to mortgage or not to mortgage?

[feh]

Hello folks!

My wife and I may be purchasing a house soon. The purchase price of the new house would probably be $50-100K more than what our current home is worth.

We own our current home outright, and have the money on hand to make up the difference. In other words, we wouldn't need to take out a mortgage.

My question is: are there any reasons to take one out any way, and pay it off quickly or immediately?

Thanks.

[zetta]

How quickly would you intend to pay it off? Suppose you didn't move. What would you be doing with that $50-100k instead? If it's just sitting in a savings account, you're better off putting it into the house. If it's invested in mutual funds that are getting good returns, and you plan to leave it there for > 10 years, it might be worth taking out the mortgage.

[disneysteve]

Originally Posted by feh

My question is: are there any reasons to take one out any way, and pay it off quickly or immediately?

I can think of no reason to take out a mortgage just to pay it off right away. In fact, I think there are reasons not to.

You avoid all the hassles of applying for the mortgage. No need to produce a zillion documents, pay stubs, bank statements, etc. No credit inquiry. No application fee to pay. Even if you pay it off right away, there would be some interest accrued. No waiting period to be approved. Very quick, streamlined closing process as no funds need to be transferred. You come to the closing table with 100% of the money in hand. You should be in and out within an hour.

If you really don't need to borrow any money to make the purchase, why bother? Just pay cash.

[pearlieq]

In addition to all of the hassle already mentioned, closing costs on a mortgage should also be considered. Origination fees, doc prep fees, etc. can add up very quickly.

Unless it would completely drain all of your savings, I can't see any advantage to taking a mortgage.

[scfr]

In addition to what others have mentioned, having no financing contingency can give you a fair amount of clout with some home sellers since the closing can happen really fast if they are in a hurry to sell.

Also, if you have no mortgage you alone choose what type of home owner's insurance coverage you want; you can go for a higher deductible that what the mortgage company may require (if you're comfortable with that).

I vote for no mortgage.

[feh]

Originally Posted by zetta

How quickly would you intend to pay it off? Suppose you didn't move. What would you be doing with that $50-100k instead? If it's just sitting in a savings account, you're better off putting it into the house. If it's invested in mutual funds that are getting good returns, and you plan to leave it there for > 10 years, it might be worth taking out the mortgage.

Thanks for all the replies folks. I'd like to avoid the mortgage also, but was wondering if there were any benefits.

To answer your question, the $50-$100K would come out of a money market account and/or a mutual fund (we currently carry about 10% of our portfolio in cash). My wife and I are 41 and are probably at least 10 years away from retirement.

[jIM_Ohio]

What do you use the 10% cash position to do? buy on dips?

If you have 10% as part of a good, aggressive allocation, and need money on hand to buy on dips, I suggest mortgage. It will have hassles as others have mentioned.

Do you track your net worth? From that stand point leveraging with a mortgage will increase your networth more... where as paying cash for the house would be a "zero sum" net worth equation.

If you are closer to retirement, I say no mortgage regardless of above
If you have 10 years to retire, having a low mortgage payment and being invested with 10% cash available to buy on dips or pay off mortgage is a good choice to have.

[feh]

Originally Posted by jIM_Ohio

What do you use the 10% cash position to do? buy on dips?

If you have 10% as part of a good, aggressive allocation, and need money on hand to buy on dips, I suggest mortgage. It will have hassles as others have mentioned.

Do you track your net worth? From that stand point leveraging with a mortgage will increase your networth more... where as paying cash for the house would be a "zero sum" net worth equation.

If you are closer to retirement, I say no mortgage regardless of above
If you have 10 years to retire, having a low mortgage payment and being invested with 10% cash available to buy on dips or pay off mortgage is a good choice to have.

10% is in cash for a couple reasons:

- Following the advice I've read for 2007. After the run-up over the last 10 months, many people seem to think the market will be volatile this year, so having cash on hand is just hedging.
- Our portfolio is fairly aggressive; we have very little money in bonds. Having the cash reduces our overall risk.

[jIM_Ohio]

Originally Posted by feh

10% is in cash for a couple reasons:

- Following the advice I've read for 2007. After the run-up over the last 10 months, many people seem to think the market will be volatile this year, so having cash on hand is just hedging.
- Our portfolio is fairly aggressive; we have very little money in bonds. Having the cash reduces our overall risk.

In this case I would not consume all 10% into paying off new house. I would keep some cash on hand.

Fundamentals behind WHY you made the decision to go 10% cash have not changed, yet if you pay off your new house, your allocation will have changed.

I think the flexibility of having cash is a luxery you can afford... you will probably get a long term return of 6-11% on the cash based on your current allocation... and the return on that money from a mortgage would be around 4-5%.

[PharmacistRealtor]

I would rent out the house you are in and take that cashflow to begin paying for a new house with it, you can easily get 3% back to cover any closing costs for a new home and go in with no money to settlement and then you're paying off a second home...what I'm doing now...

[feh]

Another option to consider -

What about taking out a mortgage and not repaying it immediately? Assuming the market as a whole would have a higher rate of return (10% ?) than a house would appreciate (6-7% ?) over 10 years, would it be better to have $200K invested in the market instead of a home? Given that the current interest rate for a 15 year mortgage is around 5-6%.

Are there any calculators on the web that would allow me to do some comparisons?

Thanks!

[Ima saver]

I vote for no mortgage either. I would never have another rental house in my life. I had 3 and I sold them all for much less than I paid for them, plus spent thousands trying to fix them up.

[InDebtInDC]

Originally Posted by feh

Another option to consider -

What about taking out a mortgage and not repaying it immediately? Assuming the market as a whole would have a higher rate of return (10% ?) than a house would appreciate (6-7% ?) over 10 years, would it be better to have $200K invested in the market instead of a home? Given that the current interest rate for a 15 year mortgage is around 5-6%.

Are there any calculators on the web that would allow me to do some comparisons?

Thanks!

I don't think you can program a computer to do that kind of analysis, especially tailored to your situation.

Let's look at the possibilities.

1. You sell the first home. You pay cash for the second home.

Pros: save processing fees, no interest, never be homeless, just come up with enough to pay bills and taxes

Cons: all your money is tied up in the house and not in the market

2. Sell the first home. Finance about 70-80% of the second home. Check with your lender to see how much down payment they like and research on private morgate insurance (PMI).

Pros: frees money for investing, mortgage interest expense is tax deductible,

Cons: processing fees & interest, must be able to pay the mortgage or be homeless, harder on people with unsteady income

3. Refinance first home and take out all equity. Rent out first home. Pay for second home with cash.

Pros: rental income, appreciation in 2 houses instead of 1, more real estate tax deductions (not necessarily a good thing)

Cons: landlord's nightmare tenants

4. Refinance first home and rent out. Finance second home. Put all the money in investments.

Pros: maximize your portfolio, more deductions, etc

Cons: double the cash outflow each month


As you can see, it's not quite as easy and simple as you may think. It depends on your aptitude and how much work you want to do, it gets complicated real quick.

For most people I would say put your house up for sale. After you close on it move into temporary housing until you can close on your new house. You don't want to own 2 houses at the same time.

If you want more work for more money, look into being a landlord before you get stuck being one.

Good luck.

[Scanner]

What about taking out a mortgage and not repaying it immediately? Assuming the market as a whole would have a higher rate of return (10% ?) than a house would appreciate (6-7% ?) over 10 years, would it be better to have $200K invested in the market instead of a home? Given that the current interest rate for a 15 year mortgage is around 5-6%.

Are there any calculators on the web that would allow me to do some comparisons?

I doubt there are any calculators but you have hit upon a salient point.

I read somewhere, with someone making a roundabout point, that your home is only valuable to you 2 ways - completely paid off or completely mortgaged.

Yes, numbers speaking, it's better to cash all of your equity out - deploy it into the market and let that earn interest over the years (historically!).

Not to mention, you now have a tax advantage, mortgage interest that you won't have if you just buy cash and carry.

The problem I see with that proposal - let's say you leverage your house 80% - where are you going to stuff $200,000 of money into a shelter? So, you'd be getting a tax deduction on mortgage interest but then paying tax above and beyond your yearly maxes on 401(k)'s and Roths and/or SEP's.

To shelter it, you'd have to buy muni bonds, and the interest rate isn't going to nearly match what you are paying on your mortgage.

I instead would agree with the Conservatives here and just pay for house cash in hand.

Consider your house as part of your portfolio (I know many here disagree with me on this but I insist I am right for one to consider this in their net worth).

Then, go more aggressive with the rest of your portfolio - given the fact you are so secure, speculation, at least a little of it, may be appropriate for you now.

Futures, options, commodities, some risky stocks etc. . .deploy a little of your portfolio (5-15%) into those entities because you have your home paid off at 41 y.o.

You see my point?

Don't just play the mutual fund game exclusively.

[lgslgs]

Originally Posted by feh

Another option to consider -

What about taking out a mortgage and not repaying it immediately? Assuming the market as a whole would have a higher rate of return (10% ?) than a house would appreciate (6-7% ?) over 10 years, would it be better to have $200K invested in the market instead of a home? Given that the current interest rate for a 15 year mortgage is around 5-6%.

Are there any calculators on the web that would allow me to do some comparisons?

Thanks!

The calculator your requested: Invest vs. Payoff

And other good stuff here: Hugh's Mortgage and Financial Calculators

Not paying off our house is worth a minimum of $600 per month for us (based on a conservative investment return percentage.) And it's more like $800 - 900 when calculated against our lifetime historical return on our invesments.


Lynda

[Hypersion]

With that small of a mortage you won't be able to right off the interest or land taxes.

So I vote for paying cash for the house.

[loanstar]

Originally Posted by feh

Hello folks!

My wife and I may be purchasing a house soon. The purchase price of the new house would probably be $50-100K more than what our current home is worth.

We own our current home outright, and have the money on hand to make up the difference. In other words, we wouldn't need to take out a mortgage.

My question is: are there any reasons to take one out any way, and pay it off quickly or immediately?

Thanks.

i don't see a reason, why take a loan when you have the money at hand?..
if in future you need the money, you can always refinance.

[JustDoIt]

I believe you should always pay with cash when you have the cash AS LONG AS you're not compromising your safety net (emergency fund). I think it's poor advice to rely on refinancing if you should get in a financial bind.

1. If the financial crunch is that you've lost your job, good luck finding someone who'll finance you.
2. If you do get financed, you're then paying interest on an amount you couldn't afford in the first place (which is why you sought out a loan).
3. If you've paid cash for your homes and had no other loan or debts in a long time, your FICO score will be low (and you know what that means when applying for loans).

The 3rd point is something I have a problem with in regards to the prevalence of FICO's use!

...soap box...
Our society relies too heavily on FICO and is getting lazier about common sense lending. Specifically, I'm thinking of the situation where a person has paid all debts back, paid off her mortgage, and has several savings accounts for different purchase goals. She pays for everything in cash and is so financially responsible that she has saved in advance money for big purchases like school, car and emergencies and doesn't have a need for installment loans or car loans. However, say this person receives a job transfer to a more expensive state, sells her current home, applies the earnings to a new home in the new state but still needs to take out a loan to make up the difference in home price. Her FICO is terribly low (if existent at all) because she has no current debt/loan records on file. What then?

She is charged a higher interest for not having a debt history on file. She is essentially being punished for becoming self-reliant and not carrying debt.

Our dependence on FICO is contributing in a BIG WAY to a culture dependent on loans!

/soap box

[Tree0164]

I would pay as much cash as you can for the new home. You don't want to drain your emergency fund so if you need to take out a small mortgage that is ok.

You sound like you are in awesome shape!

[Snoopy2645]

definetly dont take out a mortgage if you have the money to buy it outright you will start saving immideatly if you dont mortgage the house