Real estate: we don't need no stinkin' mortgage; what now?

In My Humble Opinion
21

Exactly, although I would personally be more likely to put the money in bonds or cash instruments—something with less volatility than the stock market. Think of it this way: You wouldn’t take out a $300K loan at 6% and put it in the stock market, would you?

If you can find an investment that pays about the same as the interest rate you are paying (pretty feasible in the 30-year window of a traditional mortgage), then you’ll actually make (your marginal tax rate) x (interest paid) a year out of the tax writeoff.

Except (and most people overlook this), you shouldn’t consider the effective rate of your mortgage in a vacuum, you should take into account the standard deduction. Few people without a mortgage itemize deductions. If you are paying $12,000 in deductable interest a year, and the standard deduction is $5,000, all of a sudden you’re only making (marginal tax rate) x (interest paid - standard deduction) a year.

Why are you counting the loan PLUS rent? I think it’s because you would own one house, but have to live somewhere else. If so, your math is wrong, for a couple reasons.

First, if you’re going to be living in Austin before moving to NE, then wait to buy the house until you’re actually ready to move. As others have pointed out, we’re in a falling market, so you may stand to gain from waiting simply because of that.

Second, if you’re going to be paying rent to live somewhere other than the house you buy, that will cost you regardless of whether you buy with cash or use a mortgage. You can’t count the rent against your hypothetical mortgage-case cashflow, but not against your cash-case cashflow and expect to get valid results.

The cashflow you should be balancing are the cost of the mortgage (with all applicable tax benefits) vs the interest you can earn on the money in other investments. Your individual finances will apply, but given the mortgage tax deduction, it is very likely that a mortgage is in your best interest. The deck is simply stacked towards homeowners with mortgages.

I agree with the others who told you to seek the advice of a professional financial advisor. Get one that you pay by the hour, not one who makes a commission on the products he sells you.

And, now, my personal recommendation*. Don’t buy a house. You’re going to have an uncertain living condition for the next several years, you will likely lose money if you have to rent out a house in the short term, and the transaction costs for housing are high compared to other investments. It sounds to me like you’ve got the idea that housing is a rock-solid, high yeild, low-risk investment, and since you’ve got a bunch of money coming in, there’s no better place to put it than a house. It’s an easy impression to get from the market in the last couple of years, but it’s not well-supported by historical trends.

*advice freely given on the internet is worth what you pay for it, avoid direct sunlight, do not operate heavy machinery or go swimming for at least 30 minutes after reading this advice

22

Ditto that. Just because you have the cash and love the house doesn’t mean you shouldn’t bargain. I bought two houses using the agent who was selling those houses. (Small town, not a lot of choices.)

I loved the houses and paid the asking price, even though one of them had been on the market for two years. I later sold those houses (using the same agent - yeah, I don’t learn) less than what I paid (after making improvements).

So don’t listen to me! :slight_smile:

If I had it to do over again, I’d use my own agent. If my agent showed me a house and s/he represented the seller, I’d get another agent’s advice.

I’m not sure if this is the same everywhere, but here you can call the county assessor’s office and get a history of the property – when it sold and for how much.

I agree with walrus that you should wait to buy until you’re reasonably certain that you’ll be living in it for at least a few years.

23

This depends on the extent to which you are already/could deduct state and local income taxes (and other itemized items). For instance, if your state & local taxes are $4,500, you would only reduce the interest paid by $500 in your example. If state & local taxes are more than the standard deduction, effectively all of your interest is deductable, at least until you hit the alternative minimum tax threshhold. The complexities of these calculations is why you should seek a tax/financial professional on these types of questions.

I would concur with the recommendation that a fee-based advisor would be much better than a commission-driven advisor. What you want is someone who can review your whole financial picture and the tax aspects of the proposed transaction. Most commission advisers are only focused on your financial investments (i.e. stocks/bonds/funds, not your house), and more specifically, what they can sell. I would suggest an accountant who specializes on personal tax advice.

24

There’s a columnist at the Washington Post (either Benny Kass or Robert Bruss) who repeatedly argues against paying cash for a house. His logic includes: If you pay cash, you’re tying up all your liquid assets in something you can’t access readily if you need money, and also if you use a mortgage company, some protective steps will be insisted upon (title insurance, formal survey etc.) that will protect you as well as the mortgage company.

My suggestion, worth pretty much what you’ve paid me for it: Once you decide whether owning is the right option (and I wouldn’t rush into it given that you have so many things up in the air): Figure out what your rent would be. Put enough down on the house that your mortgage would be similar to the rent. Keep the remainder as a liquid investment (retirement, cushion for home repairs, or whatever) or if you like, for other investments e.g. the stock market. This way you’re no worse off than you currently are, and you’re building home equity, getting that nice tax deduction etc. so you’re actually better off, without wiping out your nest egg.

Oh, and do get title insurance for yourself, whether you pay cash or use a mortgage - that protects your interest in the property should anything crop up down the line. The title insurance you are required have to get when you take a mortgage, that just protects the mortgage company.

25

Yes, indeed, a deduction is very nice, but without the Mortgage Interest Credit, you’re lucky to get 40% back (I assume State Income Tax). And, as iamthewalrus(:3= point out, that assumes you already have enough to itemize without buying a home.

The reason why dudes think it’s so great is that in some markets, your house payments- after you figure that Income tax deduction will save you 40% of the Interest- can be around the same as rent. (not here. :frowning: not even close) And then you do own something at the end (although most dudes just refi over & over & over…)

And, if you assume the RE market will keep going up (a good assumption only over the very long term, and assuming that you don’t buy at the crest of the market), then you’re getting that market increase in Equity with borrowed money. And, in many past markets, the increase in market value, plus the deductions for Home Mortgage interest- made it a very sweet investment indeed. But not today. Thus, buying with cash may well be better than buying with credit, **Mama Zappa’s ** Washington Post writer aside.
Right now, I agree with **iamthewalrus(:3= ** don’t buy in todays market given your circumstances. I vetted this with my Bro, who is a certified Tax Expert.

*Back to the OP’s question. * :smiley: Just be honest. Look online a lot. When you call, be honest, and tell them that you may be paying with cash. You can buy it, and most dudes are just “lookie-loos”, so there won’t be any resentment as long as you are open.

26

Excellent further clarification, Billdo. I was too used to my own tax situation to think about other deductions that people might have.

27

I agree with you wholeheartedly on that as well. You will see versions of that type of thinking all over the place:

  1. “Don’t worry about that trip, it was a tax right-off.” :confused:
  2. My Discover card gives me up to 1% cash back if I load her up for the whole year.
  3. I better sell these stocks before they get too high. I wouldn’t want to pay taxes on all those gains.

I was a fairly financially savvy adult before I finally admitted what I had no idea what many of these people were talking about so I did lots of reading and found out that tax breaks on mortgage interest and tax write-offs aren’t a good thing by themselves and only help to make a bad situation a little more bearable. You would have thought that some people had hit the lottery when they pay $10,000 but get $3,000 back. That is how the casinos stay in business.