Get a mortgage or pay with cash?

[WEL]

I'm thinking a mortgage would be better because of the simple math:

A person with a mid to high 700 FICO score could get a mortgage of say 4%. You can assume the stock market will do 8%. Thus, you'll be 4% ahead by investing while getting a mortgage. If you skipped the mortgage and just paid cash, you'd lose a lot of opportunity.

This is just simple math but I'm sure you see my point.

Does anyone see a reason to pay cash for a home? It's usually 'out of the box' thinking does me well. Not getting a mortgage is certainly that type of thinking.

[Petunia 100]

I'm thinking a mortgage would be better because of the simple math:

A person with a mid to high 700 FICO score could get a mortgage of say 4%. You can assume the stock market will do 8%. Thus, you'll be 4% ahead by investing while getting a mortgage. If you skipped the mortgage and just paid cash, you'd lose a lot of opportunity.

This is just simple math but I'm sure you see my point.

Does anyone see a reason to pay cash for a home? It's usually 'out of the box' thinking does me well. Not getting a mortgage is certainly that type of thinking.

I think it depends where you are in life. If you are younger, taking a mortgage and investing long-term makes a lot of sense. If you are middle-aged or a senior citizen, you may be investing more conservatively, so there may not be much expected difference between your mortgage rate and your investment returns.

Or, if you have plenty of money to both pay cash for a home and keep plenty invested, you may wish to just not bother with a mortgage.

[disneysteve]

You can assume the stock market will do 8%. Thus, you'll be 4% ahead by investing while getting a mortgage.

You can assume anything you'd like, but just remember it is an assumption. The market may not average 8%. There's no guarantee. Also, those returns are taxable unless you're investing in a tax-free account like a Roth. Of course, the mortgage interest is also tax-deductible making the net interest paid lower than the 4% figure.

The mortgage interest is fixed and guaranteed. You know exactly how much interest you will pay over the life of the loan. And you can always choose to prepay the mortgage to reduce the total interest paid. You could also do a little of both by making a larger down payment and take a smaller mortgage which would kind of blend the options.

There are very rarely only 2 choices when making a financial decision, although people tend to pose the questions that way.

[avil_saver36]

I'm thinking a mortgage would be better because of the simple math:

A person with a mid to high 700 FICO score could get a mortgage of say 4%. You can assume the stock market will do 8%. Thus, you'll be 4% ahead by investing while getting a mortgage. If you skipped the mortgage and just paid cash, you'd lose a lot of opportunity.

This is just simple math but I'm sure you see my point.

Does anyone see a reason to pay cash for a home? It's usually 'out of the box' thinking does me well. Not getting a mortgage is certainly that type of thinking.

Assuming the market will yield 8% is a big mistake.

I will always take the guaranteed 4% returns still enough to beat inflation comfortably and buy with cash.

[disneysteve]

Assuming the market will yield 8% is a big mistake.

I will always take the guaranteed 4% returns still enough to beat inflation comfortably and buy with cash.

It really depends. Would you pay with cash rather than funding your 401k, especially if there is a company match? How about instead of funding your Roth?

I don't think the guaranteed return of a mortgage beats those options at all. Paying with cash or prepaying your mortgage can be a smart move as part of your overall investment plan but it shouldn't be in place of your investment plan. If you are relatively young, investing is going to beat the mortgage over time.

[WEL]

Is it ever wise to withdraw Roth IRA money for a first-home purchase? Penalty free, of course.

[disneysteve]

Is it ever wise to withdraw Roth IRA money for a first-home purchase? Penalty free, of course.

I don't think you should ever take money out of a retirement plan for anything other than retirement unless it is a dire emergency - like saving a life type of thing.

I think two of the biggest mistakes the government ever made were putting a loan provision in 401k plans and putting the withdrawal provision in Roths.

[avil_saver36]

It really depends. Would you pay with cash rather than funding your 401k, especially if there is a company match? How about instead of funding your Roth?

I don't think the guaranteed return of a mortgage beats those options at all. Paying with cash or prepaying your mortgage can be a smart move as part of your overall investment plan but it shouldn't be in place of your investment plan. If you are relatively young, investing is going to beat the mortgage over time.

I of course assume you will fund your 401K to the point of employer match. This is what I have done historically. I do not like putting everything in 401K. Just like you diversify in stocks, you should also diversify your portfolio. Having real estate investments is just as important IMO, and paying for your house in cash is a part of that.

Market returns are also mythical. If you started investing since 1990, you would come with a vastly different conclusion compared to someone who invested starting 1999. Same is true for someone who invested since 2009 - that person would have a totally skewed idea of the return. You really need to be in a sweet spot - the spot where you start buying when the stocks are cheap. Today, the stocks are anything but cheap.

You can lose quite a bit in the stocks gamble. Real estate returns are almost guaranteed. The returns on paying your debts off are 100% guaranteed. For me, smart money lies on taking guaranteed and almost guaranteed returns first before gambling.

To give a comparison point, this is what we as a household are doing:

- 10% pretax savings in 401K.
- 15-20% after tax cash savings that are simply liquid. This money is being accumulated to buy our second house.
- Any leftover is being thrown in paying down all non mortgage debts.

Depending upon your preference, you can change the percentages, but IMO, it should really be a mix of strategies. We personally do not care to totally pay down our current mortgage since we are not enthused by this house and treat this house as a rental. But my second house will be my permanent house and I will throw every available dollar to pay it down to 0. Being mortgage free before I turn 50 is more important to me than having an IRA Roth.

Of course, real estate could heat up and it may very well turn out I didn't have to pay down the mortgage because refinancing an appreciated house would be very easy - but having seen the real estate bust personally, I tend not to fall for the same mistake again. To me, owning the house free and clear beats all other objectives - maybe it's a cultural thing.

[avil_saver36]

This is 10 mins of lazy research.

Chart 1: The historical Dow Jones index average:

http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

The approximate Dow Jones average index is:

1990: 2800
2000: 11500
2015: 17500

The rate of return since 1990 is just over 7.5%. The rate of return since 2000 is under 3%. So the mythical 8% return holds true for the absolutely best case scenario where we are counting 2 major booms (dot com and the current social media driven). The realistic scenario is perhaps this century where the index is a paltry 3% and can drive low if the market turns bear and experiences a correction.

Chart 2: The Case Shiller real estate pricing index:

http://data.okfn.org/data/core/house-prices-us

The approximate index through the same 3 years is:

1990: 76
2000: 100
2015: 164

The rate of return since 1990 is 3.5% and the rate of return since 2000 is 3.25%. Real estate looks more consistent.

Sure, you could argue if you got in at 1990, you could get more in the market. But that ignores the fact that real estate gives you close to ~5% in rental yields. Since when did any stock send you dividends anywhere close to 5%? With stocks, you are simply buying on the promise of future value and nothing to show in the immediate returns. If we add the 5% yields (even subtracting the upkeep and maintenance costs), real estate would still win even taking 1990 as a starting point. With 2000 as a starting point, there is no contest.

Over a long term, since when did the market ever return 8%? Why is this assumption thrown around in every discussion? I cannot say. I am open to criticism - if you can shred this apart, please do.

[avil_saver36]

Is it ever wise to withdraw Roth IRA money for a first-home purchase? Penalty free, of course.

I took a 401K loan to buy my first house. It allowed me to save a fortune on the PMI and got me a better rate. I then refinanced and took some more loan - I put in more equity in my house that way. Then, I turned around, got a very cheap home equity loan (like 0.99% and NO CLOSING cost cheap), and paid off the 401K loan.

I didn't miss much in the market appreciation. I put a lot of equity in my house and am now near 25%...going over this number will allow me to count the rental income as part of my total income and qualify me for the second house. Yes I am paying off the home equity loan, but at the minuscule interest rate, it isn't hurting me. If the variable rate jumps too much tomorrow, so what? I will wait to buy my second house and pay off the home equity loan with my cash first. The point is that I have "flexibility".

Financial decisions are complicated. There is a term - "leveraging". Big time institutions do this all the time, and as a small time investor, you can do it too. There is no simple answer - yes, sometimes it can be wise to leverage your retirement accounts (money is money - just because it's in a retirement account doesn't mean it's sacred not to be touched) to invest in real estate. KNOW what you are doing though - this means, know all the pros and cons. If you want to discuss your situation in detail, I will be happy to indulge.

[tripods68]

If you're going to buy a home with a mortgage, you need established 3-6 months of EF and debt free (no credit cards, student loans balance). You also should have at least 20% down payment that will allow you avoid PMI payments @ 15 year mortgage not 30


If I have to do over again (buying a home 13 years ago). We would have saved aggressively towards paying for a home CASH. It eliminate so many uncertainties in life. FREE & CLEAR is freedom.

With no mortgage you can aggressively save towards retirements (even better if you are young) because the time value of money favors those who starts early and better manage risk.

Why would I lend someone my own money and them the lender 4%? I wouldn't. The idea that I may make more than 4% in the stock market make sense BUT it doesn't address other aspect of the math equation which is RISK and UNCERTAINTY or the volatility of the stock market.

The idea of "No Mortgage Payment" is a security itself and powerful. It puts you in-charge of your financial situation No matter what happens in your own career path, lay-offs, job-related injury without losing your home. With no mortgage payments to worry about, it puts you in the best financial situation no matter where at you in life. You are likely to reach the "millionaire" status faster those who have mortgage debt.

[GREENBACK]

I can only speak from my personal experience with this issue. I am 50 yrs. old and have continuously refinanced mortgages for many years. My current rate is about 4%. My returns in investments have been double that or more over the years. My balance on my current mortgage is about 1/10th of my portfolio. I have no intention of paying this off before it's neccessary. Why give a bank your money to invest when you could be investing it? I could pay off my mortgage with my EF fund precisely because I didn't hand the money over years ago.

Remember, you're still on the hook for taxes and insurance on your property. Paying off the mortgage is not the end all to beat all. PAY YOURSELF FIRST!!!

[avil_saver36]

I can only speak from my personal experience with this issue. I am 50 yrs. old and have continuously refinanced mortgages for many years. My current rate is about 4%. My returns in investments have been double that or more over the years. My balance on my current mortgage is about 1/10th of my portfolio. I have no intention of paying this off before it's neccessary. Why give a bank your money to invest when you could be investing it? I could pay off my mortgage with my EF fund precisely because I didn't hand the money over years ago.

Remember, you're still on the hook for taxes and insurance on your property. Paying off the mortgage is not the end all to beat all. PAY YOURSELF FIRST!!!

Approximately when did you start investing? Also, if you have a detailed record of money in, it's not that difficult to calculate the Internal Rate of Return (IRR). In my portfolio, I have saved all the monthly statements since 2005 (when I started investing) and my IRR is near 2% (I predominantly invest in extremely low cost index funds - at my current employer, I don't incur even a single cent in fees). Do you only invest in the index funds (I only cited the Dow Jones index historically and it's simply not going to give you 8% unless you are taking small time windows) or in other specific equity funds as well? Did you invest in specific companies like Google, Amazon, Netflix at their onset, where the returns could be as high as 500%?

I am talking about someone who wants to invest today. Even a cursory Google search will show that for most stocks, P/E ratio is out of whack - which means stocks are too overvalued. If someone wanted to take a 401K loan to put equity in the house (this does not incur any penalties and is not considered a distribution as long as you pay off the loan), now is a good time in my opinion.

[GREENBACK]

I began to invest in the mid 90's and I feel this has worked best for me so I was only stating my personal feelings on the issue and attempting to address the OP's original question. I'm not a financial genious and don't claim to have the absolute best strategy. I think a lot has to do with your comfort level. I'm more comfortable with having a lot of value in my investments versus having a house that is paid for but not having much else.

[avil_saver36]

I began to invest in the mid 90's and I feel this has worked best for me so I was only stating my personal feelings on the issue and attempting to address the OP's original question. I'm not a financial genious and don't claim to have the absolute best strategy. I think a lot has to do with your comfort level. I'm more comfortable with having a lot of value in my investments versus having a house that is paid for but not having much else.

Since you invested starting the mid 90s, just the index has probably returned 7%. As I said, your "experience" with investing will be vastly different than mine (when I started in 2004). In my view, the market is overvalued and the revenues are not increasing as much because incomes all over the world are flat.

My point about paying off the house includes having a multitude of assets - in no way, I hinted that you should put everything in the house. If anything, I would suggest buying rental properties on cash.The 2 indexes I compared (Dow Jones and Case Shiller) show clearly that starting 2000, housing is winning big time over the market.

In conclusion, I suggest a mix, and my preference is to pay off the house as fast as possible, buy a couple of rentals along the way, and accumulate enough in the market by taking advantage of employer match and other tax benefits along the way.