| Purchasing a home cash vs. a mortgage |
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tcrosby
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| Purchasing a home cash vs. a mortgage |
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I would like to ask everyone's opinion on buying my first home cash or with a mortgage? I am currently 29 years old I work full time earning $65,000 a year in a stable career. I currently have an investment portfolio totaling around $500,000. What I am considering is selling a portion of my portfolio to purchase a home with cash. I understand the tax rules around doing this and I will fall under the long term capital gains tax. While I do not like the idea of paying taxes on my money I still feel it will be better than the interest on a 15 or 30 year mortgage. I am looking to purchase a home around $150,000 - $200,000. The things that are really attracting me to a cash purchase are owning the home outright and that I will be purchasing with profits from my stocks without touching the principle investment. I am just curious about the pros and cons of purchasing this way and would like some more opinions?
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Fri Dec 14, 2012 9:40 pm |
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oldguy
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No - I wouldn't. That $200k invested at 11%/yr will be about $4,400,000 in 30 years (age 59) when the house is paid off. You don't want to derail a $4M plan just to avoid $150k of interest payments (the loan payment on $200,000 is about $950/m - ie, $340,000).
A US home mortgage is among the lowest cost capital in the world, all of the other nations reqire periodic refi's, resets. But in the US Joe Average can go into a bank, ask for $200k, ask for a 4% fixed rate, guaranteed for 30 years, and get the money.
And, as you say, to net $200k for a house you would need to sell $240k of stock and pay about $40k in longterm Fed & State cap gains taxes. IMO, borrow as close to the full amount as you can, put the monthly payments on auto-pay - and retain the use of your $240k for better things.
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Sat Dec 15, 2012 1:49 am |
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tcrosby
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How are you assuring a 11% increase over the next 30 years? Many of my stocks are higher risks but over such a long span don't I also have an equal change of potentially losing in the long run depending on the economy, global status, etc? I am not trying to spark an argument I am just wondering where the 11% gain is coming from?
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Sat Dec 15, 2012 2:09 am |
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tcrosby
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One more thing to add that I didn't say in the original post. If I do pay cash for the house I am looking to take the monthly mortgage payment amount and reinvest it. I was looking at the cash buy for the comfort and freedom of owning the property free and clean since I don't know what might happen in the future i.e. loss of job, disability etc.
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Sat Dec 15, 2012 2:17 am |
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oldguy
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quote:
If I do pay cash for the house I am looking to take the monthly mortgage payment amount and reinvest it.
If you invest $950/m in an 11% Index Fund for 30 yrs you'll have $2,520,000. Or, if you invest $200,000 into that same fund upfront, you'll have $4,400,000. The investment is the same but with the $200k lomp sum you have more money , on average, in the 11% fund for th e30 yr period.
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freedom of owning the property free and clean since I don't know what might happen in the future i.e. loss of job, disability etc.
Don't you have this backwards? The only way that you can have a paid-for house is to have $200,000 LESS in the bank - ie, that money came from somewhere. So - if you have a job loss, isn't an extra $200k of cash more useful to you than a paid-for house? (You can pull $950/m from a $200k bank account for a long tiome.)
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How are you assuring a 11% increase over the next 30 years? Many of my stocks are higher risks but over such a long span don't I also have an equal change of potentially losing in the long run depending on the economy, global status, etc?
The 11%/yr is the longterm (many decades) average of the generic US stock market. (and many other countries shadow it too - ie, Germany, UK).
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
Most 30-year blocks average close to 11%/yr. In fact the most recent 30-yr block was exactly 11% (1982.10 to 2012.10). You can check several 30-yr blocks - you seldom see one below 9.5% and seldom above 12.5%/yr. Of course, that is not a guarantee nor assurance - but history is your only basis for decision, the future cannot be predicted. In fact, everyone's predictions are in yesterday's Dow - and tomorrow's Dow will be a result of something that has not yet happened.
As for taking higher risks - yes, risk and return are directly proportional - but don't take uncompensated risk. Eg, an individual stock carries the risk of company failure plus business sector failure plus US economy failure. The first two are mostly uncompensated - ie, the US economy provides a return that is approx equal to the longterm average of individual companies.
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Sat Dec 15, 2012 3:16 pm |
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