Paying cash for a house. Good idea?

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alil
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Paying cash for a house. Good idea?

Post by alil » Sun Aug 19, 2018 3:20 pm

I would really appreciate your advice on the best way to pay for a house.

I have delayed buying a house, as a result a have a significant sum of money invested conservatively, therefore I am considering buying cash.

Asking price 250K - will require at least 50K of renovations
Annual income 300K

Current available funds:

65 K in an online saving account - 1.85%
55 K in a 5 year CD which matures in one year - 2.25%
150 K in taxable Vanguard account Intermediate term municipal fund (would have 3K capital loss if I was to sell)
50 K in I bonds (have been contributing for the past 5 years so only 40 K would be available)
50 K in EE bonds (have been contributing for the past 5 years so only 40 K would be available)

My asset allocation is currently 35/65- bonds/cash // stocks - I'm 38 years old, single, no real estate exposure, stable job

Current net worth about 1.7 mil - my emergency fund is included in the above accounts

I max out all my tax deferred accounts and invest in taxable Vanguard account monthly (Municipal, TSM and TISM funds)

My plan was to pay cash out of the above accounts and re balance in my taxed advantaged accounts.

My questions are:
1. Is it a good idea to pay cash (the house will be my primary residency) as opposed to taking a mortgage
2. What accounts should I draw from if I was to pay cash?

My inclination is to sell 40k of EE bonds, the municipal fund and use the online saving account money and leave I bonds as my emergency fund.

If I am missing any relevant information please let me know.

Thank you!

JoeRetire
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Re: Paying cash for a house. Good idea?

Post by JoeRetire » Sun Aug 19, 2018 3:53 pm

alil wrote:
Sun Aug 19, 2018 3:20 pm
65 K in an online saving account - 1.85%
55 K in a 5 year CD which matures in one year - 2.25%
150 K in taxable Vanguard account Intermediate term municipal fund (would have 3K capital loss if I was to sell)
50 K in I bonds (have been contributing for the past 5 years so only 40 K would be available)
50 K in EE bonds (have been contributing for the past 5 years so only 40 K would be available)

My asset allocation is currently 35/65- bonds/cash // stocks - I'm 38 years old, single, no real estate exposure, stable job

Current net worth about 1.7 mil - my emergency fund is included in the above accounts
Where is the rest of your net worth hidden?

Buy a house with cash if you are extremely debt-averse or the thought of a mortgage would keep you awake at night.

With that income, a stable job, and that net worth you can afford to do whatever suits your fancy. It doesn't have to be financially optimal. I wouldn't deplete my emergency finds that much, but mortgages don't keep me awake at night.
Last edited by JoeRetire on Sun Aug 19, 2018 3:55 pm, edited 1 time in total.

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TomatoTomahto
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Re: Paying cash for a house. Good idea?

Post by TomatoTomahto » Sun Aug 19, 2018 3:53 pm

We paid cash for our new house. I do not regret it. The mortgage company wanted us to jump through a zillion hoops for a mortgage of 20% of the purchase price. Most importantly, the mortgage company couldn't guarantee that they'd be done with their "process" by our preferred closing date. A "Private Banker" wanted us to move assets to their account before they'd give us an asset based loan. A margin loan would have involved other complications.

A pox on their houses. We had more capital gains than I'd have preferred to realize this year, but I guess I can call it Tax Gain Harvesting, Idiot Edition.

Capital Gains taxes: moderately expensive. Feeling of telling mortgage company to pound sand: Priceless.

alil
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Joined: Mon Nov 18, 2013 2:52 pm

Re: Paying cash for a house. Good idea?

Post by alil » Sun Aug 19, 2018 4:27 pm

Thank you for your answers,

The rest is in tax advantaged accounts and vanguard taxable account - I essentially have a three fund portfolio (TSM TBM and TISM index funds) with the exception of muni fund, EE and I bonds.

Depleting my emergency fund it what makes me nervous, but I would prefer to avoid the fees and the hassle of the mortgage.

A more specific question is whether withdrawing 1-5 years old EE or I bonds is a good idea (assuming I will keep them for 20 years - i.e. await for the to double - 3.53% annual return).

exit_r
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Re: Paying cash for a house. Good idea?

Post by exit_r » Sun Aug 19, 2018 6:12 pm

Shopping for a home as a cash buyer can be a great advantage during negotiations. You can close the transaction much sooner than a typical deal involving a lender.

deikel
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Re: Paying cash for a house. Good idea?

Post by deikel » Sun Aug 19, 2018 6:18 pm

From a cash flow perspective I would not cash the house (other than that's the only way to make an offer that will stick) and rather get a mortgage. You can always pay off the mortgage with money you have laying around, but its much harder to get the liquidity from a house you own in case you need it.

If you leverage the money carefully and not as a speculative investment, I think the mortgage gives you a higher degree of freedom, some minor tax advantage and maybe a motivation to save more since it comes from your account automatically.
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immidiatly and destroy any copy or remembrance of it.

bberris
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Re: Paying cash for a house. Good idea?

Post by bberris » Mon Aug 20, 2018 1:55 pm

I would pay cash if I could. You avoid the hassles , paperwork and fees (some to the lender and their associates, some to governments) of a loan.

You are also getting a tax free return on the equity in your house. If you borrow most of the cost, you will have to pay tax on the income from the investments you make with that cash you did not invest in the house. Mortgage interest is largely non-deductible due to limits and the high standard deduction now in place.

I get the concern about depletion of the emergency fund, but your income should allow you to pay most expenses outright, and puts you in a good place to borrow if you need to, even using a home equity loan. And you will soon replace the EF.

Darth Xanadu
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Re: Paying cash for a house. Good idea?

Post by Darth Xanadu » Mon Aug 20, 2018 2:08 pm

Although I generally would be in favor of taking a mortgage for cash-flow flexibility, it would seem in your circumstances, paying cash is an attractive option.

One thing you mentioned is $50k+ in reno costs. Are these expenses imminent / urgent? If so, then I'd lean more towards getting a loan (either mortgage, or Home equity loan but I have no experience with the latter).
"A courageous teacher, failure is."

MichCPA
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Re: Paying cash for a house. Good idea?

Post by MichCPA » Mon Aug 20, 2018 2:17 pm

Will you itemize your taxes this year? If not, I would pay cash. If you are itemizing, your effective mortgage rate would be 35% lower than the nominal amount and a mortgage would be tempting. With your income you are probably taking the 10k max SALT and itemizing.

NYCguy
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Re: Paying cash for a house. Good idea?

Post by NYCguy » Mon Aug 20, 2018 3:14 pm

In your circumstance I would pay cash and use the proceeds from the investments you suggested.

Even though you have a stable job, if you’re concerned about diminished liquidity, take out a home equity line of credit and draw upon it only if you need liquidity. Chances are you will not need it but you may sleep better knowing you have it.

In the meantime you can rebuild your cash reserves to whatever level you are comfortable with.

Congratulations on your success.
If your out-go is greater than your income, your upkeep will be your DOWNFALL.

Jablean
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Re: Paying cash for a house. Good idea?

Post by Jablean » Mon Aug 20, 2018 5:00 pm

Can you borrow from a 401K? Take out of Roth? Do you have fairly high cushion on multiple credit cards?

I think your cash is a bit under what you need and another year would give you your cushion. What's the economic outlook in your area? Is it reliant in international trade?

Nissanzx1
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Re: Paying cash for a house. Good idea?

Post by Nissanzx1 » Mon Aug 20, 2018 5:12 pm

I would pay cash in a second. Keep it simple.

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grabiner
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Re: Paying cash for a house. Good idea?

Post by grabiner » Mon Aug 20, 2018 5:15 pm

Paying cash makes sense. Most of the cash is coming from the interemediate-term muni fund, which has a duration of about 5 years, comparable to the duration of a 10 year mortgage. Selling this fund to take out a smaller mortgage is likely a net gain, given the yield on the fund and mortgage rates, particularly if the interest turns out not to be fully deductible. (If you are single, you can deduct all the interest if you have $10K in state and local taxes and $2K in other deductions such as charity.) And a cash offer of the same number of dollars is more attractive to a seller, as the seller doesn't have to worry about financing problems.

Don't sell the older EE bonds, assuming that your intention is to hold them for 20 years. EE bonds double in value if held for 20 years, but 5-year-old bonds have earned almost nothing up to now. The return on holding those bonds for another 15 years would be over 4%, risk-free and tax-deferred, which is well above the current market rate on long-term bonds. The I-bonds don't have the same issue, as you can buy new I-Bonds at the same rate as the old ones.
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