Get a mortgage or pay with cash?

[WEL]

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.

Dave... is that you?

[Randomsaver]

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.

When you said 8%, you meant an average of 8% down right?

[corn18]

I would only pay cash or pay off a mortgage if I had ALL of my tax advantaged space funded:

1. 401k to employer match
2. Roth IRA (could be backdoor if you exceed AGI limits)
3. pre-tax 401k to max
4. After tax 401k to max (if allowed)
5. Taxable investments

If you have #1 - #3 fully funded, then you can look at paying off a mortgage early or all at once. Only exception would be if you have PMI, but if you have PMI you didn't follow the 20% down rule, so you are playing from a disadvantage.

I have #1 - #4 fully funded and have some going into #5 that could go to the mortgage instead. I need leverage more than a 4% guaranteed return, so the mortgage is just getting a normal payment each month.

Tom

[Fishindude77]

Sounds like this is more of a "what if" question rather than a real life scenario?

Although your math may play out, I would almost always opt for NO DEBT over DEBT. There is great security in having a home free and clear, paid for.

[Jluke]

good question... it would be a great position to be in to have cash to pay for a house.

I'll assume a 200k house as hypothetical:

if you opt for a mortgage, I would consider a 10-year (or 15-year term max) with at least 50% down. This leaves 100k to play with and minimizes amount of interest paid (i.e. money "lost"). it also mitigates risk by being all in on the house or all in for the stock market.

if you pay cash for the house, you have probably depleted most of your EF/savings and will have to rebuild it. Either way you are at a starting point to begin investing, but amount of cash on hand is different in each scenario. Here, you would not have a mortgage payment and you can dollar cost average into the market for the foreseeable future (although investing is a loose term as there are other opportunities besides the stock market).

[LivingAlmostLarge]

Real estate is location dependent. My rental I'm living in, no way does it support a 5% ROI. In fact I might guess it's close to negative. But that's part of the risk of real estate. Saying real estate has no risk and stocks do is not making a fair comparison.

I think you have to determine what your area is doing for real estate. I like the idea personally of investing in real estate but have never done it.