Getting a Mortgage when You can Pay Cash for a House

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A-Commoner
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Getting a Mortgage when You can Pay Cash for a House

Post by A-Commoner » Fri Jan 11, 2019 11:04 am

Hi. I’d appreciate it if anyone who has done this can chime in. Say you have 300k cash. That’s on top of other savings such as retirement accounts, taxable funds, and college funds for kids which are adequately funded and will continue to be adequately funded. You want to buy a house. You could pay cash, but you could also get a 30 year fixed mortgage at a sub 4% rate. What is the optimal choice?

HEDGEFUNDIE
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by HEDGEFUNDIE » Fri Jan 11, 2019 11:18 am

4% is too high to play interest rate arbitrage. Sub-3% and we’re talking...

magicrat
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by magicrat » Fri Jan 11, 2019 11:20 am

If you take the mortgage, what would you do with the $300k cash? Need an alternative to make a comparison.

Jags4186
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Jags4186 » Fri Jan 11, 2019 11:26 am

It depends on how old you are and also what your alternative with the money is. If you’ve already won the game, it likely makes little sense to take on the mortgage.

Snowjob
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Snowjob » Fri Jan 11, 2019 11:30 am

HEDGEFUNDIE wrote:
Fri Jan 11, 2019 11:18 am
4% is too high to play interest rate arbitrage. Sub-3% and we’re talking...
I disagree, 4% fixed rate & tax deductible (depends on other factors) is still Ok. Nominal returns for equity are hopefully in excess of the 4% over 30 year period.

The question is, starting valuation of the equity markets and what your forecast returns are from here. Assume you dropped your 300k of cash in VTI at around Christmas / New years with the S&P between 2300-2500. That is probably a very fair starting point over a long time horizon despite the run up. A bet at that level makes the IRR much better than a bet at S&P ~3000 at the peak this summer.

Any of us with a taxable account could pay off our mortgage but we are choosing not to are taking this bet in a way. I assume you have a long run way and taking on the incremental leverage makes sense in the first place.

sixty40
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by sixty40 » Fri Jan 11, 2019 11:43 am

We were in s similar situation and we chose to have a mortgage instead of paying cash, we wanted liquidity.

For me it was a personal decision and I was willing to sacrifice any financial gain for peace of mind, I slept well at night knowing I had ready cash and that I could pay off my mortgage at any time if certain life events changed. We took out a 30-yr mortgage with a lower monthly payment instead of 15-yr even though 15-yr would have a lower interest rate, again more ready cash available. I ended up paying off the mortgage early anyway since as time went on I saved more money, and it came to the point that I can pay off the mortgage w/o it affecting my ready cash.

Dottie57
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Dottie57 » Fri Jan 11, 2019 11:54 am

Put down a large down payment and the rest in a mortgage. It is not an all or nothing decision.

mptfan
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by mptfan » Fri Jan 11, 2019 11:58 am

Snowjob wrote:
Fri Jan 11, 2019 11:30 am
I disagree, 4% fixed rate & tax deductible (depends on other factors) is still Ok.
We don't know the OP's tax situation, but the mortgage interest is unlikely to be tax deductible given that the standard deduction is now so high....now $24,400 for married filing jointly in 2019.

Also consider that you have a much stronger negotiating position when buying a house with cash, and the closing costs are lower.
Last edited by mptfan on Fri Jan 11, 2019 12:06 pm, edited 2 times in total.

zubinh
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by zubinh » Fri Jan 11, 2019 12:02 pm

If you are in a high tax bracket, the 4% mortgage rate you are paying is really 2.5%. Chances are, you could earn a higher rate of return on the cash by investing in a tax efficient balanced fund over 5-6 years. At the same time, I would want to be debt free. So as a compromise, I would take out the mortgage and make $5,000 monthly payments for 6 years. That way you have time to build liquidity while being mortgage free in 6 years...and you get to deduct the interest (if that applies to your situation). Good Luck.
Last edited by zubinh on Fri Jan 11, 2019 12:09 pm, edited 1 time in total.

Goal33
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Goal33 » Fri Jan 11, 2019 12:03 pm

For me, this is a decision about taxes. 300k is not just going to fall in my lap. There will be gains from investing to consider... Also, liquidity is nice.
A man with one watch always knows what time it is; a man with two watches is never sure.

hyperpigment26
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by hyperpigment26 » Fri Jan 11, 2019 12:13 pm

Offering a cash offer to a seller has leverage, and in some cases quite a lot. Sometimes they are desperate to move because they can't afford their payments or have personal or occupational reasons for wanting a quick sale. A quick all-cash closing without hindrance from a lender can help close your deal in less than half the time. So much so that you may be able to negotiate a lower selling price. I've been on both sides of real estate transactions (buyer and seller) and cash vs mortgage turned out to be crucial.

So you'd need to weigh that against the expected return on the mortgage choice to help make a decision.

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djpeteski
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by djpeteski » Fri Jan 11, 2019 12:15 pm

If you are dead set on getting a loan, I would advise against a conventional loan. Conventional loans have high origination costs, and in the case you cite (30 year fixed) a relatively high interest rate.

From my experience you are better off getting a fixed rate and length home equity loan. While most people get these in supplement to their existing mortgage, you could have this as your main mortgage. Banks give very good rates for these kinds of loans as their risks are pretty low (first position), and they pay closing costs.

When I did this, I got a 7 year fixed not to replace my conventional 15 year. The rate was below their advertised teaser rate. I did this to pay off my loan early, and I understand that you have a different purpose. While the 7 year time frame would not be appealing, the rate was very appealing. At the end of the 7 years you can always do the same thing again, or not. That is up to you.

To give you numbers prevailing 30 year rates, at the time I did this, were about 4, my existing 15 year was 3.5, and I got 2.62 on the home equity loan.

Snowjob
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Snowjob » Fri Jan 11, 2019 12:48 pm

mptfan wrote:
Fri Jan 11, 2019 11:58 am
Snowjob wrote:
Fri Jan 11, 2019 11:30 am
I disagree, 4% fixed rate & tax deductible (depends on other factors) is still Ok.
We don't know the OP's tax situation, but the mortgage interest is unlikely to be tax deductible given that the standard deduction is now so high....now $24,400 for married filing jointly in 2019.

Also consider that you have a much stronger negotiating position when buying a house with cash, and the closing costs are lower.
Even if its not tax deductible, I'm willing to bet equity outpaces a 4% nominal return going forward. Now is it necessary for this particular person, no its probably unnecessary risk given that they just had this 300k in cash and didn't consider it part of their taxable account. My mortgage is in the mid 3's if I recall, and while I could pay it off, I'm using the incremental leverage. At this junction each payment is about 80% principle so its pretty cost effective.

Dude2
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Dude2 » Fri Jan 11, 2019 12:59 pm

Dottie57 wrote:
Fri Jan 11, 2019 11:54 am
Put down a large down payment and the rest in a mortgage. It is not an all or nothing decision.
Yes, I just bought a house last month, and this was my play. Coincidently the house I bought was around 300k. I put 100k down, just because it was a nice, round number. I've since paid down the principle to 150k.

However, even with super-dooper credit score, my rate was 5.125% (locked in around Oct/Nov of 2018), so I don't know how you got a nice 4%. (Mine was 30 year conventional).

Anyway, no matter what anybody says, I do not want to pay somebody thousands of dollars a year for the privilege of using their money when I can use my own money. Currently at 150k, I'm still paying somebody over $7500 a year. The way I look at it, that's $7500 I could have in my pocket. Even if you argue that I can invest the 150k and make 7%, I'm still only netting 2%. In my mind, if you aren't concerned so much about liquidity, then just use your cash. If you are concerned, take a mortgage, but bear in mind that you are paying somebody for having "liquidity peace-of-mind".

In my case there was a deal with the builder that if you used their lender you'd get 8% for closing costs. That was my only real motivation in going through the mortgage process, but you forget how much of a pain all of that is until you go through it again.
Last edited by Dude2 on Fri Jan 11, 2019 1:04 pm, edited 1 time in total.

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Toons
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Toons » Fri Jan 11, 2019 1:03 pm

I have always had an aversion to debt.
I would pay cash.
I would continue investing the hypothetical mortgage payment monthly.(which I did)
:happy
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Grt2bOutdoors
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Grt2bOutdoors » Fri Jan 11, 2019 1:16 pm

Would you borrow money to a) invest in the stock market?, b) borrow money to put the proceeds in your savings account or c) borrow money to inflate your standard of living?

That is what you will be doing IF you take a mortgage on your prospective home.

The next question is what hurdle rate must the investment/savings account offer you to make a mortgage worthwhile. In my mind, significantly higher than the rate on the debt because if you fail to pay for any reason the lender can and will seize the collateral (no risk to lender), you on the other hand are exposed to substantial risk of loss. So cross out the savings account, returns are too low, cross out standard of living because I LBYM. That leaves investments which for me need to return at least double the risk free rate on an after tax basis. Say 6-7%+ - hard to get that in the equities markets today.

No, I wouldn’t borrow and if I did it would be no more than $100k.
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international001
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by international001 » Fri Jan 11, 2019 1:20 pm

djpeteski wrote:
Fri Jan 11, 2019 12:15 pm
If you are dead set on getting a loan, I would advise against a conventional loan. Conventional loans have high origination costs, and in the case you cite (30 year fixed) a relatively high interest rate.

From my experience you are better off getting a fixed rate and length home equity loan. While most people get these in supplement to their existing mortgage, you could have this as your main mortgage. Banks give very good rates for these kinds of loans as their risks are pretty low (first position), and they pay closing costs.

When I did this, I got a 7 year fixed not to replace my conventional 15 year. The rate was below their advertised teaser rate. I did this to pay off my loan early, and I understand that you have a different purpose. While the 7 year time frame would not be appealing, the rate was very appealing. At the end of the 7 years you can always do the same thing again, or not. That is up to you.

To give you numbers prevailing 30 year rates, at the time I did this, were about 4, my existing 15 year was 3.5, and I got 2.62 on the home equity loan.
Don't you have to own the house before you get a home equity loan? Are you suggesting paying in cash and then get the home equity loan?

I thought they were higher rates
https://www.bankrate.com/home-equity.aspx

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whodidntante
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by whodidntante » Fri Jan 11, 2019 1:29 pm

Toons wrote:
Fri Jan 11, 2019 1:03 pm
I have always had an aversion to debt.
I would pay cash.
I would continue investing the hypothetical mortgage payment monthly.(which I did)
:happy
You are the most consistent poster on the site, Toons. :happy

international001
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by international001 » Fri Jan 11, 2019 1:32 pm

Dude2 wrote:
Fri Jan 11, 2019 12:59 pm
Dottie57 wrote:
Fri Jan 11, 2019 11:54 am
Put down a large down payment and the rest in a mortgage. It is not an all or nothing decision.
Yes, I just bought a house last month, and this was my play. Coincidently the house I bought was around 300k. I put 100k down, just because it was a nice, round number. I've since paid down the principle to 150k.

However, even with super-dooper credit score, my rate was 5.125% (locked in around Oct/Nov of 2018), so I don't know how you got a nice 4%. (Mine was 30 year conventional).

Anyway, no matter what anybody says, I do not want to pay somebody thousands of dollars a year for the privilege of using their money when I can use my own money. Currently at 150k, I'm still paying somebody over $7500 a year. The way I look at it, that's $7500 I could have in my pocket. Even if you argue that I can invest the 150k and make 7%, I'm still only netting 2%. In my mind, if you aren't concerned so much about liquidity, then just use your cash. If you are concerned, take a mortgage, but bear in mind that you are paying somebody for having "liquidity peace-of-mind".

In my case there was a deal with the builder that if you used their lender you'd get 8% for closing costs. That was my only real motivation in going through the mortgage process, but you forget how much of a pain all of that is until you go through it again.
That's a bad move. Get a 30 years loan and pay 50k in the first month? Why didn't you get a shorter term loan with a better rate?

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whodidntante
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by whodidntante » Fri Jan 11, 2019 1:34 pm

I don't think I can participate because my brain would revolt and burrow out of my skull if I tried to hold 300k in cash.

Dude2
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Dude2 » Fri Jan 11, 2019 1:41 pm

international001 wrote:
Fri Jan 11, 2019 1:32 pm
Dude2 wrote:
Fri Jan 11, 2019 12:59 pm
Dottie57 wrote:
Fri Jan 11, 2019 11:54 am
Put down a large down payment and the rest in a mortgage. It is not an all or nothing decision.
Yes, I just bought a house last month, and this was my play. Coincidently the house I bought was around 300k. I put 100k down, just because it was a nice, round number. I've since paid down the principle to 150k.

However, even with super-dooper credit score, my rate was 5.125% (locked in around Oct/Nov of 2018), so I don't know how you got a nice 4%. (Mine was 30 year conventional).

Anyway, no matter what anybody says, I do not want to pay somebody thousands of dollars a year for the privilege of using their money when I can use my own money. Currently at 150k, I'm still paying somebody over $7500 a year. The way I look at it, that's $7500 I could have in my pocket. Even if you argue that I can invest the 150k and make 7%, I'm still only netting 2%. In my mind, if you aren't concerned so much about liquidity, then just use your cash. If you are concerned, take a mortgage, but bear in mind that you are paying somebody for having "liquidity peace-of-mind".

In my case there was a deal with the builder that if you used their lender you'd get 8% for closing costs. That was my only real motivation in going through the mortgage process, but you forget how much of a pain all of that is until you go through it again.
That's a bad move. Get a 30 years loan and pay 50k in the first month? Why didn't you get a shorter term loan with a better rate?
I guess I just didn't have the time to mess with it, and I knew that since it's a simple loan, I can just pay it off whenever. I would see it as splitting hairs to say that I could have taken a 15 yr loan @ 4.75% and the interest I saved in a month (197.92) versus 30 year at 5.125% (213.54) --> I lost $15.62 for not taking out a 15 year loan. I can live with that. My time is worth something.

fire_rebel
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by fire_rebel » Fri Jan 11, 2019 2:21 pm

How much do you save in closing costs/origination fee by paying with cash 5K ? 10K ? .That is worth something.

cusetownusa
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by cusetownusa » Fri Jan 11, 2019 2:52 pm

Snowjob wrote:
Fri Jan 11, 2019 12:48 pm
mptfan wrote:
Fri Jan 11, 2019 11:58 am
Snowjob wrote:
Fri Jan 11, 2019 11:30 am
I disagree, 4% fixed rate & tax deductible (depends on other factors) is still Ok.
We don't know the OP's tax situation, but the mortgage interest is unlikely to be tax deductible given that the standard deduction is now so high....now $24,400 for married filing jointly in 2019.

Also consider that you have a much stronger negotiating position when buying a house with cash, and the closing costs are lower.
Even if its not tax deductible, I'm willing to bet equity outpaces a 4% nominal return going forward. Now is it necessary for this particular person, no its probably unnecessary risk given that they just had this 300k in cash and didn't consider it part of their taxable account. My mortgage is in the mid 3's if I recall, and while I could pay it off, I'm using the incremental leverage. At this junction each payment is about 80% principle so its pretty cost effective.
Do you have bonds or are you 100% equities?

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Meg77
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Meg77 » Fri Jan 11, 2019 3:14 pm

As a banker who does a lot of mortgages, I advise most people in this situation (who are usually in their 50s or older) to pay cash for the house and/or to pay off their mortgages if they have the cash, especially if they are at or near retirement age or have obtained financial freedom (in other words, if their monthly budgets aren't tight). I advised my own mother to do the same thing when she bought her last home several years ago. Sure, in hindsight we know that she may have done slightly better to keep those funds in the stock market (over the last 4 years at least). BUT not having a mortgage has had unquantifiable effects as well. She has so few monthly fixed expenses that she doesn't ever worry about the stock market or check her account. This makes it easier to stay invested in harder times (the December dip didn't give her a moment's pause). She's also more generous that I think she'd be if she had a mortgage payment. She's taken a few big early retirement trips that I think she'd worry about spending money on if she still had a mortgage.

Many people weigh the decision to pay cash the same as whether to pay off an existing mortgage, but not obtaining a mortgage in the first place saves even more money than the pure interest rate arbitrage calculation would suggest. For one, offering to pay cash and foregoing a financing contingency in the contract can often get you a discount on the purchase price or other considerations from the seller. But besides that, using a mortgage to buy a home comes with closing costs that one can usually avoid when paying cash. Examples include a lenders title policy (more expensive in many states compared to an owners policy because lenders require many added endorsements), a formal appraisal (and you can't shop around or pick the appraiser when using a lender), underwriting/processing/origination fees, credit report fee, flood certification fee, and a certain level of insurance coverage that may be more than you need.

Also, many people weigh this decision theoretically and then don't follow through. For example, if you determine that investing $300k cash in the stock market is likely to return more than your mortgage interest rate costs and you're willing to take that risk, then you actually have to be prepared to take that $300k and dump it into the stock market. Usually people don't do this. They keep higher cash reserves and increase discretionary spending, investing maybe only a portion of the funds that would have been used to buy the home outright.
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Toons
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Toons » Fri Jan 11, 2019 4:02 pm

whodidntante wrote:
Fri Jan 11, 2019 1:29 pm
Toons wrote:
Fri Jan 11, 2019 1:03 pm
I have always had an aversion to debt.
I would pay cash.
I would continue investing the hypothetical mortgage payment monthly.(which I did)
:happy
You are the most consistent poster on the site, Toons. :happy

Gracias Amigo
:mrgreen: :mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

StrawMan
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by StrawMan » Fri Jan 11, 2019 4:22 pm

I paid cash on my last two houses. Last one I was 44 and just about to retire from the military. Everyone says "smart money" is take a loan and invest the cash... Uh huh, you know what I worry about at night? Not a damn thing. Honestly, I do see and appreciate the thought process. But I too have an aversion to debt.

Snowjob
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Snowjob » Fri Jan 11, 2019 4:31 pm

Meg77 wrote:
Fri Jan 11, 2019 3:14 pm
As a banker who does a lot of mortgages, I advise most people in this situation (who are usually in their 50s or older) to pay cash for the house and/or to pay off their mortgages if they have the cash, especially if they are at or near retirement age or have obtained financial freedom (in other words, if their monthly budgets aren't tight). I advised my own mother to do the same thing when she bought her last home several years ago. Sure, in hindsight we know that she may have done slightly better to keep those funds in the stock market (over the last 4 years at least). BUT not having a mortgage has had unquantifiable effects as well. She has so few monthly fixed expenses that she doesn't ever worry about the stock market or check her account. This makes it easier to stay invested in harder times (the December dip didn't give her a moment's pause). She's also more generous that I think she'd be if she had a mortgage payment. She's taken a few big early retirement trips that I think she'd worry about spending money on if she still had a mortgage.

Many people weigh the decision to pay cash the same as whether to pay off an existing mortgage, but not obtaining a mortgage in the first place saves even more money than the pure interest rate arbitrage calculation would suggest. For one, offering to pay cash and foregoing a financing contingency in the contract can often get you a discount on the purchase price or other considerations from the seller. But besides that, using a mortgage to buy a home comes with closing costs that one can usually avoid when paying cash. Examples include a lenders title policy (more expensive in many states compared to an owners policy because lenders require many added endorsements), a formal appraisal (and you can't shop around or pick the appraiser when using a lender), underwriting/processing/origination fees, credit report fee, flood certification fee, and a certain level of insurance coverage that may be more than you need.

Also, many people weigh this decision theoretically and then don't follow through. For example, if you determine that investing $300k cash in the stock market is likely to return more than your mortgage interest rate costs and you're willing to take that risk, then you actually have to be prepared to take that $300k and dump it into the stock market. Usually people don't do this. They keep higher cash reserves and increase discretionary spending, investing maybe only a portion of the funds that would have been used to buy the home outright.
My parents are in the opposite situation, have 2 mortgages, but it allows them to live a lifestyle they couldn't afford otherwise. When I was younger my dad joked that when he died he wanted to be down to his last dollar and that seems be the glide path he's on !

Snowjob
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Snowjob » Fri Jan 11, 2019 4:38 pm

cusetownusa wrote:
Fri Jan 11, 2019 2:52 pm
Snowjob wrote:
Fri Jan 11, 2019 12:48 pm
mptfan wrote:
Fri Jan 11, 2019 11:58 am
Snowjob wrote:
Fri Jan 11, 2019 11:30 am
I disagree, 4% fixed rate & tax deductible (depends on other factors) is still Ok.
We don't know the OP's tax situation, but the mortgage interest is unlikely to be tax deductible given that the standard deduction is now so high....now $24,400 for married filing jointly in 2019.

Also consider that you have a much stronger negotiating position when buying a house with cash, and the closing costs are lower.
Even if its not tax deductible, I'm willing to bet equity outpaces a 4% nominal return going forward. Now is it necessary for this particular person, no its probably unnecessary risk given that they just had this 300k in cash and didn't consider it part of their taxable account. My mortgage is in the mid 3's if I recall, and while I could pay it off, I'm using the incremental leverage. At this junction each payment is about 80% principle so its pretty cost effective.
Do you have bonds or are you 100% equities?
As far as investments, I have a few fixed income like products in workplace accounts to which I have limited access to, as well as some nominal leverage in a taxable account. Net there is roughly 100% equity at this juncture, was probably closer to 85% this fall. If you count the mortgage as a negative bond then I am > 100% equity.

Starfish
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Starfish » Fri Jan 11, 2019 4:43 pm

I always take the maximum loans possible for everything I can (houses, cars, I would by food on 30y fixed low interest if it was possible), so yes I would do it.
Under 4% - in my case deductible too - fixed for 30 years qualifies in my book as a great deal.
I like cash for investment or safety cushion.

I wouldn't do it if I had to generate income to cover the mortgage (retirement).

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220volt
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by 220volt » Fri Jan 11, 2019 5:24 pm

With 300k you can buy either:

a piece of mind (house paid for)
or
uncertainty (stock market returns)
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart

worthit
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by worthit » Fri Jan 11, 2019 5:49 pm

It depends on a) whether you prefer having liquidity b) whether you are someone who values being debt-free as supposed to having a mortgage c) whether this is your long time home or a final destination in terms of residence d) whether you job(s) are secure and you are as certain as you can reasonly be that nothing will impact your lifestyle in the near future in terms of expenses.

These are some of things I went through when I purchased my house over 3 years ago with an interest rate of 3.675% even though I could have paid cash. I am still paying my mortgage monthly and just started exploring my options to pre-pay. But I also have an additional consideration as my job prospects might force me to move to another state or even overseas. So the decision was mostly personal influenced by the unknowns listed above (specifically "c" and "d").

Either way you would be fine.

Cheers!

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djpeteski
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by djpeteski » Mon Jan 14, 2019 11:53 am

international001 wrote:
Fri Jan 11, 2019 1:20 pm
djpeteski wrote:
Fri Jan 11, 2019 12:15 pm
If you are dead set on getting a loan, I would advise against a conventional loan. Conventional loans have high origination costs, and in the case you cite (30 year fixed) a relatively high interest rate.

From my experience you are better off getting a fixed rate and length home equity loan. While most people get these in supplement to their existing mortgage, you could have this as your main mortgage. Banks give very good rates for these kinds of loans as their risks are pretty low (first position), and they pay closing costs.

When I did this, I got a 7 year fixed not to replace my conventional 15 year. The rate was below their advertised teaser rate. I did this to pay off my loan early, and I understand that you have a different purpose. While the 7 year time frame would not be appealing, the rate was very appealing. At the end of the 7 years you can always do the same thing again, or not. That is up to you.

To give you numbers prevailing 30 year rates, at the time I did this, were about 4, my existing 15 year was 3.5, and I got 2.62 on the home equity loan.
Don't you have to own the house before you get a home equity loan? Are you suggesting paying in cash and then get the home equity loan?

I thought they were higher rates
https://www.bankrate.com/home-equity.aspx
I think you are correct on the first point, sorry, that would not work in this case, good catch.

On the second point they normally list home equity loan rates as if they will be in supplement to an existing mortgage and in second position. Those are much higher risks, and as such have higher rates. A number of circumstances could lead to the home equity lender with zero compensation if the borrower defaults as they are in second position. However, when they are in first position, that is almost never the case so they can afford to give much lower rates.

Using bankrate, or other advertising, is not an accurate research of rate as very few people put their home equity loan in first position.

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willthrill81
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by willthrill81 » Mon Jan 14, 2019 12:07 pm

whodidntante wrote:
Fri Jan 11, 2019 1:34 pm
I don't think I can participate because my brain would revolt and burrow out of my skull if I tried to hold 300k in cash.
Ditto! :beer I can't even hold an extra $500 in our checking account without putting it to better use somewhere.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by willthrill81 » Mon Jan 14, 2019 12:11 pm

Snowjob wrote:
Fri Jan 11, 2019 12:48 pm
mptfan wrote:
Fri Jan 11, 2019 11:58 am
Snowjob wrote:
Fri Jan 11, 2019 11:30 am
I disagree, 4% fixed rate & tax deductible (depends on other factors) is still Ok.
We don't know the OP's tax situation, but the mortgage interest is unlikely to be tax deductible given that the standard deduction is now so high....now $24,400 for married filing jointly in 2019.

Also consider that you have a much stronger negotiating position when buying a house with cash, and the closing costs are lower.
Even if its not tax deductible, I'm willing to bet equity outpaces a 4% nominal return going forward. Now is it necessary for this particular person, no its probably unnecessary risk given that they just had this 300k in cash and didn't consider it part of their taxable account. My mortgage is in the mid 3's if I recall, and while I could pay it off, I'm using the incremental leverage. At this junction each payment is about 80% principle so its pretty cost effective.
The hurdle is more than a 4% mortgage interest rate (don't forget closing costs on top of this). The OP will need to pay taxes on the gains first, so the hurdle could easily be 5% since LTCG could be 20%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Getting a Mortgage when You can Pay Cash for a House

Post by TomatoTomahto » Mon Jan 14, 2019 12:14 pm

Toons wrote:
Fri Jan 11, 2019 1:03 pm
I have always had an aversion to debt.
I would pay cash.
I would continue investing the hypothetical mortgage payment monthly.(which I did)
:happy
After the mortgage company made us crazy with their wacky requirements we decided to eat the resulting capital gains and raise the cash. For example, the mortgage company wanted 3 paycheck stubs at our new location, which we were moving to because of a job and wanted to settle in before my wife began work, and 3 paychecks would have meant waiting 1.5 months before buying, even if we had a rock solid offer letter. The jumbo loan requirements were crazier. A "conforming loan" was for around 20% of the purchase price; we'd make up the rest in cash. The final insult was that they couldn't guarantee that the cashier's check would be available in time for the closing.

Additional taxes due to LTCG: a six digit amount
Satisfaction of telling the mortgage company to pound sand: Priceless
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Getting a Mortgage when You can Pay Cash for a House

Post by JoeRetire » Mon Jan 14, 2019 12:31 pm

A-Commoner wrote:
Fri Jan 11, 2019 11:04 am
Hi. I’d appreciate it if anyone who has done this can chime in. Say you have 300k cash.
Why do you have this $300k in cash?

Significantly risk intolerant?
Had a plan to use the cash for something else?
Using it as an emergency fund?
Can't think of anything better to do with it?

What has changed that you might now be willing to no longer have cash, but instead might be willing to put this cash into the walls of your house?

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Re: Getting a Mortgage when You can Pay Cash for a House

Post by michaeljc70 » Mon Jan 14, 2019 1:25 pm

I paid cash for my place and then took a 3.3% 15 year mortgage. Mostly I needed some money for remodeling and some for EF and some in case of a cash flow issue. I took around 60% of the value of the home. I invested some of the mortgage money. If rates were a lot higher, I probably wouldn't have taken the mortgage and would have held off on remodeling until I saved enough money.
Last edited by michaeljc70 on Mon Jan 14, 2019 1:38 pm, edited 1 time in total.

btenny
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by btenny » Mon Jan 14, 2019 1:28 pm

Do the math using Turbo Tax for the new rules to forecast your taxes for your situation and make sure you consider all your deductions. Guess what you can earn for the invested money. With the old tax rules you could make about $1K to $2K per year or slightly more by taking a modest mortgage and investing the cash and deducting the interest. This worked for me for 20 years before I retired and downsized. For most younger people with kids and medical expenses and good jobs I suspect this is still a good trade off.

I did the math back in 2003ish as a retired married couple after I downsized. I found I was going to make $1200 or maybe less. So it was not worth it to me. In my case I did not have enough deductions to get the full interest deduction.

Good Luck.

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Re: Getting a Mortgage when You can Pay Cash for a House

Post by KlangFool » Mon Jan 14, 2019 1:35 pm

OP,

Besides the 300K, what is the size of your portfolio now?

A) 2.1 million -> Pay cash.

B) 150K -> take the loan.

You do not want to be "House Poor" asset wise.

KlangFool

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Re: Getting a Mortgage when You can Pay Cash for a House

Post by hightower » Mon Jan 14, 2019 1:41 pm

A-Commoner wrote:
Fri Jan 11, 2019 11:04 am
Hi. I’d appreciate it if anyone who has done this can chime in. Say you have 300k cash. That’s on top of other savings such as retirement accounts, taxable funds, and college funds for kids which are adequately funded and will continue to be adequately funded. You want to buy a house. You could pay cash, but you could also get a 30 year fixed mortgage at a sub 4% rate. What is the optimal choice?
It's all about perspective. People say they choose a mortgage because they want "liquidity." But, do you really have liquidity if you're in debt? I would argue no. Sure you can go buy more things with your cash, but technically you're buying things with borrowed money. Owning your own house with no attached debt is a very liquid place to be IMO. You get to keep much more of the money you earn each month and can choose to work more or less because you want to, not because you have to.
Others may argue the tax benefits of having a mortgage. If you have a mortgage, no matter how good your tax benefits are, you're still paying mortgage interest ON TOP OF the tax benefits you're getting. You basically get an interest discount, but it will never be discounted to zero. It will still be something like 2%, depending on your tax bracket and individual situation.

If I were the OP, I'd definitely pay cash and sit back and enjoy my interest free life.

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Re: Getting a Mortgage when You can Pay Cash for a House

Post by HomerJ » Mon Jan 14, 2019 1:44 pm

Snowjob wrote:
Fri Jan 11, 2019 4:31 pm
My parents are in the opposite situation, have 2 mortgages, but it allows them to live a lifestyle they couldn't afford otherwise. When I was younger my dad joked that when he died he wanted to be down to his last dollar and that seems be the glide path he's on !
This doesn't make any sense. Is the plan to spend all the money they borrowed, and then die before they have to pay it back?
The J stands for Jay

hightower
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by hightower » Mon Jan 14, 2019 1:49 pm

Meg77 wrote:
Fri Jan 11, 2019 3:14 pm
As a banker who does a lot of mortgages, I advise most people in this situation (who are usually in their 50s or older) to pay cash for the house and/or to pay off their mortgages if they have the cash, especially if they are at or near retirement age or have obtained financial freedom (in other words, if their monthly budgets aren't tight). I advised my own mother to do the same thing when she bought her last home several years ago. Sure, in hindsight we know that she may have done slightly better to keep those funds in the stock market (over the last 4 years at least). BUT not having a mortgage has had unquantifiable effects as well. She has so few monthly fixed expenses that she doesn't ever worry about the stock market or check her account. This makes it easier to stay invested in harder times (the December dip didn't give her a moment's pause). She's also more generous that I think she'd be if she had a mortgage payment. She's taken a few big early retirement trips that I think she'd worry about spending money on if she still had a mortgage.

Also, many people weigh this decision theoretically and then don't follow through. For example, if you determine that investing $300k cash in the stock market is likely to return more than your mortgage interest rate costs and you're willing to take that risk, then you actually have to be prepared to take that $300k and dump it into the stock market. Usually people don't do this. They keep higher cash reserves and increase discretionary spending, investing maybe only a portion of the funds that would have been used to buy the home outright.
Great post and I fully agree, especially the first paragraph. I think we, as a society, have become so accustomed to being in massive debt for our homes, that we don't even consider what life would be like without it. It's as if it's a fantasy world that no one can imagine. Debt free is true freedom and that includes the mortgage.

Starfish
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Starfish » Mon Jan 14, 2019 1:56 pm

Just to put a number on it, last 30 years S&P 500 had a return of about 1500%. 300k$ invested in 1988 would have been 4.5 million today.
So prepaying mortgage was pretty much the largest destroyer of wealth.

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dratkinson
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by dratkinson » Mon Jan 14, 2019 2:01 pm

Retired from military, pension covered frugal lifestyle, and could pay cash or get a mortgage. What to do?

Heard Suze Orman explain why, if you can afford to pay cash, it's a bad idea to use a mortgage to transfer your wealth to a banker. (Logic made sense.)

Didn't know about BH way of investing before buying house so was only investing in CDs. The thought of earning CD rate, to turn around and pay higher mortgage rate, seemed to be a pure waste of money. So paid cash.

Later found the BH way of investing and investing success turned around.



Agree with others. If you have not previously invested the $300K, then use it to pay cash.

Then invest your monthly non-mortgage payments.

If you need it, it is frequently advised to get a HELOC as an extended EF tier. So you can get your home's equity back if you need it.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

Dude2
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Dude2 » Mon Jan 14, 2019 2:12 pm

Starfish wrote:
Mon Jan 14, 2019 1:56 pm
Just to put a number on it, last 30 years S&P 500 had a return of about 1500%. 300k$ invested in 1988 would have been 4.5 million today.
So prepaying mortgage was pretty much the largest destroyer of wealth.
Conclusion: borrow as much money as possible, and invest it in the S&P500. Any other course of action is a guaranteed loss?

Starfish
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Starfish » Mon Jan 14, 2019 2:25 pm

Dude2 wrote:
Mon Jan 14, 2019 2:12 pm
Starfish wrote:
Mon Jan 14, 2019 1:56 pm
Just to put a number on it, last 30 years S&P 500 had a return of about 1500%. 300k$ invested in 1988 would have been 4.5 million today.
So prepaying mortgage was pretty much the largest destroyer of wealth.
Conclusion: borrow as much money as possible, and invest it in the S&P500. Any other course of action is a guaranteed loss?
No, that is not at all the conclusion.
First of all you cannot borrow money in the same conditions as a mortgage (30 years, low interest fixed, non callable), so the discussion is pointless. The mortgage at interest rates we have now is a very precious asset.

Secondly, there is a balance between risk and reward for each person, but in this case it seems excessive on the caution side at a very high price.

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Re: Getting a Mortgage when You can Pay Cash for a House

Post by MotoTrojan » Mon Jan 14, 2019 3:13 pm

Snowjob wrote:
Fri Jan 11, 2019 11:30 am

Any of us with a taxable account could pay off our mortgage but we are choosing not to are taking this bet in a way. I assume you have a long run way and taking on the incremental leverage makes sense in the first place.
A taxable account with enough to payoff a mortgage likely has long-term gains that would be prohibitive tax-wise.

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Re: Getting a Mortgage when You can Pay Cash for a House

Post by BigoteGato » Mon Jan 14, 2019 3:28 pm

OP : I was in your situation 4 years back (but more expensive house). What made up my mind is that I had sufficient $ in bonds to buy home, so I wasn’t comparing mortgage interest to equity returns but to TBM’s. So I sold bonds, and treated the house $ amount as part of my bond allocation I’m my asset alllocation. Liquidity was not an issue given other funds.
BG

Dude2
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by Dude2 » Mon Jan 14, 2019 3:34 pm

Starfish wrote:
Mon Jan 14, 2019 2:25 pm
Dude2 wrote:
Mon Jan 14, 2019 2:12 pm
Starfish wrote:
Mon Jan 14, 2019 1:56 pm
Just to put a number on it, last 30 years S&P 500 had a return of about 1500%. 300k$ invested in 1988 would have been 4.5 million today.
So prepaying mortgage was pretty much the largest destroyer of wealth.
Conclusion: borrow as much money as possible, and invest it in the S&P500. Any other course of action is a guaranteed loss?
No, that is not at all the conclusion.
First of all you cannot borrow money in the same conditions as a mortgage (30 years, low interest fixed, non callable), so the discussion is pointless. The mortgage at interest rates we have now is a very precious asset.

Secondly, there is a balance between risk and reward for each person, but in this case it seems excessive on the caution side at a very high price.
Thanks for your perspective. Yes, the debate probably boils down to different perceptions of how risky stocks are and an individual's willingness to take it. If I truly believed that I could make 1500% on a 30 year investment in the S&P, I would be taking out mortgages at 4% (and not paying a dime extra) without hesitation, no doubt. Unfortunately, I don't, so it is more rational in that case to choose a sure-thing versus a "hindsight is 20-20" mirage. Another idea is to hedge the bet and do a little of each. Nobody said that the person with the 300k in their pocket wasn't also still investing -- just a matter of how much dry powder they are holding for unforeseen expenses.
Last edited by Dude2 on Mon Jan 14, 2019 3:36 pm, edited 1 time in total.

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willthrill81
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Re: Getting a Mortgage when You can Pay Cash for a House

Post by willthrill81 » Mon Jan 14, 2019 3:35 pm

Starfish wrote:
Mon Jan 14, 2019 2:25 pm
Dude2 wrote:
Mon Jan 14, 2019 2:12 pm
Starfish wrote:
Mon Jan 14, 2019 1:56 pm
Just to put a number on it, last 30 years S&P 500 had a return of about 1500%. 300k$ invested in 1988 would have been 4.5 million today.
So prepaying mortgage was pretty much the largest destroyer of wealth.
Conclusion: borrow as much money as possible, and invest it in the S&P500. Any other course of action is a guaranteed loss?
No, that is not at all the conclusion.
First of all you cannot borrow money in the same conditions as a mortgage (30 years, low interest fixed, non callable), so the discussion is pointless. The mortgage at interest rates we have now is a very precious asset.

Secondly, there is a balance between risk and reward for each person, but in this case it seems excessive on the caution side at a very high price.
Back in the year 2000, stocks had been on a record tear for nearly two decades. 30 year mortgage rates that year averaged 8.05%. From 2000-2018, U.S. stocks averaged 5.15% nominal returns. Paying cash for a home was clearly superior to getting a mortgage and investing the difference in stocks, although perhaps if stocks go on a record tear over the next 11 years, their returns will catch up, but I doubt it.

Will the same be true today? I don't know. But a bird in the hand is worth two in the bush.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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