Home loan or No?

[Broken Arrow]

Let's say that I know someone who has the ability to buy a house, up front and in cash. However, they are wondering if there are tax advantages to having a mortgage anyways.

What are the pros and cons of buying a house outright as opposed to getting a mortgage?

[Elgin526]

Pros to having a mortgage?

None.

Yes, interest is tax deductable, but you're still paying interest. If you pay $10,000 in interest, it will save you about $3000 (give or take, depending on yor tax bracket). So, you still spend $7,000 in interest.

Or you can buy the house outright and NOT spend $7,000 in interest.

[34saving]

Pros: Minimal closing costs. No interest. No waiting. Ability to make an offer that's not dependent on financing.

Cons: If the house is a money pit it's 100% his problem. (Some people would rather take the credit hit allowing the foreclosure of a house with serious issues than pay for it with their own money.) Capital could be invested in other things and possibility make much more money than buying the house outright. Tax deduction is lost (and therefore other deductions might be lost since often it's the mortgage interest deduction that makes it worth it to itemize.)

[kristinecfp]

There can be tax advantages to having a mortgage but you shouldn't let the tax tail wag the dog. The real question should be would the person be better off investing that money or using it to pay for the house outright? Other questions to consider, does the person have an emergency fund? Do they have adequate retirement savings? Do they have the discipline to invest the money they would have spent on the house if they get a mortgage? What kind of credit does the person have - will they get a good mortgage rate?

We don't have enough information to give an informed decision, but hopefully I've given you some questions to consider to help your friend make the best decision.

[Ima saver]

Well, I sure would not want to pay interest mortgage if I did not have to. I like a paid for house.

[pearlieq]

There's no logic in paying $1000 in interest to the bank to save $150 on your taxes!!!

This is one of the oldest money misconceptions around. There is no "advantage" , tax or otherwise, to pay more than you have to!

[mud]

if their credit is in the ****, the home loan would help

[Diolla]

If you want a tax deduction you could donate the interest you are not paying to charity and get the same deduction.

I can't imagine what kind of money pit the place would have to be that I would let my credit be ruined by a foreclosure.

[34saving]

Originally Posted by taking charge

I can't imagine what kind of money pit the place would have to be that I would let my credit be ruined by a foreclosure.

It depends on your values overall. I'm sure there are lots of residents of New Orleans who are still making their mortgage payments despite the fact that their houses are worth basically nothing . . .but I'm also sure that there are lots of people who aren't. Some things that could easily wipe out the value of your home: Toxic mold, termite infestation, asbestos, lead, environmental contamination, "earth movement", flood, prior meth production, title issues, etc. (Personally I'm in the "pay off the house as soon as you can" camp, but there are two sides to the issue.) Oh, if you think that home inspections save you from most of these problems you're right. However, if your home inspector missed the toxic mold infestation that you discover 2 months after you move he'll generally refund the money you paid for the inspection (and that's it!).

What about homeowner's insurance and title insurance? I live in an arid climate so the mold never occurred to me, ditto termites, but I think a lot of those other things can be repaired and to have it at the level you are talking about - well I would hope that someone who has the money to pay cash for a home would also have the intelligence to have it checked out thoroughly.

[greedy4chips]

Originally Posted by mud

if their credit is in the ****, the home loan would help

A small personal loan, car loan, paying bills on time would also help and cost far less than thousands in interest.

Pros: Peace of mind! Tax deduction...hahahahaha...thats why so many people are poor, the math just doesn't add up!

Cons: The mattress is too heavy to carry into the title company!

[34saving]

Originally Posted by taking charge

What about homeowner's insurance and title insurance?

Both can be great things, but I really suggest that everyone here read their policies throughly. Most insurance companies know about the real hazzards and don't insure against them. (Last time I looked only 1/3 of Californians had insurance that covers earthquakes and the federal government is the only entity generous/stupid enough to even offer flood insurance.) (BTW, the flood insurance FEMA offers is the best and the only thing out there, but it's far from comprehensive.)

Again, I'm still in the "pay it off quickly" camp, but the true professionals (I'm not one) in real estate tend to risk other people's money instead of their own.

My insurance company did bring up flood insurance when I was purchasing my homeowners insurance policy, but given where I live, and how my house is situated, I declined. It may have been the federal plan, but they did bring it up.

My cousin, who lives in the San Fernando Valley, did have earthquake insurance to do the home repairs from the last big one they had.

I know when I got my mortgage there were certain conditions they wanted and adequate insurance was one. Title insurance was one - and they did a title inspection before providing that insurance. I would imagine that for most people, and it would just be idiotic for one not to continue to have that coverage just because they no longer had a mortgage.

[34saving]

Originally Posted by taking charge

My insurance company did bring up flood insurance when I was purchasing my homeowners insurance policy, but given where I live, and how my house is situated, I declined. It may have been the federal plan, but they did bring it up.

Good for your agent. If it wasn't the federal plan I'd be VERY surprised. You might want to examine your situation a little bit more. If your risk is truly pretty low, flood insurance might be very cheap and well worth the investment. I didn't even know my community participated in the federal program (that's how low our likelihood was) until after the flood. We didn't loose a lot and, no, we did not default on our mortgage. However, Minnesota is not known for getting 14 inches of rain in one shot (we actually broke a statewide record -- "they" say it was a 700 year storm). Our house went from "pond view" to "pond frontage" to "pond". We had 20 inches of water against the patio doors of our lower level walk-out. By the grace of God the patio doors held and we never lost power (2 sump pumps and 3 shop vacs were the crucial elements that got the water back out almost as quickly as it came in.) Anyway, moral of the story is, flood insurance might be worth looking into

[Ima saver]

Broken arrow, have they decided yet? I would be mortgage free if it were me.

[Broken Arrow]

They were originally going to pay up front anyway, but they wanted to ask just to be sure before the plunk down that chunk of change. And of course, with that much money on the line, I wanted to double check my own answer as well. That's why I asked here.

Don't worry though. We're all on the same page on this one, and I'm almost certain they are going ahead with cash up front.

[Ima saver]

Well, that is great!!

[cschin4]

If they are putting all their money on the line, then a mortgage might give them some breathing room. There are always unexpected costs when you move in and buy a home. I think I would take on the mortgate until I was settled and comfortable unless I had alot of money to spare.

[autoxer]

The only con is not being able to invest that cash elsewhere.