If there were a “Like” button, I’d have used it for this post 
BTW, I thought this would be an uncommon situation. It isn’t. About 10% of the houses bought in the Twin Cities (according to my Realtor and backed up by the closing agent) are bought with cash. Its often older people who are downsizing.
I say go for it. I purchased my first house with a mortgage, but then, about three years later, was able to pay it off in cash. There is something to be said for the feeling of owning your home outright. Just make sure all of the additional costs are factored in and you will be in great shape!
. . . but people should recognize that buying that feeling can be expensive.
Not terribly. Its a investment with a very stable return (right now, about 4%). That’s a great return considering that its a fairly low risk (assuming you are in for the long haul and not flipping homes).
Granted you COULD do much better in the stock market, but over the long haul it would be about 8% - a 4% difference. Ignoring the tax write off for the mortgage that would increase the money in your pocket a little - but also ignoring the eventual LTCG. And the market does carry more risk.
It doesn’t sound like stpauler has taken the stock market step with his wealth anyway, nor that these homes are a huge investment. If the money is in savings, he isn’t getting the 4% return and his cash flow is going toward rent. Buy the house, his cash flow goes into maintaining and improving the home, but anything left over can go towards investments - if he is so driven (and not everyone is).
Well, I don’t know in how many threads you and I need to discuss the same issue. I don’t think another is needed. As someone said above, it comes down to a person’s own analysis of their situation and their risk tolerance. I just don’t like when people think “well of course you don’t want to pay interest” without thinking about the whole picture (ye olde fighting ignorance, don’tcha know).
I think it’s a good idea. No mortgage, no payments, not paying interest to a bank. Less worries if your life takes a bad turn (ie, don’t have to worry about “How do I make my house payment?”)
Yeah, yeah, there’s always people that will claim you could make more money investing in other ways. You could also lose it all that way too.
Just be sure, as others said, that the house doesn’t have a lot of issues that you’re going to be paying for over the next couple of years. Having had my own house for 11 years before I got married and sold it, then having dealt with my now ex-wife’s shithole house, Shit Never Ends. There’s always more maintenance, something that needs painting, rebuilding, replacing, repairing. Just be sure it’s not stuff like your furnace, A/C, plumbing, roof or foundation.
In that case, you can fight ignorance with far more success (and maybe have those less financially savvy than yourself LEARN something) by saying “its a matter of analyzing your situation and risk tolerance.” See how easy that is?
That’s essentially what I’ve said. In this thread and the other one.
By all means buy on cash.
Not if you’re not working, or the house value tanks (further) or any one of a myriad other reasons.
I would prefer liquidity.
Not sure what sorts of figures we are talking here, but I would rather keep a biggish lump sum invested and take out a mortgage.
Why?
- What you earn on your money will offset the mortgage interest
- You will be building up a credit history
- Lumps sums are harder to come by, and once gone it is gone. Once you have a house you may well want to improve it, so it will be “harder” for you to save and get back the lump sum. Whereas mortgage payments are a must.
- 1 on this.
If you have cash you can pay a mortgage whenever you like. But the converse is not always true. (i.e you can’t always get a mortgage when you don’t have cash)
Indeed you did. And in response we hear “but it feels so good to not have a mortgage.”
Another nail in the coffin of homo economicus.
So why do banks sell mortgages, instead of investing in the market? Are they not interested in getter a larger return on their investment?
I’ve heard that paying off a mortgage is about the best thing you can do to polish your credit rating. It’s probably not an issue for you since you’ve saved enough cash to buy a house, unless maybe you’ve thought about one day starting a business or have some other future borrowing need…you never know. Also, if you can itemize deductions on your tax return, the mortgage interest rate will effectively be lower. Given the weak economic recovery and national debt turmoil, I would not plunk the cash down on stocks, salivating over the difference between 10% annual investment returns and 4% mortgage rate; you may be waiting until the end of the 20 year rolling period beginning today for that to materialize. Security and peace of mind are worth a lot. You might also want to consider using some cash to hedge against future energy cost increases… perhaps a hybrid for your next vehicle or a geothermal well for the house.
Well, first, loans are just the kinds of investments banks make. If they wanted to make other types of investments, it wouldn’t be a bank. It’s like asking why McDonald’s makes hamburgers instead of aircraft parts.
Second, it’s not the case that a bank only makes 4% on loans and would make 10% in the market. Banks are highly leveraged, so their return on their own money is much higher than the interest rate on the loan. For example, someone could start a bank for $10, get someone else to deposit $100 at 1%, then loan out $90 at 5%. So, their $10 earns them $3.50 a year, which is nice.
Also, loans are much less volatile than the narket. Sure some number of people will default, but the value of a loan portfolio doesn’t fluctuate as much as a stock portfolio.
Which is why some people decide to invest in their property and save the 4% mortgage interest (plus real estate growth, which will return), rather than invest in the market and make 10% profit over 20 years.
Those people aren’t investing in loans, they are investing in real estate. But that’s just a quibble–you are right that real estate is also less volatile than stocks. And of course some people choose to invest in real estate over stock, I’ve just been sating that it should be a choice based on all the facts–it shouldn’t be based on a simple-minded “debt is bad, mmmkay” attitude.
That feeling is based on cold, hard economic facts - namely, that carrying debt is a source of risk.
Certainly, it can be a savvy move to take out a large mortgage, take advantage (in the US) of interest tax deductions, and invest all that in equities … but it’s also relatively risky, as much can go wrong with that plan: one could for example lose one’s source of income (presumably some sort of job) as the market enters a temporary tumble - and end up losing both house and investments. Many would be satisfied with a lower potential return but less risk.
It isn’t very useful to know that, historically, the market generally goes up, if you can’t survive those years when it goes drastically down - and takes your job with it.
They may not articulate it like that of course. But some sort of feeling of that nature is what lies behind the good feeling of not carrying a debt.
That’s right, there’s risk. But risk is a good thing, not a bad thing. There’s no reward without risk. So risk should be managed, not avoided. Taking too little risk is every bit as much a mistake as taking too much risk.