Paying cash for new home vs. mortgage ? |
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crawdaddy
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Paying cash for new home vs. mortgage ? |
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We are planning on downsizing in a few years and will be building a new home. Our current home is paid for and I was wondering if we would be better off paying cash for the home we build, or would be we better off putting the money in a money market or some other account and taking out a mortgage on the new home? I'm 50 years old and working and my spouse is 41 and disabled and unable to work.
Thanks for any input...pros and cons.
CD
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Sun Aug 05, 2007 6:24 pm |
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oldguy
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I vote for the mortgage.
1. Safety. You are a one-income family so you need to stay safe. A paid-for house isn't much help if you become jobless. And, if you need money to live and fund a job search for a few months, you won't be able to get a loan. But if you had $100k or $200k in reserve you could live, job-hunt, and make your mortgage payments for many years.
2. Net worth. It is fairly easy to get a return that is higher than your mortgage cost. If the mortgage is 6%, you only need a 6% return to offset that cost. If you put 80& in money market (5%) and 20% in an Index (12%), the combined return would be about 6.4%. And you could increase the % in the Index if you wanted to take more risk to get a higher return. (I've done this for many years - I invest 100% of my mortgage money in 12% Index Funds)
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Sun Aug 05, 2007 8:53 pm |
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BlankenshipFP
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I agree with oldguy. If you are concerned about safety you'll want to remain somewhat conservative in the allocation (as oldguy indicates with the 80/20 allocation). This way you should always be in a position to pay off the mortgage at any time with your investment account if you needed to.
Jim Blankenship, CFP�, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Mon Aug 06, 2007 1:46 pm |
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crawdaddy
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Thank you for the wise input.
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Mon Aug 06, 2007 2:48 pm |
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more freedom
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It depends, and this can get complicated.
If you have cash generating assets to choose, and you can invest in these assets with the rate of return which is higher than your mortgage interest rate, then you would be better off when you apply the home loan.
It is about managing our cash flow as well as other financial knowledge here
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Sat Aug 18, 2007 3:01 pm |
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austin
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downsizing |
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I noticed you said you were downsizing and that your current home was paid for. If you could buy your next home in cash and then invest the remainder that might not be a bad idea. If you get a mortgage but the stock market goes down you could be in a tight spot.
On the other hand if you house is paid off and you have some money invested regardless of what happens with the stock market you will not have a mortgage over your head.
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Sun Aug 26, 2007 7:05 am |
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Ultimate Cheapskate
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Old Guy Wrote :I vote for the mortgage.
1. Safety. You are a one-income family so you need to stay safe. A paid-for house isn't much help if you become jobless
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Wow, Oldguy, I couldn't disagree with you more. Definitely pay cash for the house - it's a no brainer. 1- Avoid interest payments (I know it's tax deductible, but that's like saying gambling is a good investment because 27% of the time you win your money back!); 2 - Reduce your cash flow needs by what is typically the single largest use of funds - a home mortgage (that, Oldguy, is what I call "Safety" in the event of losing a job, etc); and 3 - Invest in an asset (your own home) that's likely to increase in value and can be tapped (via a home equity loan) if you encounter a real emergency and need cash.
I'm surprised after the events of the last few weeks that ANYONE is still preaching the old-school "don't pay off your mortgage ASAP" philosophy.
Stay Cheap! Jeff Yeager, The Ultimate Cheapskate
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Tue Aug 28, 2007 3:24 pm |
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oldguy
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quote: Invest in an asset (your own home) that's likely to increase in value and can be tapped (via a home equity loan) if you encounter a real emergency and need cash.
Wow, sure glad I didn't listen to you 40 years ago.
I put loans on each of my rental houses and I invest the money elsewhere. I refi a rental, take out $50,000 of cash, that costs me $300/m for 30 yrs, ie $58,000 in interest. I invest the $50,000 cash in the SP500 Index Fund at 12%, it grows to $1,500,000 in 30 years, that is well worth paying $58k for the use of that capital. (The tax deductability is true but it has little to do with the outcome, I certainly didn't borrow $100's of thou to get a tax deduction.)
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Tue Aug 28, 2007 6:48 pm |
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Ultimate Cheapskate
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Present tense? |
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Hi Oldguy (sorry to call you that - I'm an older guy myself - but that's what you call yourself, so, oh well...)
I noticed you speak in the present tense when you talk about your leveraging of various properties, etc., even though you talk about "40 years ago." Hope it all works out for you, thou I guess that remains to be seen...
Don't want to pry into your personal finances, but I think it's best to put your debts - especially home mortgage - in the grave as early as you can in life, rather than continuing to roll the make-more-money dice. Guess I'd rather settle for less than spend my whole life unsettled, always wanting more --- even if that's how it works out for you. But maybe that's just me.
Stay Cheap! Jeff Yeager - The Ultimate Cheapskate
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Tue Aug 28, 2007 9:22 pm |
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Ultimate Cheapskate
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COASTER Wrote:
I think there's a good middle road between these two positions. Oldguy is mainly talking about leveraging his rental properties, and his plan makes sense and has been proven to be a way to build wealth. However, leverage also has its risks. I think a good compromise is to take the conservative approach toward your own HOME. Try to pay down the mortgage on that so you own it free and clear and no one can take it away from you no matter what financial circumstances befall. However, if one wants to own real estate, then use oldguy's plan for the rental properties. You can always walk away from a rental property, perhaps with your credit it tatters, but at least you still have your home.
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Fair enough, BUT the question was about whether to use the proceeds from the sale of an existing home to pay cash for a new replacement home. So, I'll stick with my advice: Pay cash for the new home - NO MORTGAGE.
I also notice that Oldguy doesn't factor in taxes owed on the "theoretical" earning on his money market /index fund investing plan (which would knock his "theoretical" return of 6.4% down below his benchmark of 6% ---- and keep in mind that that 6%, which would be the savings in mortgage intrest payments, is "guaranteed" NOT "theoretical"). Of course, Oldguy also forgot to factor in the likely (albeit admittedly not guaranteed) appreciation in the value of the property the owner would own, 100%. I still say the choice is a no brainer, with all due respect to Oldguy.
Stay Cheap! - Jeff Yeager - [deleted]
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Wed Aug 29, 2007 3:56 pm |
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oldguy
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UltCheap. You're getting a bit off track - here is what I do
quote: I put loans on each of my rental houses and I invest the money elsewhere. I refi a rental, take out $50,000 of cash, that costs me $300/m for 30 yrs, ie $58,000 in interest. I invest the $50,000 cash in the SP500 Index Fund at 12%, it grows to $1,500,000 in 30 years, that is well worth paying $58k for the use of that capital.
There is no 6.4% benchmark, that was just an example of how 'low risk' you can go if you want to - sorry, I explained that poorly. Anyway, I put $50k in the SP500, wait 30 yrs and grow it to $1.5M. Actually a bit better than that, the SP500 has returned nearly 13% over the most recent 30 years.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
Yes, the $1.5M is taxable - when I sell some to buy more houses, etc, I pay 15% capital gains tax on my sale. But most of it will be inherited so the tax will never be due (stepped up basis). BTW, because of that, I often borrow rather than pay cash and disturb the account - eg, when we buy a car, I finance it 100%, pay 5.5% at the credit union, and let that money stay in the SP500 and draw 12%.
quote: Of course, Oldguy also forgot to factor in the likely (albeit admittedly not guaranteed) appreciation in the value of the property the owner would own, 100%.
C'mon, I know that you know better? The owner gets that appreciation even if he owns only 10% or the house. In fact, my Return on equity (ROE) will be much higher than if I owned the house 100%.
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Wed Aug 29, 2007 9:04 pm |
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Ultimate Cheapskate
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Hey Oldguy -
Yep, I'm even dumber than I look, and that's saying some thing...
Still curious thou: Are you still "leveraging" all these rental properties for theoretical riches, or have you finally cashed in the chips? I was once up $180K at a black jack in Vegas - thought it was the best thing ever - but it didn't end so well.
Some one earlier on this thread said something like: "leverage of rental properties has been a proven way of building wealth." Fair enough, but definitions please. Folks have come out on the winning hand of that black jack table; so is that a "proven way" of building wealth? Again, sorry to be so dense, but I am...
Jeff Yeager, The Ultimate Cheapskate, [deleted]
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Thu Aug 30, 2007 12:06 am |
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oldguy
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quote: Are you still "leveraging" all these rental properties for theoretical riches, or have you finally cashed in the chips?
I sold two houses right after I retired. But that doesn't disturb the SP500 investments, the mortgage money can stay invested undisturbed when you sell a house, so that money is still in place in the SP500.
quote: "leverage of rental properties has been a proven way of building wealth." Fair enough, but definitions please. Folks have come out on the winning hand of that black jack table; so is that a "proven way" of building wealth?
The difference between BJ and real estate is that real estate always recovers. Otherwise how could a $8000 house from 1950 be worth $250,000 today? Answer - it always goes up, there are many ups and downs but the trend is always upward.
Leverage. I refi'd a house in 2003 for 30 more years, that is the 4th mortgage that I've had on that house since 1980, so I owe a lot more on it now than it originally cost. And it has doubled in value again since 2003, so I now have about 60% ownership (way too much) so I'm thinking of another refi to take another 40% of the equity out. I'll be age 98 when I pay it off, shall I plan the party? LOL.
Risk. An important part of risk analysis is risk management, always have a fall-back plan and make certain that you always have a way to weather a down-turn (no ARMs, no balloon loans, nothing that can force yoiu to sell when you want to wait it out).
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Thu Aug 30, 2007 1:46 am |
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eaf
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I tend to agree with oldguy, but there definitely is an aspect of risk to refinancing over and over again, as you can very easily find yourself upside down in a loan if the housing market tanks out, or you could lose a bunch of capital in the stock market.
And I certainly would be a bit leery of a housing market that doubles in 4 years. Housing does come back, but it can be a slog sometimes. My parents bought a duplex in Anchorage in the mid 80's and watched it lose half its value in 2 years. By 2005, it was finally back to where it started. That's certainly not an amazingly quick recovery, and they were lucky enough to stay afloat and not have to sell the place, but it does speak for the volatility one can experience in housing markets. Granted, this is simply anecdotal evidence.
Likewise, the S&P isn't a sure thing. The 12-13% appreciation over the last 30 years is, by and large, an artifact of the incredible run-up we experienced in the 90's. I've crunched the numbers on stock market returns on the S&P 500 starting in the 50's and arriving in the present and the average 20 year return is between 7-8% not counting dividends.
However, there's nothing wrong with Oldguy's strategy--in fact, I think it is a good one, and I use it myself. Just need to make sure that the risks are on the table, as the Ultimate Cheapskate says.
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Thu Aug 30, 2007 1:40 pm |
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oldguy
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quote: I've crunched the numbers on stock market returns on the S&P 500 starting in the 50's and arriving in the present and the average 20 year return is between 7-8% not counting dividends.
eaf, love your state, we were there in July, the drive up the Highway is beautiful. Yes, the SP500 is not a sure thing, always some risk. Here is a site that makes it easy to check some 20, 25, 30 year blocks.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
quote: housing market that doubles in 4 years. Housing does come back, but it can be a slog sometimes. My parents bought a duplex in Anchorage in the mid 80's and watched it lose half its value in 2 years. By 2005, it was finally back to where it started.
Yes, that can happen. But the risk can be managed. If they had refi'd and removed the money and invested it in the SP500, the SP500 grew at about 15% for those 20 years, ie the money would have done a 10X. Some people have a great fear of being 'upside down', I don't see it as a problem, some of my houses have been upside down - just keep them rented, make the payments, and wait. In your parents case, the seed money taken from the duplex would have made way more money than the duplex itself.
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Thu Aug 30, 2007 2:45 pm |
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