considering paying cash for house- What would you do?

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lostdog850
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considering paying cash for house- What would you do?

Post by lostdog850 »

Hello everyone,

We are buying a new house which won't be done until for a couple of months. The cost is 260k in a low to medium cost of living city. We are planning on taking out a mortgage with 20% down and have been quoted 3.0% fixed rate on a 30.

We have roughly that amount in our taxable account (220k plus cash downpayment) to pay for the house cash. We would not be selling at a loss.

Some more information about us:
Age: 30, 27- no kids currently but maybe in the next year or two.
Combined income: 170 to 175k. My income around 150k and spouse's income can be 20 to 25k. She is planning on being a stay at home mom once we have kids.
NW: 405k
Debt: currently none
We invest regularly and are not planning on early retirement. Retirement accounts get maxed every year. No access to HSA unfortunately. Everything else goes to taxable account (100% stock). We have a 1 year worth of emergency fund that is not included in our NW.

Currently, our risk tolerance is high given our investment time frame.

What would you do given the information provided if you were in my shoes?

Thanks in advance! :beer
Dick D
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Re: considering paying cash for house- What would you do?

Post by Dick D »

Having a six month emergency fund, I would pay cash. Having done that I would put the equivalent to the mortgage in the taxable account each month.
Normchad
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Re: considering paying cash for house- What would you do?

Post by Normchad »

Man it would be cool to actually pay cash. Bring it to closing in a wheel-barrow!
ebeb
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Re: considering paying cash for house- What would you do?

Post by ebeb »

Normchad wrote: Thu Jul 02, 2020 10:12 pm Man it would be cool to actually pay cash. Bring it to closing in a wheel-barrow!
I dont think the settlement agent will mind the wheel-barrow as long as s/he sees a small cashiers check lying at the bottom for the full amount. :shock:
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AlohaJoe
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Re: considering paying cash for house- What would you do?

Post by AlohaJoe »

I would never pay cash if I had any reasonable option to finance.

If you really really really hate having a mortgage there's nothing that prevents you from putting down 50% and then paying off the mortgage in 1-2 years (or some other "pay off the mortgage fast" set of numbers) after you've built up your taxable substantially to restore liquidity. Just because you have a 30-year mortgage doesn't mean you can't pay it off in 5 years.

I just don't see an upside to getting rid of all my liquidity. Especially if I was planning massive life changes like having kids in the near future and losing >10% of the household income.
annu
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Re: considering paying cash for house- What would you do?

Post by annu »

Not having any mortgage to pay, is a great feeling. You will find a lot of threads here on negative bond is what mortgage is and all other stuff.

But if you think you will still be living in this area for next 10 years, and schools in your home area will be good(biggest reason we moved after kids was to an area with better public schools), regardless prices going up or down, you will be living like in your parents home, no rent/mortgage, but you are the boss :D

Since it is a new home, will not help, but sometimes you can get discount on paying cash for a house.

Yeah you can invest the money, and liquid vs illiquid, but one of your major expenses every month will be taken care of, and if things go south, you still have option to take loan against your home.
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Watty
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Re: considering paying cash for house- What would you do?

Post by Watty »

lostdog850 wrote: Thu Jul 02, 2020 8:23 pm We have roughly that amount in our taxable account (220k plus cash downpayment) to pay for the house cash. We would not be selling at a loss.
One big question is how much you would need to pay in taxes if you sold enough investments to pay cash for the house. This is more complicated than just the capital gains taxes since you could trigger net investment income taxes and a Medicare surcharge.

https://www.irs.gov/individuals/net-inv ... income-tax

https://www.irs.gov/businesses/small-bu ... dicare-tax

I am usually in the "pay it off" cheer leading camp when it comes to questions like this but I would be concerned the cost would be too high.

If paying cash would trigger to much in taxes then you might just make as large a down payment as possible without generating a lot of taxes then quickly pay off the mortgage in a few years.
Last edited by Watty on Thu Jul 02, 2020 10:50 pm, edited 1 time in total.
babystep
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Re: considering paying cash for house- What would you do?

Post by babystep »

lostdog850 wrote: Thu Jul 02, 2020 8:23 pm Hello everyone,

We are buying a new house which won't be done until for a couple of months. The cost is 260k in a low to medium cost of living city. We are planning on taking out a mortgage with 20% down and have been quoted 3.0% fixed rate on a 30.

We have roughly that amount in our taxable account (220k plus cash downpayment) to pay for the house cash. We would not be selling at a loss.

Some more information about us:
Age: 30, 27- no kids currently but maybe in the next year or two.
Combined income: 170 to 175k. My income around 150k and spouse's income can be 20 to 25k. She is planning on being a stay at home mom once we have kids.
NW: 405k
Debt: currently none
We invest regularly and are not planning on early retirement. Retirement accounts get maxed every year. No access to HSA unfortunately. Everything else goes to taxable account (100% stock). We have a 1 year worth of emergency fund that is not included in our NW.

Currently, our risk tolerance is high given our investment time frame.

What would you do given the information provided if you were in my shoes?

Thanks in advance! :beer
If you pay all cash then you have less diversification because of more than 50% invested in the home and less liquidity. How about 15 years fixed? This will reduce the cost of interest compared to 30 years fixed. May be larger down-payment like 30% as long as it doesn't result in capital gains tax due to selling stocks in the taxable?
reln
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Re: considering paying cash for house- What would you do?

Post by reln »

lostdog850 wrote: Thu Jul 02, 2020 8:23 pm Hello everyone,

We are buying a new house which won't be done until for a couple of months. The cost is 260k in a low to medium cost of living city. We are planning on taking out a mortgage with 20% down and have been quoted 3.0% fixed rate on a 30.

We have roughly that amount in our taxable account (220k plus cash downpayment) to pay for the house cash. We would not be selling at a loss.

Some more information about us:
Age: 30, 27- no kids currently but maybe in the next year or two.
Combined income: 170 to 175k. My income around 150k and spouse's income can be 20 to 25k. She is planning on being a stay at home mom once we have kids.
NW: 405k
Debt: currently none
We invest regularly and are not planning on early retirement. Retirement accounts get maxed every year. No access to HSA unfortunately. Everything else goes to taxable account (100% stock). We have a 1 year worth of emergency fund that is not included in our NW.

Currently, our risk tolerance is high given our investment time frame.

What would you do given the information provided if you were in my shoes?

Thanks in advance! :beer
I would opt for the mortgage.
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Mlm
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Re: considering paying cash for house- What would you do?

Post by Mlm »

I paid cash from my house but I was a bit older than you at the time. At your age and with today’s low interest rates I think I would take the mortgage.
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Re: considering paying cash for house- What would you do?

Post by Vanguard Fan 1367 »

When I was your age I took the 30 year mortgage and paid it off over a period of much less than 30 years.

I liked having some cash available which the mortgage gave me.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."
TheDDC
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Re: considering paying cash for house- What would you do?

Post by TheDDC »

Pay cash. Never owe anything to a bank again. You will enjoy the freedom. You can DCA the additional cash flow and make out well.

-TheDDC
Rules to wealth building: 75-80% VTSAX piled high and deep, 20-25% VTIAX, 0% given away to banks, minimize amount given to medical-industrial complex
mortfree
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Re: considering paying cash for house- What would you do?

Post by mortfree »

I would do:

100k mortgage for 10 years
150k mortgage for 15 years
200k mortgage for 30 years.
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unclescrooge
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Re: considering paying cash for house- What would you do?

Post by unclescrooge »

Not only would I not pay cash, I would be reluctant to pay down the mortgage at these rates.
shelanman
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Re: considering paying cash for house- What would you do?

Post by shelanman »

I hate having debt. But, I just can't make myself work on eliminating the mortgage. Rates are just so stupid low, borrowing the money just costs nothing, especially once you figure the tax savings on the interest. If that 3.0% APR has no points and no lender fees, honestly, you should probably just go with it. Or take a 15-year... I'm seeing ads for 2.375%, which means that 2.5% or 2.625% with no BS probably actually exist.

That said, if you make the assumption that the mortgage market is relatively efficient (which, given the amount of government manipulation in the market, is maybe a stretch), then, in theory, whichever option makes you the most comfortable will be the good option.
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whodidntante
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Re: considering paying cash for house- What would you do?

Post by whodidntante »

OP, I am much better off today because I was able to overcome debt aversion. Good luck as you choose your own path.
Silverado
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Re: considering paying cash for house- What would you do?

Post by Silverado »

whodidntante wrote: Fri Jul 03, 2020 7:03 am OP, I am much better off today because I was able to overcome debt aversion. Good luck as you choose your own path.
OP, I am much better off today because I was able to overcome debt. Good luck as you choose your own path.

Maybe somewhere in the middle would work.
student
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Re: considering paying cash for house- What would you do?

Post by student »

I would not sell investments (generating a tax bill) to buy a house in this case. I will do a large down payment and get a 10-year mortgage. This gives flexibility and one can reevaluate in 5 years.
Outer Marker
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Re: considering paying cash for house- What would you do?

Post by Outer Marker »

lostdog850 wrote: Thu Jul 02, 2020 8:23 pm We are buying a new house which won't be done until for a couple of months. The cost is 260k in a low to medium cost of living city. We are planning on taking out a mortgage with 20% down and have been quoted 3.0% fixed rate on a 30.
I'd put down the 20% in cash, but finance the rest at 2.5% on a 15 year fixed.
hudson
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Re: considering paying cash for house- What would you do?

Post by hudson »

lostdog850 wrote: Thu Jul 02, 2020 8:23 pm Hello everyone,

We are buying a new house which won't be done until for a couple of months. The cost is 260k in a low to medium cost of living city. We are planning on taking out a mortgage with 20% down and have been quoted 3.0% fixed rate on a 30.

We have roughly that amount in our taxable account (220k plus cash downpayment) to pay for the house cash. We would not be selling at a loss.

Some more information about us:
Age: 30, 27- no kids currently but maybe in the next year or two.
Combined income: 170 to 175k. My income around 150k and spouse's income can be 20 to 25k. She is planning on being a stay at home mom once we have kids.
NW: 405k
Debt: currently none
We invest regularly and are not planning on early retirement. Retirement accounts get maxed every year. No access to HSA unfortunately. Everything else goes to taxable account (100% stock). We have a 1 year worth of emergency fund that is not included in our NW.

Currently, our risk tolerance is high given our investment time frame.

What would you do given the information provided if you were in my shoes?

Thanks in advance! :beer
I would certainly want to pay cash for the house and you can.
I would list all of my options in a spreadsheet or a piece of paper and study them for a period of time.
I would also list the advantages and disadvantages of each choice.
I would be reluctant to let that 220K in cash go anywhere in this environment. I'd strongly consider making it FDIC type safe and sitting on it.
Mortgages and car loans give me great heartburn...but if in your situation, I might go for the loan.
You could also split the difference and pay off half the house...or any of many combinations.

Bottom Line:

If your holdings were over $1.3M, I'd lean towards paying cash....otherwise the loan looks like the best option.
Last edited by hudson on Fri Jul 03, 2020 9:00 am, edited 2 times in total.
Bigfish
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Re: considering paying cash for house- What would you do?

Post by Bigfish »

TheDDC wrote: Fri Jul 03, 2020 12:04 am Pay cash. Never owe anything to a bank again. You will enjoy the freedom. You can DCA the additional cash flow and make out well.

-TheDDC
+1
flaccidsteele
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Re: considering paying cash for house- What would you do?

Post by flaccidsteele »

lostdog850 wrote: Thu Jul 02, 2020 8:23 pm Hello everyone,

We are buying a new house which won't be done until for a couple of months. The cost is 260k in a low to medium cost of living city. We are planning on taking out a mortgage with 20% down and have been quoted 3.0% fixed rate on a 30.

We have roughly that amount in our taxable account (220k plus cash downpayment) to pay for the house cash. We would not be selling at a loss.

Some more information about us:
Age: 30, 27- no kids currently but maybe in the next year or two.
Combined income: 170 to 175k. My income around 150k and spouse's income can be 20 to 25k. She is planning on being a stay at home mom once we have kids.
NW: 405k
Debt: currently none
We invest regularly and are not planning on early retirement. Retirement accounts get maxed every year. No access to HSA unfortunately. Everything else goes to taxable account (100% stock). We have a 1 year worth of emergency fund that is not included in our NW.

Currently, our risk tolerance is high given our investment time frame.

What would you do given the information provided if you were in my shoes?

Thanks in advance! :beer
With interest rates today, mortgage is essentially free

You can pay cash and watch the home appreciate at the rate of inflation or use a mortgage and invest what you would’ve used to buy the house in a low fee US index.

Personal preference.

I did the latter and lucked out because the low fee US index has done well over the last decade (and the house has appreciated while the mortgage balance has declined)

I would’ve ended up poorer today if I sunk all the $ in personal shelter
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
mike_in_ny
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Re: considering paying cash for house- What would you do?

Post by mike_in_ny »

This is really a liquidity question to me -- I don't think you have enough assets to go all in
on the house with cash. If there were a significant benefit/discount to a cash offer, that
may change my mind, but as it is, I'd use the mortgage.
7eight9
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Re: considering paying cash for house- What would you do?

Post by 7eight9 »

lostdog850 wrote: Thu Jul 02, 2020 8:23 pm Currently, our risk tolerance is high given our investment time frame.
If you have a high risk tolerance I don't see why you would want to pay cash for a house. I would think that you would be willing to gamble speculate invest that money in the equity markets in hopes of obtaining a higher return. Especially if you have a long investment time frame.

I don't have a high risk tolerance. Back in the mid 2000s I put 50% down and paid the mortgage off within one year. I did that because I couldn't beat the mortgage rate in risk-free investments.
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Re: considering paying cash for house- What would you do?

Post by Flyer24 »

Topic moved to Personal Finance (mortgage).
bsteiner
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Re: considering paying cash for house- What would you do?

Post by bsteiner »

At a 3% interest rate I would put 20% down and borrow the rest at 3% for 30 years.

You don't know what the future will bring. There could be a benefit to having more liquidity.
bikechuck
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Re: considering paying cash for house- What would you do?

Post by bikechuck »

bsteiner wrote: Fri Jul 03, 2020 9:34 am At a 3% interest rate I would put 20% down and borrow the rest at 3% for 30 years.

You don't know what the future will bring. There could be a benefit to having more liquidity.
Another option is to pay cash and establish a HELOC that could be used if needed.

However, in this situation I would likely pay cash for 75% ish of the cost and have a small mortgage that could be paid off over a short time period. That would preserve a good sized emergency fund.
RevFran
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Re: considering paying cash for house- What would you do?

Post by RevFran »

+1 to the suggestion of investigating a lower interest rate on a shorter-term loan—that way you save $, move quickly toward no debt, but still have the flexibility of cash that might be important with kid+SAHparent.
rich126
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Re: considering paying cash for house- What would you do?

Post by rich126 »

This topic will always generate differing opinions. Always having a mortgage, especially in low interest times is probably the best financial situation if future stock returns are like the past but people like not having a mortgage. I can see both sides. Mine will be paid off next year because i got a 10 yr refi loan when i was 48 so it would be paid off before retirement. I may sell it and relocate. In that case i am not sure if i will get a mortgage just prior to retirement or hope a cash buy would negotiate a lower sale price.

At least it is a good situation to be in, most aren’t so fortunate.
av111
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Re: considering paying cash for house- What would you do?

Post by av111 »

bsteiner wrote: Fri Jul 03, 2020 9:34 am At a 3% interest rate I would put 20% down and borrow the rest at 3% for 30 years.

You don't know what the future will bring. There could be a benefit to having more liquidity.
I think that they have 220k in the cash reserve. They have so much cash because they are risk averse. If they take out a mortgage at 3%, will they be investing the 220k into stocks? If not, paying 3% and getting below 1% in savings bank can create continuous tussle. So buy in cash and invest monthly
AV111
Beehave
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Re: considering paying cash for house- What would you do?

Post by Beehave »

With your income, unless I'm missing something, a $260K home is easily affordable. So whether you pay cash or take a mortgage, you should be in excellent shape.

Obviously, the mortgage allows you to maintain liquidity and flexibility, both of which are nice to have. Paying cash gives you peace of mind and assures you the money does not get frittered away or lost somehow with little to show for it.

Another perspective to consider is whether there will be inflation, deflation, or if things will soldier on pretty much as they are. If there's inflation, the mortgage will become a major bargain. If there's deflation, the mortgage will seem a mistake and assuming the value of the home is depressed, refinancing may not be a viable option.

If there's inflation, my guess from your current income is that your income will rise commensurately. If there's a deflation, who knows what will happen.

All that said, to me, the odds are that the best financial decision will end up being taking the mortgage. However, the worst case scenario to me would favor paying the cash and securing the home.

Personally, I'm financially conservative and opted (at a much later phase of life than you) for the pay cash route even though I am concerned about inflation and retired (I work only casually and part-time so I am much more exposed to inflation risk. I simply really, really dislike having debts and also feel a sense of milestone-accomplishment in being debt-free relative to my assets.

So, this is a tough call. Thinking like a parent and with my experience, I'd suggest a "large" down payment and a fifteen year mortgage. This seems to me a compromise that actually makes sense.
AUH2O
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Re: considering paying cash for house- What would you do?

Post by AUH2O »

Great that you have this choice. FWIW, with a young family I would opt to maintain some liquidity. Check 15 year rates, maybe 50% down and make extra payments to retire the mortgage early. I paid mine off early, by then kids were in high school. Nice feeling to have that extra discretionary cash flow.
ScubaHogg
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Re: considering paying cash for house- What would you do?

Post by ScubaHogg »

I wouldn’t put 50% of my assets in a concentrated, likely low growth asset. Bogleheads are typically for diversification, until suddenly they aren’t.
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SouthernFIRE
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Re: considering paying cash for house- What would you do?

Post by SouthernFIRE »

Someone may have already mentioned but if you have the ability to pay cash then I would do so regardless of whether you intend to finance it or not. You will likely get a sizable discount on the purchase price with a cash offer (5-10%). That discount far outweighs any other considerations IMO. If you decide you want to take advantage of low rates, take out a mortgage after you close.
Nowizard
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Re: considering paying cash for house- What would you do?

Post by Nowizard »

A topic that brings out different opinions, often based on emotional vs. financial issues. Many love having no mortgage emotionally, others make a decision based on their risk tolerance and analysis of interest rate cost vs. investment returns of the assets. With such low interest rates, particularly if you are itemizing taxes and deduct interest, your high risk tolerance and age pose reasons to at least consider taking the mortgage and investing the other assets. Though anecdotal, we did that when younger, when middle aged and even have a small mortgage on our current home during retirement. For many of those years, including now, we could have had no mortgage. However, having one has definitely been positive for our portfolio when you consider the impact of an initial $40,000 forty years ago or so. At an average of 4% overall annual return, that amount would become $160,000+ based on 4%, compounded interest. Not for everyone, however.

Tim
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Re: considering paying cash for house- What would you do?

Post by ohboy! »

There should be a section on this site dedicated to this topic. Its multiple times per week that it comes up.
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Taylor Larimore
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Re: Considering paying cash for house- What would you do?

Post by Taylor Larimore »

lostdog850:

Many years ago I used my GI Bill to purchase an 8-unit apartment at a very low, long-term interest rate of about 2%. The loan was assumable subject to government approval.

In the late 70s, when inflation was high, we decided to sell the apartment. The buyer agreed to pay substantially more than my listing price if he could actually assume the mortgage -- which he did!

In my opinion, this is a great time to take out a long-term, low-interest rate mortgage. It is highly likely that the money you save by not paying cash, can be better used for other things, including investments.

Best wishes.
Taylor
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Re: considering paying cash for house- What would you do?

Post by flaccidsteele »

ScubaHogg wrote: Fri Jul 03, 2020 11:45 am I wouldn’t put 50% of my assets in a concentrated, likely low growth asset. Bogleheads are typically for diversification, until suddenly they aren’t.
+1

Irrational to lock money in a low growth, expense generating asset when money can be borrowed at the rate of inflation
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
masha12
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Re: considering paying cash for house- What would you do?

Post by masha12 »

What does your wife think?

It sounds like you like the idea of not having a mortgage. If that is the case, I suspect that if you take out a mortgage, you will immediately start to question whether you should pay off the mortgage and you will probably pay it off in 5 years anyway.

If this seems like what you would do, then I would just pay cash. You save the closing costs and $6k in interest the first year.
hudson
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Re: considering paying cash for house- What would you do?

Post by hudson »

flaccidsteele wrote: Fri Jul 03, 2020 12:38 pm Irrational to lock money in a low growth, expense generating asset when money can be borrowed at the rate of inflation
Didn't the official inflation rate drop recently?
JackoC
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Re: considering paying cash for house- What would you do?

Post by JackoC »

flaccidsteele wrote: Fri Jul 03, 2020 12:38 pm
ScubaHogg wrote: Fri Jul 03, 2020 11:45 am I wouldn’t put 50% of my assets in a concentrated, likely low growth asset. Bogleheads are typically for diversification, until suddenly they aren’t.
+1

Irrational to lock money in a low growth, expense generating asset when money can be borrowed at the rate of inflation
Diversification: if you live in a mortgage recourse state, financing a house doesn't remove the concentration of risk represented by the house. It does allow you to have a bigger portfolio...because you're borrowing money, so the house is a smaller % of total assets than it would otherwise be. But you're on the hook for all $260k value of the house in some event that takes it to less than 80% of what you paid for it. In a non recourse state there's a bigger diversification effect of borrowing against the house. Not only does it allow a bigger portfolio of which house is a smaller %, but your max downside on the house becomes the down payment.

As to 'borrowing at the rate of inflation' market expectation of inflation is now in the low 1's for 10 yr term. And the 2018 tax reform reduced the practical value of the mortgage tax deduction to where it's unusual (though depends on the specific case) for it to really be as low as 3%*(1-tax rate), that's only if people have itemized deductions besides mortgage which are greater than the now much bigger standard deduction. The real after tax cost of a mortgage is usually well above now expected inflation. Moreover if someone has significant taxable, they can now borrow on margin at ~1.2% at Interactive Brokers, a moderate % loan has very low chance of margin call, and would also be deductible to the extent of non-quailified dividends received. Likewise using stock index futures for some of one's stock position in tax deferred is borrowing implicitly at <0.4% now. 3% (typically only partly) deductible is not especially 'cheap money' now.

Although I'm not saying OP should buy with cash. We bought house with cash, but had a bigger investment portfolio relative to house price and were more risk averse than OP, IOW a fair amount of that portfolio was in bonds. So it was just a matter of liquidating bonds to buy the house. That's a no brainer IMO, in a recourse state. Once you have to liquidate stocks, which you were presumably comfortable with, to raise cash to buy a house it's a more complicated risk/return decision and it could go in favor of a mortgage. Again on the diversification aspect, it's important to establish if it's a recourse or non-recourse state.
ScubaHogg
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Re: considering paying cash for house- What would you do?

Post by ScubaHogg »

JackoC wrote: Fri Jul 03, 2020 3:17 pm
flaccidsteele wrote: Fri Jul 03, 2020 12:38 pm
ScubaHogg wrote: Fri Jul 03, 2020 11:45 am I wouldn’t put 50% of my assets in a concentrated, likely low growth asset. Bogleheads are typically for diversification, until suddenly they aren’t.
+1

Irrational to lock money in a low growth, expense generating asset when money can be borrowed at the rate of inflation
Diversification: if you live in a mortgage recourse state, financing a house doesn't remove the concentration of risk represented by the house. It does allow you to have a bigger portfolio...because you're borrowing money, so the house is a smaller % of total assets than it would otherwise be. But you're on the hook for all $260k value of the house in some event that takes it to less than 80% of what you paid for it. In a non recourse state there's a bigger diversification effect of borrowing against the house. Not only does it allow a bigger portfolio of which house is a smaller %, but your max downside on the house becomes the down payment.
And if the house value stays flat while the market grows 15% how does that affect my net worth if I have a mortgage? With no mortgage the house represents a much larger percentage of the OPs assets. The OP’s assets are more concentrated in the house. So yes, in most senses of the term diversifying reduces the OPs concentration of risk in the house.
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grabiner
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Re: considering paying cash for house- What would you do?

Post by grabiner »

lostdog850 wrote: Thu Jul 02, 2020 8:23 pm We are buying a new house which won't be done until for a couple of months. The cost is 260k in a low to medium cost of living city. We are planning on taking out a mortgage with 20% down and have been quoted 3.0% fixed rate on a 30.

We have roughly that amount in our taxable account (220k plus cash downpayment) to pay for the house cash. We would not be selling at a loss.
What is the tax cost of getting at this amount? This is an extra cost which you avoid by taking out the mortgage.

I was in your situation when I bought my home in 2013. If I had had enough cash in actual cash, I would have paid cash for the home. But in order to raise this cash, I would have had to sell stock for a huge capital gain. Instead, I sold only enough stock to make a down payment with 20% equity (which was more than 20% of the price because the home appraised for less than the sale price), and took out a low-rate mortgage.
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Re: considering paying cash for house- What would you do?

Post by Kranix »

You might want to also consider life and disability insurance. For example, I am a married person with a child who rents. Spouse stays at home. I keep more life and disability insurance than I would if I owned a home (or had significant equity in a home) as I want to be sure that the family has sufficient resources for housing should I be unable to provide. This is a "con" to being a renter but overall it's still the right choice for me. In other words, maybe owning a house outright means you would feel better with less insurance. You might feel differently plus the cost of insurance might not be material but something to think about. Congratulations on having this kind of a dilemma!
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Re: considering paying cash for house- What would you do?

Post by Frugalbear »

I think regardless which route you decide to go, you will do fantastic! Seriously, think about it:

1. You pay cash. With your salary, it won't be long until you are back where you are. Can't foreclose on a house that is paid for!

2. You get the mortgage at 3% for 30years and most likely won't settle for paying the minimum payment, so you'll have it paid off in 10years or less, who knows!

Now here is what I would do: buy in cash. I paid my wife's car off last month and wow it drives better, more that grass is going to feel different on a paid off house.

Cheers!
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Re: considering paying cash for house- What would you do?

Post by LittleMaggieMae »

The P&I on the 200K mortgage (for 30 years at 3%) will be about $850.00 (off the top of my head...) I'm having a hard time imagining that with a 170K income having an "extra" $850 a month (being mortgage free) will feel all that freeing or wonderful.

If it was me, I'd take the mortgage and retain the "cash". I'd figure out some way to get the "cash" to earn money for me - meaning I might have to "save" alittle less for some on the horizon expense (kids schooling, college? maybe being able to walk away from the big bucks job at 50 or 55 and do some other work that's more fulfilling? ) . I'd continue to save for the future - and as the years go by and IF you income goes up - that $850 a month is gonna become even more inconsequential. I would have a nice low housing expense for the foreseeable future and a Big Income. That's a whole lot of flexibility and a way to possibly enjoy some of the things in life you otherwise wouldn't.

ADDED: saving $1000 a month at 3% it will take 13 years to rebuild that $200,000 that was used to pay for the house.

I'd take the mortgage, and enjoy the security and flexibility that money in the bank would give me.
(also a paid off house is still an expense. You have to pay property taxes and insurance and you have to maintain the house. with a $200K mortgage I suspect the P&I part will be the lessor part of the T&I and monthly "upkeep" of the house... I'm not sure why foreclosure is such a bogeyman - especially when one has a lot of money in savings. )
Last edited by LittleMaggieMae on Fri Jul 03, 2020 5:00 pm, edited 1 time in total.
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Re: considering paying cash for house- What would you do?

Post by gasman »

Pay cash. You will save the appraisal fees and all the additional fees that the lender tacks on. I would guess that total savings will be about $1,500. You can take a home equity line of credit or cash out refi in the future if needed.
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lostdog850
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Re: considering paying cash for house- What would you do?

Post by lostdog850 »

Thank you for your input everyone. I am glad I decided to post this as this discussion has helped me have a better understanding of my options. Here is what we are likely going to do:

Take the mortgage for the following reasons as some of you have mentioned.
1) We have a good 30 years until retirement. Our money is likely going to give us better returns in the market. Now if we were planning on retiring in 10 years we would likely pay for the house upfront.
2) Borrowing money with these interest rates is relatively cheap.
3) I don't want 50% of my NW locked up in my primary residence.
4) I can always do this later down the road unless we are in the middle of another major market crash and that point we will ride out the storm until recovery. Easier said than done I know.
5) This will generate a taxable event- no thank you!

Mortage options: All will be 20% down
1) 30 year at 3% fixed- total paid in interest- 107k
2) 30 year at 3% fixed with extra 510 per month towards principal- will be paid off in 15 years- total paid in interest 53k
3) 15 year at 2.5% fixed w/o extra payment; total paid in interest 42k

We will likely be going with option two since it gives us extra flexibility with a 50% reduction in interest paid and continue to keep adding to our taxable account.

Cheers!
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Re: considering paying cash for house- What would you do?

Post by JackoC »

ScubaHogg wrote: Fri Jul 03, 2020 4:20 pm
JackoC wrote: Fri Jul 03, 2020 3:17 pm
flaccidsteele wrote: Fri Jul 03, 2020 12:38 pm
ScubaHogg wrote: Fri Jul 03, 2020 11:45 am I wouldn’t put 50% of my assets in a concentrated, likely low growth asset. Bogleheads are typically for diversification, until suddenly they aren’t.
+1

Irrational to lock money in a low growth, expense generating asset when money can be borrowed at the rate of inflation
Diversification: if you live in a mortgage recourse state, financing a house doesn't remove the concentration of risk represented by the house. It does allow you to have a bigger portfolio...because you're borrowing money, so the house is a smaller % of total assets than it would otherwise be. But you're on the hook for all $260k value of the house in some event that takes it to less than 80% of what you paid for it. In a non recourse state there's a bigger diversification effect of borrowing against the house. Not only does it allow a bigger portfolio of which house is a smaller %, but your max downside on the house becomes the down payment.
And if the house value stays flat while the market grows 15% how does that affect my net worth if I have a mortgage? With no mortgage the house represents a much larger percentage of the OPs assets. The OP’s assets are more concentrated in the house. So yes, in most senses of the term diversifying reduces the OPs concentration of risk in the house.
As I said, two aspects to it.
a) if you're selling stocks to come up with the cash to buy the house, then obviously you're reducing expected return (though also risk) of your portfolio.
b) the actual concentration/diversification represented by the house itself. This does depend on recourse v non-recourse, can't be discussed meaningfully without knowing which it is. If your state is non-recourse then an 80% financed $260 house represents a max downside of $52k, what you put up. In a recourse state, and assuming you have other assets for the lender to go after, you have a concentrated lump of $260k risk in the house whether you finance it or not.

So to semi make up number since OP's specifics weren't totally clear, say $260 house, $400k in assets now, of which $250k is stocks (leaving $52k for a down payment and $98k for an 'emergency fund' of cash/short bond).

1) buy house for cash, $260 house, 42k stock, $98k EF=$400k NW. You could say 'diversification' has been reduced but mainly practically upside potential is reduced IMO. And I wouldn't suggest buying for cash with this little in assets and that high an appetite for stocks (as shown by the stock position now, which wouldn't be fulfilled if tying up that much money in the house).

2) finance house with $208k *non-recourse* mortgage. Net asset $52k home equity, stock $250k, EF $98k=400k NW
3) finance house with $208k *recourse* mortgage. Now it's not legit to look at the house as 'net asset' of $52k. Assets are now $260 house, $250k stock, $98k EM, total $608 assets, liability $208, $400k NW.

The house represents a much larger downside risk in 3 than 2, and just focusing on downside you're not that much better off than 1 (big drop in house prices but the stock market does well?). That has to be considered, and if OP had closer to enough assets to really think about a cash house purchase, even for only $260k, the actual diversification difference between 1 and 3 would narrow. Case 2 really diversifies, but unfortunately in most states recourse mortgages are standard.
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Re: considering paying cash for house- What would you do?

Post by Watty »

lostdog850 wrote: Fri Jul 03, 2020 5:34 pm ...
2) 30 year at 3% fixed with extra 510 per month towards principal- will be paid off in 15 years- total paid in interest 53k
....

We will likely be going with option two since it gives us extra flexibility with a 50% reduction in interest paid and continue to keep adding to our taxable account.
A variation on #2 would be that instead of putting the $510 a month towards the mortgage that you just invest it each month it until you have some percentage of the loan balance, like 10% or whatever makes sense to you. You can then call your lender and ask if they will "recast your mortgage"(Google this). They are not required to do this but they usually will for a couple of hundred dollar processing fee or even for free in some cases. The way this works is that if you recast your mortgage then your interest rate and length of the loan will stay the same but your required monthly payment will be reduced by the same percentage, like 10%. This can be very important in case something happens like you are disabled or interest rates get higher than 3%.

If you just prepay the loan when you make your normal monthly payment it just shortens the length of the loan.
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