Take Loan for house or not

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Topic Author
immisaki
Posts: 30
Joined: Thu Mar 28, 2019 10:38 am

Take Loan for house or not

Post by immisaki »

Dear Bogleheads,
I am buying a 500K house in Texas and as part of relocation my company is willing to pay for most Closing Costs.
Including 1% loan origination fee, tie-in, lender required inspections/survey, escrow fee, document prep, title search etc.

I have excellent credit (>800) and I can afford to pay for the house in cash.
If i take a loan I will simply put my money in a bank (2.35%) [Not putting it in the market where i can get possibly more]
I utilize standard deduction of 24,000. My itemized calculation comes to 11K. I expect my property taxes to meet the limit of 10K and will not have state income taxes.

Is there any value in me taking the loan ?
Are there incentives available where i could take a loan but then pay it in a few months or so ?
Please share any advise you have, I have never taken a mortgage before and am not aware of it.

-immisaki
123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Take Loan for house or not

Post by 123 »

The mortgage gives you a greater degree of financial flexibility. If the company is paying for this move there may be others in their plan that you do not yet know about. If you are not convinced it is your "forever" home I would not pay cash if the relocation is the result of the company's whim.
The closest helping hand is at the end of your own arm.
tdmp
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Joined: Sat Mar 09, 2019 10:12 am

Re: Take Loan for house or not

Post by tdmp »

I don’t like Dave Ramsey investment advice bc he doesn’t recommend much index funds. But, I do like his recommendation of paying off mortgage. I assume you have a decent emergency fund.
MarkerFM
Posts: 503
Joined: Fri Nov 30, 2018 4:18 pm

Re: Take Loan for house or not

Post by MarkerFM »

Ask your company if they will give you the costs they would pay for a loan in cash.

No matter what they say, don't borrow for the house if you are going to put it in a bank at 2.35%.
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grabiner
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Re: Take Loan for house or not

Post by grabiner »

See Paying down loans versus investing on the wiki.

Since your employer will cover closing costs, the relevant rate for you is the interest rate on a 0-point loan, rather than the APR which includes the closing costs.

But if you will still take the standard deduction (or just barely itemize) and you have the cash (not needing to sell stock for a capital gain), it's probably still better to pay cash. Suppose you could take out a 15-year loan at 3.50%. A bond portfolio which would provide enough money to make the loan payments would have a seven-year duration; such a portfolio of low-risk bonds would yield 2.46% (Admiral shares of Vanguard Long-Term Tax-Exempt). Thus, unless you could deduct all the interest at a 32% tax rate for an after-tax rate of 2.38%, avoiding the mortgage comes out ahead.

You should also see what your employer will still cover. Some employers will cover only lender's title insurance (needed in order to get the loan) and not owner's title insurance (which protects your interest beyond the loan balance); if so, you may not get any coverage for the title insurance. Similarly, while there is no lender to require an inspection, you should still get one.
Wiki David Grabiner
DVMResident
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Re: Take Loan for house or not

Post by DVMResident »

The major value of taking the loan is three-fold: (1) liquidity, (2) allows withdrawal of funds over multiple years to lower taxes, and (3) opportunity to invest somewhere else.

(1) I can't answer if the liquidity matters (you didn't mention).
(2) I can't' answer if you need time to free up these house funds (you didn't mention if paying LTCG are required to access the funds).
(3) You said you will pass on the opportunity to invest in something else. I would not take the mortgage in this case.
Golf maniac
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Re: Take Loan for house or not

Post by Golf maniac »

You say you can afford to buy the home with cash. I assume that means you have a very good emergency fund even after paying for home. If that is true there is no reason for you to take out a mortgage.
Topic Author
immisaki
Posts: 30
Joined: Thu Mar 28, 2019 10:38 am

Re: Take Loan for house or not

Post by immisaki »

Thanks for the very valuable perspectives.
I am selling investment properties and expect to in a few months sell them for a enough emergency cash buffer.
I am concerned about the initial 3 months or so where after spending 500k I will be a bit short of emergency cash.

I was thinking of taking mortgage to insulate those 3 months.
is taking a 200k mortgage and paying it off in 3 months a bad idea ?
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JoeRetire
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Re: Take Loan for house or not

Post by JoeRetire »

immisaki wrote: Sun May 19, 2019 1:48 am I am selling investment properties and expect to in a few months sell them for a enough emergency cash buffer.
I am concerned about the initial 3 months or so where after spending 500k I will be a bit short of emergency cash.

I was thinking of taking mortgage to insulate those 3 months.
is taking a 200k mortgage and paying it off in 3 months a bad idea ?
The liquidity that a mortgage provides can indeed cover your emergency funds. And one of the nice features of a mortgage is that you can choose to pay it off at any time, once your emergency fund need is covered some other way.

And if your employer pays all of your closing costs, then the carrying cost of the mortgage for 3 months is minimized.

It doesn't seem like a bad idea to me.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
MarkerFM
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Joined: Fri Nov 30, 2018 4:18 pm

Re: Take Loan for house or not

Post by MarkerFM »

If you are looking for reserve liquidity, what you really want is a HELOC, not a traditional mortgage.
stevekozak2
Posts: 74
Joined: Sun Dec 25, 2016 12:38 pm

Re: Take Loan for house or not

Post by stevekozak2 »

Just pay cash and be done, in my opinion. You don't want to invest the money anyways (which I am against anyways). Take the known. Invest your income.
bayview
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Re: Take Loan for house or not

Post by bayview »

JoeRetire wrote: Sun May 19, 2019 5:49 am
immisaki wrote: Sun May 19, 2019 1:48 am I am selling investment properties and expect to in a few months sell them for a enough emergency cash buffer.
I am concerned about the initial 3 months or so where after spending 500k I will be a bit short of emergency cash.

I was thinking of taking mortgage to insulate those 3 months.
is taking a 200k mortgage and paying it off in 3 months a bad idea ?
The liquidity that a mortgage provides can indeed cover your emergency funds. And one of the nice features of a mortgage is that you can choose to pay it off at any time, once your emergency fund need is covered some other way.

And if your employer pays all of your closing costs, then the carrying cost of the mortgage for 3 months is minimized.

It doesn't seem like a bad idea to me.
Be sure that the lender will allow you to pay off in < 1year.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
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JoeRetire
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Re: Take Loan for house or not

Post by JoeRetire »

bayview wrote: Mon May 20, 2019 5:14 pm
JoeRetire wrote: Sun May 19, 2019 5:49 am
immisaki wrote: Sun May 19, 2019 1:48 am I am selling investment properties and expect to in a few months sell them for a enough emergency cash buffer.
I am concerned about the initial 3 months or so where after spending 500k I will be a bit short of emergency cash.

I was thinking of taking mortgage to insulate those 3 months.
is taking a 200k mortgage and paying it off in 3 months a bad idea ?
The liquidity that a mortgage provides can indeed cover your emergency funds. And one of the nice features of a mortgage is that you can choose to pay it off at any time, once your emergency fund need is covered some other way.

And if your employer pays all of your closing costs, then the carrying cost of the mortgage for 3 months is minimized.

It doesn't seem like a bad idea to me.
Be sure that the lender will allow you to pay off in < 1year.
Good point. Ask about prepayment first.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
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