100% Down Plan

[rj.phila]

jpg7n16-when i said this:

"i appreciate the stat guys in here, they are all RIGHT, but all this theoretical talk only goes so far compared to real listings in real markets."

i was referring to the statistical analysis of theoretical mortgages/scenarios in this thread, not to stocks. the point i was trying to make is that its sometimes misleading to deduce a general purchasing ethos from hypotheticals. that's why i suggested he start pulling props on the market and crunching actual numbers. certain thresholds of spending, debt, leverage, etc take on new meanings in the context of a familys "balance sheet".

you said:
"This seems to be a common misconception about the pro-mortgage side of the argument. It's never that the interest is somehow 'good' because of a tax deduction. The tax deduction only makes it better, because it lowers your interest cost - and therefore increases the spread between investment earnings and interest cost.

Both sides would prefer 0% interest costs."

of course, i 100% agree. when was the last time a RE agent, lender, etc said these words to you? to anyone you know? the point i was trying to make is that mortgage interest deduction gets touted as a blanket "win" by so many people in RE, and rarely do they step back and say JUST THAT. noone has ever in my life said what you just said to my face. i had to figure that out on my own. but maybe you all hang w/ smarter(monetarily) people than i do.

[jpg7n16]

Actually that cannot be true, because how is it mathmatically a better deal to pay the bank $7,946.39 in interest to only get back 1,986.60 from the IRS. So in a 30 year time that's around 149k in interest payments and 37k back from the Gov't. That is horse crap!!! He was just speaking solely about paying the bank a ton of interest and only getting 25% back. The example used here is only in regards to mortgage payments to the bank and a tax deduction from the IRS, nothing else. These are numbers from your early post that I'm using. Pays 10,306.98/year towards his mortgage (858.91 * 12), in year 1, $7,946.39 of that is interst, with 2,360.58 going to principal.

You completely ignored my post.

I specifically said, "It's never that the interest is somehow 'good' because of a tax deduction. The tax deduction only makes it better, because it lowers your interest cost - and therefore increases the spread between investment earnings and interest cost."


Let's say real quick, that you and I both have $0 and will have $0 income. But we're somehow in a 25% bracket.

If you are completely against any debt, you borrow nothing and can invest nothing, so you will stay at $0.

If I choose to borrow $100k at 5% in order to invest my $100k to earn 8% - at the end of the year, I will owe 5k in interest, but will have made 8k on investments. Then I'd pay tax on my $8k gains of $2k, so I still gain a free $1k. At the end of the year, I'd have $1,000 and you'd have $0.

But if you make my 5% interest tax deductible, now I also get back $1,250 on my refund. So now I have $2,250 and you still have $0.

The tax deduction doesn't make paying interest 'good' - it only increases the spread between investment earnings and investment costs.



You continue to look only at the costs without considering the earnings. It's like you look at the scenario I just made and go 'well at least I didn't have to pay $5k in interest! who cares if I get $1,250 back?? I still had to pay 3,750 of interest!! that's horse...' - you forget that without that interest, you wouldn't have the 8% earnings too.

[jpg7n16]

i was referring to the statistical analysis of theoretical mortgages/scenarios in this thread, not to stocks. the point i was trying to make is that its sometimes misleading to deduce a general purchasing ethos from hypotheticals.

Then I misunderstood what you were saying I thought you were comparing real estate to our stock investment calcs. I was wrong. Sorry!

[littleroc02us]

You completely ignored my post.

I specifically said, "It's never that the interest is somehow 'good' because of a tax deduction. The tax deduction only makes it better, because it lowers your interest cost - and therefore increases the spread between investment earnings and interest cost."


Let's say real quick, that you and I both have $0 and will have $0 income. But we're somehow in a 25% bracket.

If you are completely against any debt, you borrow nothing and can invest nothing, so you will stay at $0.

If I choose to borrow $100k at 5% in order to invest my $100k to earn 8% - at the end of the year, I will owe 5k in interest, but will have made 8k on investments. Then I'd pay tax on my $8k gains of $2k, so I still gain a free $1k. At the end of the year, I'd have $1,000 and you'd have $0.

But if you make my 5% interest tax deductible, now I also get back $1,250 on my refund. So now I have $2,250 and you still have $0.

The tax deduction doesn't make paying interest 'good' - it only increases the spread between investment earnings and investment costs.



You continue to look only at the costs without considering the earnings. It's like you look at the scenario I just made and go 'well at least I didn't have to pay $5k in interest! who cares if I get $1,250 back?? I still had to pay 3,750 of interest!! that's horse...' - you forget that without that interest, you wouldn't have the 8% earnings too.

Actually, look again at my post, you jumped on it to fast before I could edit it, I misread it the first time, but was basically stating that most people think a interest deduction on your taxes is a good reason to carry a mortgage. The math that I calculated shows that you pay a ton of interest to the bank to only get back a smaller portion in a tax refund. This cannot be disputed..

[littleroc02us]

If I choose to borrow $100k at 5% in order to invest my $100k to earn 8% - at the end of the year, I will owe 5k in interest, but will have made 8k on investments. Then I'd pay tax on my $8k gains of $2k, so I still gain a free $1k. At the end of the year, I'd have $1,000 and you'd have $0.

B

Its funny how you can say I ignored your post, when my response had nothing to do with investing money you get back from a tax refund. That was specifically stated in my post, but you had to bring it in. The point is that you pay the bank 8k to get back 1k or whatever.

[littleroc02us]

Let me try to explain it better jpg7n16 so that you understand what my point is:

If you have a mortgage with a bank and you pay them $10,306.98 each year, $7946.29 goes to interest and the rest goes to principle, you will only get around $1,986.60 in a tax refund. So how is it better to pay the bank 8k to only get back 2k from the IRS. That's all I'm asking you to answer. I'm not speaking about investing or anything else.

[jpg7n16]

Let me try to explain it better jpg7n16 so that you understand what my point is:

If you have a mortgage with a bank and you pay them $10,306.98 each year, $7946.29 goes to interest and the rest goes to principle, you will only get around $1,986.60 in a tax refund.

*sigh*

Did you even read my post? I tried to highlight it in blue for you.

No one here is saying that mortgage interest is 'good' solely because you can deduct it.

So how is it better to pay the bank 8k to only get back 2k from the IRS. That's all I'm asking you to answer. I'm not speaking about investing or anything else.

You are only focusing on the cost - and ignoring the earnings, just like I said in my last post.

And I know you're not speaking about investing - cause like I said, you continue to ignore the earnings.


It's like I'm talking about buying a shirt for $10 to sell it for $20, and claiming you can write off the shirt as a business expense. And you continue to say, 'why should you pay $10 for a shirt only to get $2 back on taxes?? That's stupid.' --Well, I'll make $20 when I sell it-- 'I'm not talking about when you sell it, I'm only talking about how is it smart to spend $10 to only get $2 back' --I'm not spending it to get $2 back, I'm spending it to earn $20-- 'why do you have to bring the sale into it? I'm only talking about the tax write-off' --If I don't buy the shirt, I can't make the profit-- 'I'm not talking about the profit, why spend $10 to only get $2 back?'

You are ignoring an entire half of the argument I'm making.

The only benefit to mortgage interest being deductible is that it increases the spread between the investment earnings and your cost. (I specifically highlighted that statement in blue earlier) I'm not spending the mortgage interest to get the tax refund, I'm spending it to keep my investments in tact earning more than the interest is costing me. If I pay down the mortgage, I can't keep the investments that are making more than the mortgage. Cause I'd have to sell them to pay off the mortgage.

[littleroc02us]

*sigh*

Did you even read my post? I tried to highlight it in blue for you.

No one here is saying that mortgage interest is 'good' solely because you can deduct it.



You are only focusing on the cost - and ignoring the earnings, just like I said in my last post.

And I know you're not speaking about investing - cause like I said, you continue to ignore the earnings.


It's like I'm talking about buying a shirt for $10 to sell it for $20, and claiming you can write off the shirt as a business expense. And you continue to say, 'why should you pay $10 for a shirt only to get $2 back on taxes?? That's stupid.' --Well, I'll make $20 when I sell it-- 'I'm not talking about when you sell it, I'm only talking about how is it smart to spend $10 to only get $2 back' --I'm not spending it to get $2 back, I'm spending it to earn $20-- 'why do you have to bring the sale into it? I'm only talking about the tax write-off' --If I don't buy the shirt, I can't make the profit-- 'I'm not talking about the profit, why spend $10 to only get $2 back?'

You are ignoring an entire half of the argument I'm making.

The only benefit to mortgage interest being deductible is that it increases the spread between the investment earnings and your cost. (I specifically highlighted that statement in blue earlier) I'm not spending the mortgage interest to get the tax refund, I'm spending it to keep my investments in tact earning more than the interest is costing me. If I pay down the mortgage, I can't keep the investments that are making more than the mortgage. Cause I'd have to sell them to pay off the mortgage.

I think your the type of guy that would borrow money on his house to invest, that's just what it seems like so we'll just have different philosphies about money and how much risk we are willing to take so we'll just leave it at that.

[rj.phila]

Let me try to explain it better jpg7n16 so that you understand what my point is:

If you have a mortgage with a bank and you pay them $10,306.98 each year, $7946.29 goes to interest and the rest goes to principle, you will only get around $1,986.60 in a tax refund. So how is it better to pay the bank 8k to only get back 2k from the IRS. That's all I'm asking you to answer. I'm not speaking about investing or anything else.

this actually is only true if one pays the minimum payment across the life of the loan. the interest to principal ratio adjusts across the life of a mortgage. the closer to day 1 you are, the higher that ratio is weighted towards interest. go do an amortization of your mortgage and you'll see what i mean.

[littleroc02us]

this actually is only true if one pays the minimum payment across the life of the loan. the interest to principal ratio adjusts across the life of a mortgage. the closer to day 1 you are, the higher that ratio is weighted towards interest. go do an amortization of your mortgage and you'll see what i mean.

Yes, but until the mortage is paid off your still giving the bank interest.

[Clownshoes]

Hello

Hey guys, I guess I'll resurect this thread.

New here but basically I'm in the exact scenario being discussed here, or will be rather shortly. I have been in a bit of a unique situation in large part from the generosity of my parents and the uniqueness of my job.

I'm 25 years old and have an income of about 140K. Because of my job in the oil industry I'm only "home" for about a week a month and thus my parents and friends have allowed me to basically couch surf for the last year and a half as paying rent just doesnt seem justified in my situation. Ive accumulated a little over 110k at the time of writing this and deposit between 6-8K each month into savings. My only debt is a 300/mo truck payment and insurance which I need for my job and I owe 15k on it. I really have not payed that off just to build additional credit which I know is a somewhat contested subject. Other than that nearly all my living costs are paid for by the company so I break even on gas and food.

So by the end of the year I will be in this exact scenario and expect to have 200k in cash and a number of options as to my next course of action. Its a bit overwhelming as I'm starting to sit on a pile of cash that needs to do something instead of sitting there. Ive debated buying the house outright or using the cash for either invesing in stocks or personal gain such as possibly starting a business or further education. I guess I'm just a little gunshy as to my next move which will obviously have major implications in my near and long term future.

[snafu]

Clownshoes, how long will you continue to work in those conditions in the oil patch? If you were to buy a house, would you be changing employment? Would you live in the house a few weeks each year? Do you plan to buy a rental property? Being a landlord is far more difficult than people believe. Being an absentee landlord requires paid management.

Have you been contributing to a retirement plan? Leaving large sums in a savings type vehicle is losing buying power to inflation. 1st, what are your short term, mid term and long term goals? Have you considered investing percentages in different types of investments to service goals for 5 years, 10 years and really long term 25 yrs out?

[Clownshoes]

Clownshoes, how long will you continue to work in those conditions in the oil patch? If you were to buy a house, would you be changing employment? Would you live in the house a few weeks each year? Do you plan to buy a rental property? Being a landlord is far more difficult than people believe. Being an absentee landlord requires paid management.

Have you been contributing to a retirement plan? Leaving large sums in a savings type vehicle is losing buying power to inflation. 1st, what are your short term, mid term and long term goals? Have you considered investing percentages in different types of investments to service goals for 5 years, 10 years and really long term 25 yrs out?

Well that all really depends. I have an engineering degree so I have reasonably good outlook in employment opportunities in Houston/ Dallas oil industry if I decide to work an office job. But as it stands now I would be willing to work another year at the most at my current job to save up enough to buy a house outright if I decided to.

If I did buy a house outright then yes I would be changing jobs most likely once I had the cash for a 150-175K house in Texas/ Houston and a savings cusion. I would live in it full time and get a regular 9-5 office job or persue other options. I just mentioned the rental if I did have to move and owned it out right the passive income could pay for a mortgage on a second home or just pay an apartment rent If I had to move for a job or simly wanted to move to a defferent part of town. I have family close by that could help with the rental or if need be I can hire management. Most likely I will end up working in Houston where the majority of the oil industry is.

Yes, I'm getting 12% of my income with the company match contributing 6% passivly though. Short term goals are to become independent of my current job or atleast be in a position to safely navigate the next few years without worrying to much about employment or paying debts if I decide to do something else with my life. Mid term I would like to have a good base of wealth that I can continue to build on etc. I would say I'm from a very conservative back ground financially but I'm just at a crossroads as far as the best course of action because I'm honestly unsure what I will be doing in the future but I dont want to burn through all my savings without having anything to show for it while I figure it out.

[kv968]

Not to reopen an old "wound" but I just wanted to throw in my $0.02...

Either scenario, A) Take out a mortgage and invest the lump sum or B) Pay cash for house and invest the "mortgage payments", has its own unique risks involved.

"A" has market risk in that you're trying to earn the spread between the mortgage rate and your return rate.

"B" has liquidity risk in that a majority (if not all) of your money is tied into the house, especially in the beginning.

One risk may seem more prevalent than the other depending on your circumstances and what you feel comfortable with but they are both REAL risks. And how do we minimize risks? By diverisfying.

To me the best way to achieve that in this case would be to put $100k down (more or less depending on which way you lean in the "risk" category) on the house while investing the other $100k and the difference between the current mortgage payment and the payment you would have made had you put nothing down (i.e. $1073.64-$536.82 = $536.82).

I'm not going to run the math and don't expect you guys to either but that approach would at least lessen both risks.

[LivingAlmostLarge]

littleroc, your calculations are off. You can't compare a roth with a non-roth account because the people with the mortgage can contribute to a roth as well annually as a shelter. Also the 25% is only on the gains not on the amount.

You also forget the tax deduction which is not something to be ignored.