Buy 1st House Cash?

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Stryker16
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Joined: Thu May 18, 2017 9:18 pm

Buy 1st House Cash?

Post by Stryker16 » Thu May 18, 2017 9:36 pm

Hello all, looking for some advice. I am new to the site, but can't get enough of reading all the posts.

My question is, should I buy my first house cash or with a large down payment? See details below.

Age - 27
Married
Current Income - 80k (this is just my income) - My wife works now but I don't factor that in for when we buy a house since she will probably stay home with the kids
Retirement 75k (adding approximately 20k/year with a combination of Employer Roth 401k and Roth IRA)
Two 529 Plans Started - No kids yet, but I'm a planner so I figure I'd take advantage of time/compound interest
75K - Current savings in cash. 50k is designated as the house fund. 25k is designated as emergency/other.
35k - Approximate savings per year towards the house

So basically, I am putting 15% into retirement (15% personal +10% employer match), have two 529 plans started, and will have about 150k cash saved by the time we want to buy a house. Probably will keep 30k for future expenses/emergencies, so that would leave 120k for a house. This would buy a starter house in Michigan but probably would want to move up. That leaves the option of buying a 120k house cash and then trying to invest and save to buy the next house (5-10 years) or buying a $220k house or something similar with about 50% down (10-15 year mortage I'd assume). I am pretty conservative and like the idea of a paid for house, but it seems weird to buy a house in cash only to keep saving the amount of a mortgage payment towards a future house instead of investing it.

Has anyone been in a similar boat or have advice? Thanks in advance!

PFInterest
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Re: Buy 1st House Cash?

Post by PFInterest » Thu May 18, 2017 9:56 pm

Man need to move to Michigan....120K isn't even a downpayment here.

Good luck!

BW1985
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Re: Buy 1st House Cash?

Post by BW1985 » Thu May 18, 2017 9:57 pm

Yes I chose to keep the money invested in taxable (total stock) and take out a 15 year fixed rate instead. I put 20% down. So far it's worked out favorably.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

beth65
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Re: Buy 1st House Cash?

Post by beth65 » Thu May 18, 2017 10:00 pm

I'm no expert by any stretch, but my concern would be liquidity. You could take out a home equity loan if you do need cash and aren't in a position to sell your house, but then you are paying interest versus only paying 50% down on the house and keeping the other 50% cash for investments which have potential to earn you interest and are much easier to liquidate if needed. I would only buy a home with 100% cash if I had at least another $50-80k minimum in cash or non-retirement investments. There are too many unforeseen variables, particularly with a family.

Lou354
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Re: Buy 1st House Cash?

Post by Lou354 » Thu May 18, 2017 10:02 pm

My parents bought their houses with cash. There's nothing wrong with it. It's just a little unusual, then as now. One drawback of the cash-only starter house and then move up option is you'd have the aggravation and expense of buying and selling more houses and of moving too.
Last edited by Lou354 on Thu May 18, 2017 10:46 pm, edited 1 time in total.

protagonist
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Re: Buy 1st House Cash?

Post by protagonist » Thu May 18, 2017 10:24 pm

I like the idea of buying everything with cash.
Houses are not fundamentally different than anything else you buy.

This video with Steve Martin pretty much nails it. http://www.nbc.com/saturday-night-live/ ... 2020?snl=1

radiowave
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Re: Buy 1st House Cash?

Post by radiowave » Thu May 18, 2017 11:19 pm

And if you have a reasonable mortgage, you are building your credit history. You can always pay extra each month.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

Qwertykid18
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Re: Buy 1st House Cash?

Post by Qwertykid18 » Thu May 18, 2017 11:24 pm

protagonist wrote:I like the idea of buying everything with cash.
Houses are not fundamentally different than anything else you buy.

This video with Steve Martin pretty much nails it. http://www.nbc.com/saturday-night-live/ ... 2020?snl=1
Exactly. Trying my hardest to be debt free. House is last on my list

Nate79
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Re: Buy 1st House Cash?

Post by Nate79 » Thu May 18, 2017 11:25 pm

Are you maxing all retirement accounts? This would be my priority #1.

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Watty
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Re: Buy 1st House Cash?

Post by Watty » Thu May 18, 2017 11:48 pm

Keep in mind that you are buying into a neighborhood in addition to buying the house.

Be sure to look at the schools in the areas where you can get houses for $120K. Here in Atlanta there are areas where you can get low cost houses like that but the schools in those areas are generally not rated very high. Even if you plan on moving before your future kids start schools having low rated schools can make it very hard to sell a house in a soft real estate market.

Some low cost neighborhoods have a high percentage of rentals which isn't a good thing.

Depending on the area many of your neighbors may be struggling to either pay their mortgages or rent and may be at the upper limit of their finances so you might not have a lot in common with them and you may get sucked into "drama" going on around you.

One option to consider would be to rent a house in a neighborhood of $120K homes to see if that is the type of situation that you want to be in for the next ten years.

There is not one right answer and there are lots of good choices in your situation.

Stryker16
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Re: Buy 1st House Cash?

Post by Stryker16 » Fri May 19, 2017 6:59 am

Nate79 wrote:Are you maxing all retirement accounts? This would be my priority #1.
So you would put $46k/year into retirement (17.5 401k X 2 + 5.5 Roth IRA X 2) before you would put more down on your mortgage?

Stryker16
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Re: Buy 1st House Cash?

Post by Stryker16 » Fri May 19, 2017 7:07 am

Watty wrote:Keep in mind that you are buying into a neighborhood in addition to buying the house.

Be sure to look at the schools in the areas where you can get houses for $120K. Here in Atlanta there are areas where you can get low cost houses like that but the schools in those areas are generally not rated very high. Even if you plan on moving before your future kids start schools having low rated schools can make it very hard to sell a house in a soft real estate market.

Some low cost neighborhoods have a high percentage of rentals which isn't a good thing.

Depending on the area many of your neighbors may be struggling to either pay their mortgages or rent and may be at the upper limit of their finances so you might not have a lot in common with them and you may get sucked into "drama" going on around you.

One option to consider would be to rent a house in a neighborhood of $120K homes to see if that is the type of situation that you want to be in for the next ten years.

There is not one right answer and there are lots of good choices in your situation.
Yeah, essentially all counties in our area with various schools have house that we could buy for 120k or very close and we COULD make it work. It would probably be something like a 1500 sq foot ranch with 3 bedrooms and 1.5 baths. 220k could get us a 3k sq ft house with four bedrooms and 2.5 baths. As one poster noted, definitely lucky to live in Michigan when it comes to housing cost.

Nate79
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Re: Buy 1st House Cash?

Post by Nate79 » Fri May 19, 2017 8:00 am

Stryker16 wrote:
Nate79 wrote:Are you maxing all retirement accounts? This would be my priority #1.
So you would put $46k/year into retirement (17.5 401k X 2 + 5.5 Roth IRA X 2) before you would put more down on your mortgage?
Personally I would max one 401k at least ($18k), get all match money in the other 401k, max 2 Roth IRA's first. I would not fund 529 plan for imaginary kids yet. If any cash is left over I would have a hefty emergency fund and then enough for 20% down payment on whatever house value is going to be purchased. I would then probably start a taxable account with any remainder cash/income.

FrankTheTank
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Re: Buy 1st House Cash?

Post by FrankTheTank » Fri May 19, 2017 8:46 am

If OP already knows that his family will want a bigger/more expensive home, then I would personally aim to put down a large downpayment (at least 20%) on the larger home. Buying and selling a home comes with some pretty hefty transaction costs (movers/truck rental, opportunity costs for the time involved, payments to any real estate agents used, appraisals, home inspections, etc., etc.). If you know you plan to move into something bigger and your finances can support the more expensive home (or you're simply willing to wait and save), then I'd personally hold off for now. Plus, simply putting a downpayment on the larger/more expensive home would in theory leave you more liquidity. Life is unpredictable. Given low interest rates and the mortgage interest deduction, I think it's wiser to maintain liquidity in case of accident, illness, who knows what. Better to have the funds in some stocks that you can sell and obtain cash in 3 days versus having to deal with a HELOC.

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Watty
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Re: Buy 1st House Cash?

Post by Watty » Fri May 19, 2017 8:53 am

Stryker16 wrote:Yeah, essentially all counties in our area with various schools have house that we could buy for 120k or very close and we COULD make it work. It would probably be something like a 1500 sq foot ranch with 3 bedrooms and 1.5 baths. 220k could get us a 3k sq ft house with four bedrooms and 2.5 baths. As one poster noted, definitely lucky to live in Michigan when it comes to housing cost.
Something halfway in between might be a good choice. 2000 square feet with an unfinished basement works well for us and we don't have the higher utility bills and property taxes that a larger home would have. Having the unfinished basement really makes the rest of the square footage a lot more usable so there is little need for more space than that. Many of the larger square footage houses have things like formal living and dining rooms that we would rarely use so when we were looking for a house we avoided those.

Future housing prices are impossible to predict but one risk that you have is that you could save for a few more years to be able to pay cash but the home prices may have increased by then and you may not be able to buy a homes for the same prices in five years.

One thing that it missing from your calculations is the cost of the rent that you are paying while you are delaying the purchase in order to pay cash. The rent costs are likely more than any interest that you would pay on a modest mortgage.

Another part of the problem is that you are likely only getting 1%(before taxes) on you house money that you are saving up so it is not even keeping up with inflation.

These factors could mean that the quickest way to have a paid off house might not be to wait until you have enough cash to pay cash for it.

For example you have $50K in house money now, buying a house for something like $170K home with a $120K mortgage would mean about a $600 a month mortgage payment which is likely about what you are paying in rent right now. That $600 a month along with the $35K a year that you are saving would mean that you could have it paid off in less than four years. (There would also be property taxes, maintenance, and income tax deductions that would make this more complicated)

There is not one right answer but if you have a strong desire to buy a house then buying mid range house now with a mortgage would not be a terrible choice. While you might decide that you want to upgrade from a 2,000 square foot house some day there would never be any real need to get a bigger house.
Last edited by Watty on Fri May 19, 2017 9:12 am, edited 1 time in total.

BW1985
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Re: Buy 1st House Cash?

Post by BW1985 » Fri May 19, 2017 9:01 am

FrankTheTank wrote:If OP already knows that his family will want a bigger/more expensive home, then I would personally aim to put down a large downpayment (at least 20%) on the larger home. Buying and selling a home comes with some pretty hefty transaction costs (movers/truck rental, opportunity costs for the time involved, payments to any real estate agents used, appraisals, home inspections, etc., etc.). If you know you plan to move into something bigger and your finances can support the more expensive home (or you're simply willing to wait and save), then I'd personally hold off for now. Plus, simply putting a downpayment on the larger/more expensive home would in theory leave you more liquidity. Life is unpredictable. Given low interest rates and the mortgage interest deduction, I think it's wiser to maintain liquidity in case of accident, illness, who knows what. Better to have the funds in some stocks that you can sell and obtain cash in 3 days versus having to deal with a HELOC.

+1. I would not buy a house that you know you're going to grow out of just because it's all you can pay cash for now. Too much hassle with transacting costs + moving.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

Stryker16
Posts: 24
Joined: Thu May 18, 2017 9:18 pm

Re: Buy 1st House Cash?

Post by Stryker16 » Fri May 19, 2017 9:39 am

Watty wrote:
Stryker16 wrote:Yeah, essentially all counties in our area with various schools have house that we could buy for 120k or very close and we COULD make it work. It would probably be something like a 1500 sq foot ranch with 3 bedrooms and 1.5 baths. 220k could get us a 3k sq ft house with four bedrooms and 2.5 baths. As one poster noted, definitely lucky to live in Michigan when it comes to housing cost.
Something halfway in between might be a good choice. 2000 square feet with an unfinished basement works well for us and we don't have the higher utility bills and property taxes that a larger home would have. Having the unfinished basement really makes the rest of the square footage a lot more usable so there is little need for more space than that. Many of the larger square footage houses have things like formal living and dining rooms that we would rarely use so when we were looking for a house we avoided those.

Future housing prices are impossible to predict but one risk that you have is that you could save for a few more years to be able to pay cash but the home prices may have increased by then and you may not be able to buy a homes for the same prices in five years.

One thing that it missing from your calculations is the cost of the rent that you are paying while you are delaying the purchase in order to pay cash. The rent costs are likely more than any interest that you would pay on a modest mortgage.

Another part of the problem is that you are likely only getting 1%(before taxes) on you house money that you are saving up so it is not even keeping up with inflation.

These factors could mean that the quickest way to have a paid off house might not be to wait until you have enough cash to pay cash for it.

For example you have $50K in house money now, buying a house for something like $170K home with a $120K mortgage would mean about a $600 a month mortgage payment which is likely about what you are paying in rent right now. That $600 a month along with the $35K a year that you are saving would mean that you could have it paid off in less than four years. (There would also be property taxes, maintenance, and income tax deductions that would make this more complicated)

There is not one right answer but if you have a strong desire to buy a house then buying mid range house now with a mortgage would not be a terrible choice. While you might decide that you want to upgrade from a 2,000 square foot house some day there would never be any real need to get a bigger house.
Thanks for the response. My wife and I are actually in a unique situation right now. She makes very little salary but the perk of her job is that we get free rent at a 2 bedroom apartment (at a University) and get free food in the cafeteria 9 months of the year. It is not the ideal living situation, but it is ideal from a money perspective. You are correct about the 1% on house money. I have in an account making 1% interest. The 35k is also with my wife working. Probably could save 20k towards the next house a year if she did not. I think right now we will take it one year at a time and see where that puts us based on what stage of life we are in.

bloom2708
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Re: Buy 1st House Cash?

Post by bloom2708 » Fri May 19, 2017 9:40 am

Put 50% down on a house that you can grow into. If $220k will buy that, put $110 down.

That leaves your room for drops in value, should leave you with a very reasonable payment. You can test out your willingness to have a large debt.

You can always pay down early.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

danielnash
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Re: Buy 1st House Cash?

Post by danielnash » Fri May 19, 2017 10:07 am

I would personally only put down 20% and do a 15 year mortgage. You will pay ~3.5% on your mortgage and get some savings from interest deduction on your taxes. All the extra money you would have put towards a higher down payment, I would invest in a taxable/liquid investment account.

You seem disciplined so I don't think you would go wrong either way, but I rather invest money in stocks or bonds versus sinking more than you need to in a starter home. If you need money for whatever reason, it's a lot easier to sell an ETF, mutual fund, stock, or bond versus trying to get a HELOC to get money out of your house.

Just my opinion but I rather stay more liquid and try to earn a higher rate of return on investment vs being "debt free" for the sake of it. I could quickly pay my entire house off if I wanted to but the money I would sink into paying off my mortgage is earning interest elsewhere...most likely over a 15 year period, my cash invested today will earn more than the 3.5% interest I'm paying on my mortgage.

dcd72
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Re: Buy 1st House Cash?

Post by dcd72 » Fri May 19, 2017 10:22 am

My wife and I are actually in a unique situation right now. She makes very little salary but the perk of her job is that we get free rent at a 2 bedroom apartment (at a University) and get free food in the cafeteria 9 months of the year.
I know this wasn't your question, but I would hold off on moving for as long as it is tolerable. You are in a position, as a young couple, to save roughly 45% of your income (which you say will be your only income source once you have kids). That is huge. Stick it our for as long as possible.

Think of it this way - you are talking about purchasing house for $120,000-$220,000. So, every year extra year you stay in your current arrangement covers 16%-29% of the cost of your first home. I'd do what others suggested and max out retirement savings while saving a little less for the house.

Now, if you're having kids soon and your wife will stop working (and so you'll have to move) maybe this isn't feasible. But, just throwing this out there, you have a 2 BR, and the cost of child care will almost certainly be less than the cost of rent - the decrease in your wife's income + extra food costs.

Short version - you have the opportunity to lay a very strong financial foundation. Try to do that before life starts getting more expensive.

bluebolt
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Re: Buy 1st House Cash?

Post by bluebolt » Fri May 19, 2017 10:44 am

danielnash wrote:I would personally only put down 20% and do a 15 year mortgage. You will pay ~3.5% on your mortgage and get some savings from interest deduction on your taxes. All the extra money you would have put towards a higher down payment, I would invest in a taxable/liquid investment account.

You seem disciplined so I don't think you would go wrong either way, but I rather invest money in stocks or bonds versus sinking more than you need to in a starter home. If you need money for whatever reason, it's a lot easier to sell an ETF, mutual fund, stock, or bond versus trying to get a HELOC to get money out of your house.

Just my opinion but I rather stay more liquid and try to earn a higher rate of return on investment vs being "debt free" for the sake of it. I could quickly pay my entire house off if I wanted to but the money I would sink into paying off my mortgage is earning interest elsewhere...most likely over a 15 year period, my cash invested today will earn more than the 3.5% interest I'm paying on my mortgage.
Agree with this. Rates are still near long-term lows and the return long-term investments are likely to beat the interest rate (plus tax benefit) of a mortgage. Also, cash gives you flexibility that equity does not.

I could have afforded to pay cash for my home, but at a 3.625% rate, I felt like I'd rather have that money working for me in the market. I put about 30% down.

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