Mortgage vs. Cash

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VT14850
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Mortgage vs. Cash

Post by VT14850 » Thu Oct 11, 2018 8:25 am

Hi all,

I'm a long time reader/fan of this forum but this is only my 2nd post. I know this topic has been addressed many times in the past but every case is a bit different so I'm hoping to get some feedback on our particular scenario.

We have recently sold our home in the Mid-Atlantic and have moved to New York State
We are under contract on a house with a sales price of $575K (but have not yet signed with a lending company - although I have locked in a rate of 4.65% on a 30 year fixed) and will need to decide one way or the other in the next few days.
We have roughly $700K sitting in our savings account (largely from the proceeds of our home sale)
We have roughly $350K in retirement and no other debt currently (we are renting while we wait on the house closing).
We are planning to raise our two young kids (ages 1.5 and 4 in the house we are purchasing - great neighborhood, great school, etc. and could see us staying there for at least 10-15 years (possibly longer).
Annual combined income of around $400K (although that is with me working 2 jobs one of which I am considering a time reduction on in the next few years) which may drop our combined by $100K or so.
We were planning to get a mortgage on the new house and invest about $600K of our savings into a diversified portfolio (80/10/10 or 70/15/15), except for about $50-100K as an emergency fund which we'd keep in a high interest savings account. However, after re-reviewing the blog, I'm having second thoughts and am considering just paying cash for the whole thing. With the markets at an all time high, I'm hesitant to invest almost all of our $600K into retirement only to see the markets trend downward (seems inevitable).

Feedback I received offline from another Boglehead is as follows:

"The fair comparison is between investing in long-term bonds and taking out the mortgage, or paying cash. Once you have decided to take out the mortgage, you can then make a separate decision of how much risk you want to take, by holding stocks rather than bonds, or vice versa. (This is the same decision I make; I could earn more on municipal bonds than on paying down my mortgage, so I don't pay it down, but I choose to hold stocks rather than municipal bonds in my taxable account.)

"Since Vanguard doesn't offer a fund with duration equal to the 30-year mortgage, I will compare with a 15-year mortgage, which would probably be about 4%. (I recommend that even if you decide to take out a mortgage; you can afford the higher payments and will owe less in interest. But if you decide to go with the 30-year, the 15-year rate gives a fair comparison; the extra interest you pay on the 30-year is compensation for the extra interest-rate risk the bank takes.) The 15-year mortgage has a 7-year duration (average time to payment). On a $460K mortgage, the interest payment would be $17,400, which gives you only $3400 in deductible interest plus however much you donate to charity.

"If you can deduct the whole thing (you donate $14,000 to charity), your mortgage would be deductible at 32% federal, and 5.14% NY state (you'll lose 25% of your itemized deductions in NY), for a 2.51% after-tax mortgage rate. Vanguard NY Long-Term Tax-Exempt Admiral yields 3.00%. Therefore, you'll come out slightly ahead at a similar risk level. Conversely, if you can only deduct half (and the deductible fraction will decline over time), you'll come out slightly behind at a similar risk level if you use munis, so you should pay cash.

"So consider the actual rate, including closing costs. If you have to pay 1% of the loan value as a loan origination fee, that's equivalent to about an extra 1/8% on the mortgage rate.

"Therefore, I would prefer taking out the mortgage only if you can deduct all, or almost all, of the interest; otherwise, pay cash. (Splitting the difference is a bad idea, because you will lose the deductible interest and pay more non-deductible interest.)"

Any additional advice on the matter would be greatly appreciated! We will need to make our decision on which way to go ASAP (in the next 48 hours).

Grt2bOutdoors
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Re: Mortgage vs. Cash

Post by Grt2bOutdoors » Thu Oct 11, 2018 8:39 am

Is home “move-in” ready? No window treatments, no painting, furniture, etc? My point is home costs $575k plus cost of closing - attorney, etc. You have $125k available for all of above. Is your job secure?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Watty
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Re: Mortgage vs. Cash

Post by Watty » Thu Oct 11, 2018 8:43 am

There is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

Investing the money and earning a higher return is harder than it sounds since you are in a high tax bracket and have a sequence of returns risk. Here is a simplistic example of that which I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
It is not exact but having a mortage is in many ways like a negative bond so that also changes your overall asset allocation if you subtract your mortage from the bond holdings. That could effectively give you a negative bond asset allocation and over 100% stock asset allocation when you look at it that way.

No matter how you slice and dice it getting a mortage so you can invest the money adds to your risk. A fundamental guideline for risk is that you should have a good reason for taking the risks that you take. I don't see any good reasons for you to to take on more risk. I would pay cash and then invest your "mortage payment".

By the age of your kids I would guess that you might be somewhere around 30 years old. If having a paid off house when you are about 30 is the mistake then you are still doing really good. :D

Jack FFR1846
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Re: Mortgage vs. Cash

Post by Jack FFR1846 » Thu Oct 11, 2018 8:48 am

Try to find someone, anyone who regrets paying off their mortgage. I'm glad every day and it was more than 15 years ago. If it were me, I'd pay in cash. You have to decide if you want to borrow money to invest it, because that's what you're doing. Do you invest with money borrowed on margin? Why not? If not, why are you thinking of doing so now?
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Flyer24
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Re: Mortgage vs. Cash

Post by Flyer24 » Thu Oct 11, 2018 9:02 am

Would you borrow money to invest? That is basically what you are doing. I would pay cash for the house and be debt free. Then sink your “mortgage payment” into an investment account. You are in an awesome position.

Admiral
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Re: Mortgage vs. Cash

Post by Admiral » Thu Oct 11, 2018 9:09 am

Jack FFR1846 wrote:
Thu Oct 11, 2018 8:48 am
Try to find someone, anyone who regrets paying off their mortgage. I'm glad every day and it was more than 15 years ago. If it were me, I'd pay in cash. You have to decide if you want to borrow money to invest it, because that's what you're doing. Do you invest with money borrowed on margin? Why not? If not, why are you thinking of doing so now?
It may be hard to find someone who regrets paying off their mortgage, but I don't think it's difficult to find people who regret not investing more when they were younger...which is essentially the advice you're giving when you advise against investing a lump sum by paying for something else, such as real estate.

I'm not necessarily saying the the OP should take on this particular mortgage at that particular rate, but diversity of assets is important. Tying up most or all of one's wealth in one asset class (be that a house or anything else) is often not very wise.

OP: I would look at a very large down payment such that you can/could easily afford the mortgage payment if one of you is not working or your income is severely reduced (as you note that it might be). Invest the rest.

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corn18
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Re: Mortgage vs. Cash

Post by corn18 » Thu Oct 11, 2018 9:17 am

Admiral wrote:
Thu Oct 11, 2018 9:09 am

OP: I would look at a very large down payment such that you can/could easily afford the mortgage payment if one of you is not working or your income is severely reduced (as you note that it might be). Invest the rest.
This is a nice option that I like. Then the mortgage becomes a callable option. You can choose to pay it off at any time later, or, if you want, take out a HELOC and invest more elsewhere. There is no wrong answer, only what is right for you.

mortfree
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Re: Mortgage vs. Cash

Post by mortfree » Thu Oct 11, 2018 9:32 am

15-year mortgage (borrow 300k or so).

keep some liquidity.

You are worried about stocks crashing or being all-time high.

Do you have any concerns about the housing market? Interest rates, affordability, etc...

To others:
I regret having had a paid off mortgage (age 39).... because I moved and now I have a mortgage again.

Admiral
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Re: Mortgage vs. Cash

Post by Admiral » Thu Oct 11, 2018 9:34 am

mortfree wrote:
Thu Oct 11, 2018 9:32 am
15-year mortgage (borrow 300k or so).

keep some liquidity.

You are worried about stocks crashing or being all-time high.

Do you have any concerns about the housing market? Interest rates, affordability, etc...

To others:
I regret having had a paid off mortgage (age 39).... because I moved and now I have a mortgage again.
Might be time to change your username..."formerlymortfree"? :happy

bloom2708
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Re: Mortgage vs. Cash

Post by bloom2708 » Thu Oct 11, 2018 9:37 am

mortfree wrote:
Thu Oct 11, 2018 9:32 am
15-year mortgage (borrow 300k or so).

keep some liquidity.

You are worried about stocks crashing or being all-time high.

Do you have any concerns about the housing market? Interest rates, affordability, etc...

To others:
I regret having had a paid off mortgage (age 39).... because I moved and now I have a mortgage again.
mortfree suggests getting a mortgage. (Oh the irony) :shock:

mortfree was mortgage free but regretted it and got a new mortgage (that is always an option)

I suggest paying for the home (no mortgage). If you regret it, you can always go get a mortgage. 4.6% guaranteed by not having a mortgage. Easy choice.
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend your time here! | 3. You have no control <--spend no time here!

alex_686
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Re: Mortgage vs. Cash

Post by alex_686 » Thu Oct 11, 2018 9:45 am

VT14850 wrote:
Thu Oct 11, 2018 8:25 am
Since Vanguard doesn't offer a fund with duration equal to the 30-year mortgage, I will compare with a 15-year mortgage, which would probably be about 4%.
A 30 year mortgage has a duration about 10. Duration is about the average time weighted cash flows. For bonds, most of that is at the end of 10 years. For mortgages, you really only care about the interest payment and that is front loaded. Just saying if you want to compare apples to apples this is what you need to do.

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Mlm
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Re: Mortgage vs. Cash

Post by Mlm » Thu Oct 11, 2018 9:49 am

I would absolutely pay cash if you have the discipline to save every month. That's what I did 20 years ago. You are in a great position so I would take full advantage of that. Welcome to New York !

GAAP
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Re: Mortgage vs. Cash

Post by GAAP » Thu Oct 11, 2018 9:56 am

Only $350K in retirement savings with a $400k income? Unless you are much younger than I think, and/or willing to retire on a LOT less money than you're used to living on, I would prioritize retirement savings over being mortgage-free.

Choosing to invest the money is a separate decision from choosing how to invest the money -- but you seem to be combining them, and choosing an AA that you clearly aren't too comfortable with.

an_asker
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Re: Mortgage vs. Cash

Post by an_asker » Thu Oct 11, 2018 10:06 am

VT14850 wrote:
Thu Oct 11, 2018 8:25 am
Hi all,

[...]
We have recently sold our home in the Mid-Atlantic and have moved to New York State
We are under contract on a house with a sales price of $575K (but have not yet signed with a lending company - although I have locked in a rate of 4.65% on a 30 year fixed) and will need to decide one way or the other in the next few days.
We have roughly $700K sitting in our savings account (largely from the proceeds of our home sale)
We have roughly $350K in retirement and no other debt currently (we are renting while we wait on the house closing).
We are planning to raise our two young kids (ages 1.5 and 4 in the house we are purchasing - great neighborhood, great school, etc. and could see us staying there for at least 10-15 years (possibly longer).
Annual combined income of around $400K (although that is with me working 2 jobs one of which I am considering a time reduction on in the next few years) which may drop our combined by $100K or so.
[...]
I'm nowhere close to being in your shoes. But if I were, I would pay it off right now. Why? Because your $700k is largely from the proceeds of your current/previous residence. So, it is really an apples to apples switch. Your asset allocation of that $575k is not changing. Alternatively, pay down as much as you got from the sale, and get a much smaller loan.

But still, why take a loan if you don't need to take one?

megabad
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Re: Mortgage vs. Cash

Post by megabad » Thu Oct 11, 2018 10:26 am

Personally, to me, a primary residence is not an investment so I don't consider things like hypothetical rate arbitrage (compared to bonds) to determine whether or not to get a mortgage or how big of a mortgage to get. The most important considerations to me are:

1) Do both spouse's work? If family is only one income, this leads me toward a 30yr mortgage to keep payments manageable upon job loss.
2) How stable are both spouse's jobs? If jobs are unstable, similarly leads me toward 30 yr mortgage.
3) What is the split between both spouse's incomes? If lopsided, leads me toward 30 yr mortgage.
4) Is this a forever home? This can lead either way depending on future plans.

flarf
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Re: Mortgage vs. Cash

Post by flarf » Thu Oct 11, 2018 10:38 am

Since you need to make a decision in the next 48 hours, just get the mortgage. You can always pay it off at any time. Not sure what the market is like right now, but I've done two mortgages and a few refi's in the last several years and none of them had points or required cash out of pocket other than appraisal fees.

Two banks I worked with (BofA, Citizens) offered lower rates if you moved cash over to them -- with $700k in savings, use that to your advantage. You can take the cash back out once the loan is funded.

I don't think you need to stick with a 30yr fixed either. Ability to pay is not a question here. Work with multiple lenders to see what kind of products they have at lower rates.

-buzz-
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Re: Mortgage vs. Cash

Post by -buzz- » Thu Oct 11, 2018 11:11 am

VT14850 wrote:
Thu Oct 11, 2018 8:25 am
We were planning to get a mortgage on the new house and invest about $600K of our savings into a diversified portfolio (80/10/10 or 70/15/15), except for about $50-100K as an emergency fund which we'd keep in a high interest savings account. However, after re-reviewing the blog, I'm having second thoughts and am considering just paying cash for the whole thing. With the markets at an all time high, I'm hesitant to invest almost all of our $600K into retirement only to see the markets trend downward (seems inevitable).
Were I in your shoes, I'd pay cash for the house.

After paying cash for the house, you will still have $125k left plus a $300-$400k income. That should be sufficient liquidity. You should be able to grow your liquidity and retirement savings quickly with such a great income.

Your $700k is sitting in cash, so we're not talking about selling $700k in appreciated investments and getting nailed on taxes. No problem there.

Good luck.

Flyer24
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Re: Mortgage vs. Cash

Post by Flyer24 » Thu Oct 11, 2018 11:38 am

megabad wrote:
Thu Oct 11, 2018 10:26 am
Personally, to me, a primary residence is not an investment so I don't consider things like hypothetical rate arbitrage (compared to bonds) to determine whether or not to get a mortgage or how big of a mortgage to get. The most important considerations to me are:

1) Do both spouse's work? If family is only one income, this leads me toward a 30yr mortgage to keep payments manageable upon job loss.
2) How stable are both spouse's jobs? If jobs are unstable, similarly leads me toward 30 yr mortgage.
3) What is the split between both spouse's incomes? If lopsided, leads me toward 30 yr mortgage.
4) Is this a forever home? This can lead either way depending on future plans.

I actually think those first three points make it more compelling to not have mortgage. If you take an income hit with a temporary job loss, then you will not be bound making a big mortgage payment. You probably can’t go wrong either way. I wouldn’t sell investments to pay for a house but I absolutely would put proceeds from a home sale to pay for the new home.

bsteiner
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Re: Mortgage vs. Cash

Post by bsteiner » Thu Oct 11, 2018 11:48 am

The mortgage has a tax arbitrage to the extent you can deduct the mortgage interest against ordinary income but your investment income will largely be qualified dividends, long-term capital gain (not taxable until you sell) and tax-exempt interest (though the interest rates on tax-exempt bonds are lower than on taxable bonds).

This tax arbitrage is much less in 2018-25 since the deduction for state and local taxes is limited to $10,000, and the standard deduction is now $24,000 (joint).

There's also an option element to the mortgage. If interest rates drop, you can pay off the mortgage. But if interest rates go up, you can keep the loan outstanding.

The mortgage also protects against your needing liquidity at some point.

megabad
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Re: Mortgage vs. Cash

Post by megabad » Thu Oct 11, 2018 3:42 pm

Flyer24 wrote:
Thu Oct 11, 2018 11:38 am
megabad wrote:
Thu Oct 11, 2018 10:26 am
Personally, to me, a primary residence is not an investment so I don't consider things like hypothetical rate arbitrage (compared to bonds) to determine whether or not to get a mortgage or how big of a mortgage to get. The most important considerations to me are:

1) Do both spouse's work? If family is only one income, this leads me toward a 30yr mortgage to keep payments manageable upon job loss.
2) How stable are both spouse's jobs? If jobs are unstable, similarly leads me toward 30 yr mortgage.
3) What is the split between both spouse's incomes? If lopsided, leads me toward 30 yr mortgage.
4) Is this a forever home? This can lead either way depending on future plans.

I actually think those first three points make it more compelling to not have mortgage. If you take an income hit with a temporary job loss, then you will not be bound making a big mortgage payment. You probably can’t go wrong either way. I wouldn’t sell investments to pay for a house but I absolutely would put proceeds from a home sale to pay for the new home.
Interesting. I guess it depends on how you look at it and where you are in life. In my mind, I can't eat the equity in my house and likely won't be able to get much credit if I lose a job. Yes, you could instantly sell your house and move to a cheaper one, but I would be concerned about facing a loss upon sale and about having to move my family. Personally, I would rather have $600k in diversified investments. But I can understand people disliking having a mortgage payment hanging over you.

mortfree
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Re: Mortgage vs. Cash

Post by mortfree » Thu Oct 11, 2018 4:11 pm

700k
-575k house price.
=125k.

Minus:
Closing costs
Moving costs
Property taxes
New home needs
New home surprises

Why does it have to be mortgage vs investing?

I dont know.

I don’t think the math is that simple and OP will be left with minimal cash. The salary is a huge help but plans to take a 100k paycut anyways.

Good luck with the decision.

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grabiner
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Re: Mortgage vs. Cash

Post by grabiner » Thu Oct 11, 2018 4:47 pm

alex_686 wrote:
Thu Oct 11, 2018 9:45 am
VT14850 wrote:
Thu Oct 11, 2018 8:25 am
Since Vanguard doesn't offer a fund with duration equal to the 30-year mortgage, I will compare with a 15-year mortgage, which would probably be about 4%.
A 30 year mortgage has a duration about 10. Duration is about the average time weighted cash flows. For bonds, most of that is at the end of 10 years. For mortgages, you really only care about the interest payment and that is front loaded. Just saying if you want to compare apples to apples this is what you need to do.
You care about the dates of both principal and interest payments for a mortgage. The duration of a mortgage is still slightly less than half its term, because the payments in later years are of lower present value. For example, suppose that you had a 15-year mortgage with a payment of $3000 per month, and 180 bonds maturing in 1-180 months which would produce $3000 per month. You would be in the same position as if you had no mortgage, since you will break even if the bond payments are used to make the mortgage payments. The bond portfolio has a duration of about seven years (not seven and a half) for the same reason as the mortgage.

And it is that equivalence which is often missed in arguments like this:
Flyer24 wrote:
Thu Oct 11, 2018 11:38 am
megabad wrote:
Thu Oct 11, 2018 10:26 am
The most important considerations to me are:

1) Do both spouse's work? If family is only one income, this leads me toward a 30yr mortgage to keep payments manageable upon job loss.
2) How stable are both spouse's jobs? If jobs are unstable, similarly leads me toward 30 yr mortgage.
3) What is the split between both spouse's incomes? If lopsided, leads me toward 30 yr mortgage.
4) Is this a forever home? This can lead either way depending on future plans.
I actually think those first three points make it more compelling to not have mortgage. If you take an income hit with a temporary job loss, then you will not be bound making a big mortgage payment.
Those first three points are good reasons not to take a risk that could make the mortgage hard to pay. However, they aren't considerations for the decision whether to take out a mortgage and invest the cash in low-risk investments; if you lose a job, you have the cash to make the mortgage payments anyway. In the example above, you have the same ability to pay the mortgage whether you have no mortgage or a bond portfolio which makes the mortgage payments.

The decision whether to take out the mortgage should be made first; you can then make a separate decision of how much risk to take. Since the OP's cash comes from selling his current home, taking out a mortgage on the new home and buying stock would be a significant risk increase. So would paying cash for the house and moving a lot of investments from bonds to stock.

If these are inconsistent with the risk tolerance, then more reasonable alternatives would be to either pay cash for the house, or take out a mortgage and invest in NY municipal bonds. Both have similar risk, and which one is better depends on liquidity (apparently not an issue) and relative interest rates (which argues for paying cash unless the mortgage is entirely deductible).
Wiki David Grabiner

JGoneRiding
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Re: Mortgage vs. Cash

Post by JGoneRiding » Thu Oct 11, 2018 10:43 pm

Doesn't NY have a weird stamp tax act? I thought it was affected by the size of the mortgage but don't understand their real estate enough to know. This would severely limit refi options and that rate is high.

I would go no mortgage but then invest aggressively. I would figure out what the payment would have been with 90% mortgage and I would treat that like am auto payment

bluelight
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Re: Mortgage vs. Cash

Post by bluelight » Fri Oct 12, 2018 12:11 am

We moved to NY in 2016 and were in a similar situation. I was on the fence on taking a small mortgage for our 550k house or paying cash. After finding that NY has a mortgage tax, I decided to keep that money for myself. We paid cash. I have no regrets for that decision.

https://www.advantagetitle.com/new-york ... ge-tax.php

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grabiner
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Re: Mortgage vs. Cash

Post by grabiner » Fri Oct 12, 2018 6:50 am

JGoneRiding wrote:
Thu Oct 11, 2018 10:43 pm
Doesn't NY have a weird stamp tax act? I thought it was affected by the size of the mortgage but don't understand their real estate enough to know. This would severely limit refi options and that rate is high.
That cost, like any other cost of getting the mortgage, effectively increases the rate; it may not be included in the Annual Percentage Rate. If you pay $404K to get a $400K loan, then what you effectively did is borrowed $396K, not $400K, so your effective interest rate is higher than the quoted rate.

A 1% non-deductible tax would be equivalent to an extra 0.14% of non-deductible interest on a 15-year loan (which has a duration of 7 years), or 0.09% on a 3o-year loan (which has a duration of 11 years) so it increases by 0.14% or 0.09% the benefit from not taking out the mortgage. Similarly, a 1% loan origination fee charged by the lender would have the same effect, although the loan origination fee might be deductible as interest.

Note that all of these adjustments are only relevant to the decision whether to take out a loan in the first place. Once you have taken out a mortgage, any points, taxes, or other up-front fees are already gone, so the return on a payoff is the interest rate.
Wiki David Grabiner

sophie1
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Re: Mortgage vs. Cash

Post by sophie1 » Fri Oct 12, 2018 7:32 am

I just have one observation to add to the above excellent posts:

Assuming that New York's efforts to circumvent the new tax law will fail, you will not be able to deduct as much of the mortgage interest above posts above are assuming. (And unfortunately, you will probably lose a lot more than 25% of your itemized deductions.)

State income tax + property tax is capped at $10,000, so (assuming you file as married/joint) you effectively only get to deduct mortgage interest in excess of $14,000. Assuming $22,000 in interest, that's a deduction of $8,000 per year above the standard deduction. Still something, but it only reduces your after-tax mortgage interest to ~4%, not 2.5%.

In order to profit from investing the money instead of paying for the house, you need the market to yield 4% for you after tax. I would guess that's going to be pretty close to break-even over the long term. Not enough upside to justify the added risk, IMHO.

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grabiner
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Re: Mortgage vs. Cash

Post by grabiner » Fri Oct 12, 2018 7:52 am

sophie1 wrote:
Fri Oct 12, 2018 7:32 am
I just have one observation to add to the above excellent posts:

Assuming that New York's efforts to circumvent the new tax law will fail, you will not be able to deduct as much of the mortgage interest above posts above are assuming. (And unfortunately, you will probably lose a lot more than 25% of your itemized deductions.)

State income tax + property tax is capped at $10,000, so (assuming you file as married/joint) you effectively only get to deduct mortgage interest in excess of $14,000. Assuming $22,000 in interest, that's a deduction of $8,000 per year above the standard deduction. Still something, but it only reduces your after-tax mortgage interest to ~4%, not 2.5%.
If you can deduct the mortgage interest from federal tax, you will probably also be able to deduct it from NY tax. If you donate $14,000 to charity, then you have the full $24,000 before any mortgage interest, so you can deduct the whole mortgage; the $14,000 donated to charity also counts towards your NY itemized deductions. Similarly, if you donate $7000 to charity, mortgage interest above $7000 is deductible from federal tax, and you will probably already itemize NY state tax with charity and property taxes, so your whole mortgage interest will be deductible from NY tax.
Wiki David Grabiner

NextMil
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Re: Mortgage vs. Cash

Post by NextMil » Fri Oct 12, 2018 8:38 am

I would pay cash in a heartbeat. The older I get, the more I want my life to be less complicated.

VT14850
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Re: Mortgage vs. Cash

Post by VT14850 » Fri Oct 12, 2018 2:04 pm

All,

This advice is incredible and so highly valued. Thank you all. Based in large part of the consensus of this group with is consistent with our independent research on the topic, we have decided to pay cash to purchase the house in question. To work with actual numbers, based on today's current rate of 4.25% on a 15 year jumbo, we would pay $18,877.90 in interest for the whole of 2019. This would be an itemized deduction of: 18,878 (interest)+10,000 (tax)=$28,878 and we would get the higher of $24,000 or $28,878. Despite this, for the following reasons have decided the cash route:

1) Interest rates as of this week are at a 7 year high.
2) The only reason we are in a position to pay cash for this home is due to the sale of our prior home in DC so the asset remains essentially equivalent.
3) We are committed to investing the fictitious mortgage payment each month.
4) The peace of mind that having no mortgage will bring. There is a lot to be said (as has been pointed out) for the psychological impact of that which is difficult to put a true dollar amount on.
5) Several other reasons that I'm sure I'm forgetting and may be pointed out to me in subsequent responses (by all means :)

Thank you all again for your prompt and thoughtful feedback on our question. It really means a lot to me.

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