying off a mortgage) would more than pay for our family home's debt service, insurance, taxes, and projected repairs, with money to spare. {Cue the doomsayers about the instability of the housing and therefore rental markets ... all I can say is that there is an enormous margin of error built into our business.}

So, what's the highest and best use of your capital?

That being said, if your spouse isn't whole-heartedly on board with a mortgage, why fight it? What benefit could possibly be worth the strife?

I'd rather be happy than technically "right," any day.

-OY

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Re: Would you take out a mortgage or pay cash?

Post by Liquid » Sat Feb 11, 2012 1:35 pm

For a rental property leverage is very tempting to maximize returns. However, for a home the security of debt-free does seem equally appealing, but just comes down to personal perspective and opportunity costs.

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Re: Would you take out a mortgage or pay cash?

Post by nonnie » Sat Feb 11, 2012 2:16 pm

Noobvestor wrote:
nonnie wrote:
Culture wrote:I was anticipating some sort of very esoteric analysis involving yield curves, Macaulay duration, emerging market bond default rates and possibly even a reference to string theory. The Bogleheads have instead, like a laser, gone straight to the heart of the issue :-).
The heart of the issue is misogyny? I wish BHs could give advise without resorting to stereotypes. That said, read this article by Larry Swedroe--last time I checked he was still male:

http://www.investmentadvisornow.com/inv ... edroe.html

Nonnie
Can you point out the misogyny? Or even sexism? To illustrate what I mean: can you replace 'wife' with 'husband' or 'life partner' and find that it doesn't work equally well? Or anything that implied a hatred for one's wife/partner? Maybe I missed something, but I saw nothing that couldn't be applied equally regardless of gender in the comments above the one you quoted - i.e. nothing sexist, let alone misogynistic.
mi·sog·y·ny noun \mə-ˈsä-jə-nē\ Definition of MISOGYNY : a hatred of women
Thank you for your politely worded post and including "life partner" in your response. In my neck of the woods, constant referrals or remarks such as "keep your wife happy" are considered misogynist and the word has taken on a meaning other than "hatred of women" which is really a translation, not a definition. Yes, you can replace replace 'wife' with 'husband' or 'life partner' and find that it does work equally well-- I don't personally subscribe to the belief that kind of analysis can be used to defend racism, sexism, homophobia, etc. but that's me and the climate in which I live. You might want to see how many BH posts you can find that say, "keep your husband happy" with several folks chiming in " +1." That's another reason I reacted-- and probably over-reacted-- I sometimes get frustrated by the male/female ratio here and these kinds of remarks are pretty one-sided.

I probably was influenced by this thread, among others, that feels to me that some here do take a sexist view of women:
http://www.bogleheads.org/forum/viewtop ... 7&start=50

I apologize to you and any others who were offended; it was not intended that way.

BTW, what did you think of the Larry Swedroe link I posted, I don't think anyone has commented on it:
http://www.investmentadvisornow.com/inv ... edroe.html

Nonnie
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Re: Would you take out a mortgage or pay cash?

Post by Osmund Yep » Sat Feb 11, 2012 2:31 pm

Liquid wrote:For a rental property leverage is very tempting to maximize returns. However, for a home the security of debt-free does seem equally appealing, but just comes down to personal perspective and opportunity costs.
Agreed that leverage is tempting. However, we buy rental properties outright, no mortgages.

In this climate, we have found that paying cash for well-priced rental properties far outweighs the returns (in terms of interest and mortgage tax deduction savings) from a paid off residence. In the end, assuming you can somewhat quantify the stress reduction of having a paid off home, then it comes down to balancing risk/reward, just like any other investment.

I like the idea of a paid of mortgage very much. I like the reality of a far superior income stream even more.

-OY

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Re: Would you take out a mortgage or pay cash?

Post by Culture » Sat Feb 11, 2012 9:28 pm

nonnie wrote:The heart of the issue is misogyny?
Well, if I was female, the answer could just has easily been keep your husband happy. That said, it probably would have been a better choice to say "keep your spouse happy." I don't think anyone would ever suggest that advice was rooted in misogyny or misandry.
nonnie wrote:That said, read this article by Larry Swedroe--last time I checked he was still male:
http://www.investmentadvisornow.com/inv ... edroe.html
Thanks for the great lead.

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Re: Would you take out a mortgage or pay cash?

Post by supersharpie » Sat Feb 11, 2012 9:36 pm

Jeez, there are some thin-skinned people out there!

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Re: Would you take out a mortgage or pay cash?

Post by Culture » Sat Feb 11, 2012 9:47 pm

Harold wrote: A couple of fascinating behavioral finance items I see in your post:

1) No view of debt as a financial burden (if anything, you seem to be viewing debt as a financial positive)
2) No assessment of the shift in risk due to either approach
3) Confidence in your inflation guess over the consensus inflation guess of active and deep financial markets
This is why you have to be careful of analyzing anyone based on a short post:

1) I definitely view debt as a burden. However, I think it would be short-sighted to argue that debt is always bad. IMHO, debt is good when used wisely. I would hazard a guess that not a single company of the 5000 biggest in the US got there without taking on debt, and I suspect 90% of homeowners would be renters without debt.
2) You can't discuss everything in a brief post. Obviously the "risk" can not be accurately quantified. However, as I pointed out, I have considered the risk qualitatively, and believe that my financial situation significantly reduces the risk associated with carrying a loan.
3) I think the consensus opinion of the market is that inflation will increase over the next 30 years, and that long-term bond rates are being kept artificially low. Purchasers of long-term bonds are mostly driven by other considerations, such as lack of a better place to put the money (i.e. china) and defined long-term obligations (i.e. insurance and pensions). I know that many will disagree with this analysis. However, I do not see a long of investment professional (or bogleheads) suggesting that individuals put money into long-term bonds at this time.

Unfortunately, we can never know to what extent we are carefully considering the facts and making a rational judgement vs. simply rationalizing the decision we have already made subconsciously. I truly think that one of my skill sets is dispassionately considering the facts and making decisions. I hope I am right, and I think my history of success in life and business bears this out.

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Re: Would you take out a mortgage or pay cash?

Post by Culture » Sat Feb 11, 2012 9:50 pm

livesoft wrote:Not stated was the taxes to be paid on an additional 9% withdrawal from assets to pay for the house in-full. Perhaps a mortgage would allow a lower tax rate on the same net amount if withdrawn over a number of years to pay the mortgage.
This is a good point that I had not considered in my analysis. I will have to carefully consider the implications, if any. The entire sum will be after tax money, so only capital gains would be an issue.

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Re: Would you take out a mortgage or pay cash?

Post by Culture » Sat Feb 11, 2012 9:53 pm

nonnie wrote:I probably was influenced by this thread, among others, that feels to me that some here do take a sexist view of women: http://www.bogleheads.org/forum/viewtop ... 7&start=50
Seriously, that one made me kind of sad also, in the "I cry for America's future" kind of way. I understand your frustration.

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Re: Would you take out a mortgage or pay cash?

Post by grabiner » Sat Feb 11, 2012 10:05 pm

Culture wrote:Should I take out a mortgage? I am assuming I will take a 30 year fixed rate mortgage at 3.9%.

I am strongly leaning toward yes, and my wife strongly towards no. I want a mortgage because I feel it is much more likely than not I will be paying most of it back at moderately to severely inflated dollars, and I can afford the risk I am wrong. I also know that I will invest (wisely i think) the money that I do not spend on the house (i.e. the alternative to paying cash for the house is not blowing it on something else). I would also get a pretty good mortgage deduction which would lower the effective interest rate.
You have considered the options correctly, but you need to look at an investment of equivalent risk. If you put the money that could have been used to pay cash for the house in stocks, you will probably get a better return than you lose on the mortgage, but you will also take much more risk. If you want to take more risk, you can do that without the mortgage, by selling some of your bonds to buy stocks.

Therefore, a fair comparison is between a low-risk bond portfolio and the mortgage. Admiral shares of Long-Term Tax-Exempt yield 2.62%. If you can get a 15-year mortgage at 3% and are in a 25% tax bracket, that is only 2.25% after tax, so you could earn a bit more on your bond portfolio, but with a bit of risk; that's a close decision. (A 15-year mortgage has an average duration of 7 years, the same as the bond fund.)
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Re: Would you take out a mortgage or pay cash?

Post by WhiskeyJ » Sat Feb 11, 2012 10:09 pm

Well I say congrats on basically being able to buy twice the house and still have it be less than 10% of your assets! I'd do a mortgage if I were in your shoes. I was thinking getting to house = 25% before retirement would be a nice accomplishment...

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Re: Would you take out a mortgage or pay cash?

Post by Watty » Sat Feb 11, 2012 10:29 pm

I would also get a pretty good mortgage deduction which would lower the effective interest rate.
If you save your cash and have a $100K mortage then the flip side is that you will have $100K in investments that may be generating taxable income that would offset the mortage interest deduction.

This taxable income, or other taxable income like IRA withdrawls to pay the mortage would not only of course be taxed but each dollar of this taxable income could also cause up to an additional 85 cents of your social security to be taxed within certain income ranges.

http://www.bogleheads.org/wiki/Taxation ... y_benefits
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Re: Would you take out a mortgage or pay cash?

Post by RTR2006 » Sat Feb 11, 2012 11:52 pm

No to the mortgage. There's no need to get one. And why get into an argument over something for which you already know the outcome (no mortgage = happy : mortgage = unhappy)?
Buy the house outright. It'll make you both happy.

RTR

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Re: Would you take out a mortgage or pay cash?

Post by Culture » Sun Feb 12, 2012 5:48 pm

Watty wrote:This taxable income, or other taxable income like IRA withdrawls to pay the mortage would not only of course be taxed but each dollar of this taxable income could also cause up to an additional 85 cents of your social security to be taxed within certain income ranges.
Fortunately for me all of my SS is most likely going to be taxed. However, this is a good point that should generally be considered.

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Re: Would you take out a mortgage or pay cash?

Post by Culture » Sun Feb 12, 2012 5:54 pm

I guess after considering everything, the biggest I want to carry a mortgage is as a "bet" that I cam going to win on the interest rate side. However, as Harold says, I am essentially betting against the market on this issue. Even though I think I am right, Harold is probably correct that this is a dangerous bet to make.

I will resurrect this post when a decision is made and tell you what I decided and why.

Thanks for the input. Bogleheads are useful as always.

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Re: Would you take out a mortgage or pay cash?

Post by livesoft » Sun Feb 12, 2012 6:35 pm

grabiner wrote:Therefore, a fair comparison is between a low-risk bond portfolio and the mortgage. Admiral shares of Long-Term Tax-Exempt yield 2.62%. If you can get a 15-year mortgage at 3% and are in a 25% tax bracket, that is only 2.25% after tax, so you could earn a bit more on your bond portfolio, but with a bit of risk; that's a close decision. (A 15-year mortgage has an average duration of 7 years, the same as the bond fund.)
I am going to disagree with this supposition again. The mortgage has more features than a low-risk bond portfolio that can make it more attractive. For one thing, you have the option to pay it off early if you want to. I can imagine a scenario where you invest the money in equities with the expectation that at some point in the life of the mortgage the return will be much better than having used the cash to buy the house outright and have no mortgage. If equities tank, you just wait for them to recover while making payments. If they go way up, then you pay off the mortgage or sell the equities and move to low-risk bond at that time. I think such options are valuable. One might ask if back-testing shows if this idea ever failed because it is rare for equities to lose money over 30 years.
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Re: Would you take out a mortgage or pay cash?

Post by FrugalInvestor » Sun Feb 12, 2012 7:03 pm

nonnie wrote:
BTW, what did you think of the Larry Swedroe link I posted, I don't think anyone has commented on it:
http://www.investmentadvisornow.com/inv ... edroe.html

Nonnie

The second posting of your link doesn't work for me nonnie but the initial one does.
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Re: Would you take out a mortgage or pay cash?

Post by nonnie » Sun Feb 12, 2012 7:20 pm

FrugalInvestor wrote:
nonnie wrote:
BTW, what did you think of the Larry Swedroe link I posted, I don't think anyone has commented on it:
http://www.investmentadvisornow.com/inv ... edroe.html

Nonnie

The second posting of your link doesn't work for me nonnie but the initial one does.
Thanks, fixed now.
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Re: Would you take out a mortgage or pay cash?

Post by nonnie » Sun Feb 12, 2012 7:33 pm

Culture wrote:I guess after considering everything, the biggest I want to carry a mortgage is as a "bet" that I cam going to win on the interest rate side. However, as Harold says, I am essentially betting against the market on this issue. Even though I think I am right, Harold is probably correct that this is a dangerous bet to make.

I will resurrect this post when a decision is made and tell you what I decided and why.

Thanks for the input. Bogleheads are useful as always.
Hi there,

I don't have the time right now to go back and see if I've previously posted this but our decision came down to two choices:

1) 5/5 Pen Fed a 7/1 or even 10/1 somewhere-- you know you *can* pay off the mortgage if rates go against you. Perhaps this "splitting the baby" solution will work for you and your wife

2) cash

We made the cash decision--it was just one less thing we had to worry about and fortunately we both agreed. One less thing to disagree about, one more bit of stress out of our lives (betting on the market--I know awkward choice of words). Right now, as I've posted before, I worry less about my home maintaining its value (CA) than I do about my portfolio over the nex t decade.

Nonnie
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Re: Would you take out a mortgage or pay cash?

Post by mtbouchard » Sun Feb 12, 2012 7:34 pm

"9% of our gross assets"

That said it all to me. Don't take the mortgage.

To be out of debt is just a great thing - esp. these times. Im in my 30s and don't have a home, but paying for a car in Cash and paying off my student loans ($50k) made a significant impact on me. When you don't owe someone - you have complete control and don't need to worry about the future.

The only reason to not pay off a house is if it doesn't allow you to be diversified, but it sounds like you are lucky enough to still be (9%). I hope I will as well, but here in San Francisco, I doubt it! :)

Matt

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Re: Would you take out a mortgage or pay cash?

Post by momar » Sun Feb 12, 2012 7:58 pm

I hardly consider someone whose mortgage would be 9% of their gross net worth to be "in debt".

Once you have the ability to snap your fingers, metaphorically speaking, and make your debts go away, you aren't really in debt. You're just making a decision.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep

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Re: Would you take out a mortgage or pay cash?

Post by Cosmo » Sun Feb 12, 2012 8:36 pm

damjam wrote:
Keep your wife happy.
Words to live by. :P
Happy wife = Happy life

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Toons
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Re: Would you take out a mortgage or pay cash?

Post by Toons » Sun Feb 12, 2012 8:37 pm

Pay cash ,my wife and I retired this year and that is what we did, feels GREAT,debt free . :D :D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Would you take out a mortgage or pay cash?

Post by Watty » Sun Feb 12, 2012 11:05 pm

Culture wrote:I guess after considering everything, the biggest I want to carry a mortgage is as a "bet" that I cam going to win on the interest rate side. However, as Harold says, I am essentially betting against the market on this issue. Even though I think I am right, Harold is probably correct that this is a dangerous bet to make..

Just to play devil's advocate lets say it is true that in a lot of ways it is just a bet but depending on what you do with the money it may not be all that dangerous if you don't take a lot of risks with the money.

It would be good to try to put some numbers on what the worst case is if the money is invested in something safe.

For example if you are dealing with $100K then you could get a 30 year fixed rate mortgage at maybe 3.75% but then you would have an extra $100K to put somewhere.

PenFed has a seven year CD that is paying 2.76%

https://www.penfed.org/productsAndRates ... icates.asp

If you bought a $100K 7 year CD there then then your difference would be 1% or $1,000 a year and the CD interest and Mortgage interest would mostly offset each other on your taxes. Since some principal is being paid down on the mortgage payment each month you would also have to pay that down from other funds. (That extra $1,000 in mortgage interest might be tax deductible so it might only cost $600 or so in after tax money) (Since you will be keeping the mortage for at least seven years paying aditional points to lower the rate might be a good choice.)

At first glance borrowing at a high interest rate to buy a CD paying a lower interest rate looks like a no brainer dumb move.

The place where it gets interesting though is in seven years when the CD's matures you get your $100K from the CD and then either pay off the mortgage if you can't find investments that are better than 3.75% then or you can keep the mortgage and put it into something like a new CD that pays a higher interest rate. In the worst case you go ahead and pay off the mortgage and are out around $7,000 (1000 * 7) and some loan origination and tax costs. In the other extreme in seven years inflation and interest rates might be much higher and having 23 years left on a 3.75% mortgage could be VERY valuable.

My parents at a fixed mortgage at a similar rate during the double digit inflation years of the late 1970's and early 1980's and this really helped offset the bad aspects of inflation for them. They apparently periodically got letters from the lender offering to let them pay off the mortgage for a small fraction of the loan balance. They declined since they knew that the reduction in the mortgage would be reported and taxed as a capital gain.

Basically you would be buying an option to help hedge your portfolio that would protect you against inflation. There are of course real options traded but I am not sure how much something similar would cost or if you can get such a long period of coverage. Traditional options would also generate taxable gains. Given that TIPS have a negative yield right now paying that spread might not be such a bad bet.

For what it is worth I am not doing this myself since I will likely move when I retire and I am not ready to buy a retirment home yet

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Re: Would you take out a mortgage or pay cash?

Post by FrugalInvestor » Sun Feb 12, 2012 11:10 pm

nonnie wrote:Right now, as I've posted before, I worry less about my home maintaining its value (CA) than I do about my portfolio over the nex t decade.

Nonnie
The way I look at it, as long as I'm alive I'll likely need a home. If the value of my home falls the one I'll need to replace it with will likely fall as well so I don't worry at all.

Of course there are nuances such as relative real estate values and trends by region but if those things become issues I can always opt to take advantage and move to a lower cost area. You certainly could.
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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Re: Would you take out a mortgage or pay cash?

Post by nonnie » Sun Feb 12, 2012 11:21 pm

FrugalInvestor wrote:
nonnie wrote:Right now, as I've posted before, I worry less about my home maintaining its value (CA) than I do about my portfolio over the nex t decade.

Nonnie
The way I look at it, as long as I'm alive I'll likely need a home. If the value of my home falls the one I'll need to replace it with will likely fall as well so I don't worry at all.

Of course there are nuances such as relative real estate values and trends by region but if those things become issues I can always opt to take advantage and move to a lower cost area. You certainly could.
NO, I couldn't. I've lived in CA too long and like the climate--both temperature and political. I grew up in MI, my partner on Cape Cod-- we both hate snow, extreme temps in the summer and humidity. Even most of CA is too hot for us. It's really a quality of life issue for us and as BHs the main thing we spend our money on is housing rather than fancy restaurants, cars, shoes, jewelry, etc.. I'm very serious-- and I know this sounds extreme--if I run out of money ten years from now-- I run out of life. I will have had 80 good years and I have no need to live in a cramped apartment or in a state with the conditions I described above. We've each owned homes all our lives, we met after we each got divorced and sold our respective homes 5-6 years ago and we are renting from Dragon Lady, the landlord right now--the past three years--and a quality home in a quality place is with the security of not being evicted is our number one priority.

Nonnie
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Re: Would you take out a mortgage or pay cash?

Post by docneil88 » Mon Feb 13, 2012 3:27 am

Sellers love cash: faster and more likely closing of escrow. I read the discount on a home price for cash offers is usually 5-10% to fair market value. Plug that into your formulae.

The discount can be even larger on homes that, for whatever reason, require only all cash offers. Banks often won't lend on major fixer uppers, or red tagged houses, or condos with an HOA in litigation. If you find such a situation, you could be looking at a 10-20% discount to fair market value solely due to the cash requirement. And I'm starting with a lower fair market value due to the cost of repairs or the possible negative outcome of a lawsuit.

Good luck, Neil

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Re: Would you take out a mortgage or pay cash?

Post by M B » Mon Feb 13, 2012 4:07 am

- A 30 year loan would be repaid when you are something like 90. Do you expect to find a banker happy with this?
- If your financial assets are partly in bonds, it basically means borrowing to invest in bonds. This is a carry trade (but with the interest differential probably against you).

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Re: Would you take out a mortgage or pay cash?

Post by Noobvestor » Mon Feb 13, 2012 11:04 pm

nonnie wrote:I apologize to you and any others who were offended; it was not intended that way.
No apology necessary - and thanks for your explanation. It does make sense to me, re:ratios and other threads. Sadly :/
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Would you take out a mortgage or pay cash?

Post by Cruncher » Tue Feb 14, 2012 4:10 am

Great advice here already:

Keep wifey happy - job #1. Happy wifey, make happy hubby.

Educate & understand the various aspects of each solution (this might take a little longer than a couple days on a forum). Have a frank discussion, ... maybe a bottle of wine, come to an agreement.

Next day, confirm agreement (re:bottle of wine), make decision.

Debt free burden-free retirement is worth a lot.

Be happy with whatever decision makes wifey happy. Work on your handicap (or whatever will fill your time).

Good luck & congratulations!

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