Cash or mortgage? (fit in, credit card, loan)

[CaroleF]

If a buyer can afford to pay cash for a home , it sounds like that would be better than taking out a mortgage because the house would be yours and you wouldn't have a monthly mortgage payment, which would just be the interest on the loan anyway.

Can any of you knowledgeable souls out there explain why a mortgage would be better? What does it mean to be able to claim your interest on your tax return? How much do you get back?

[ewhiz123]

Everyone's situation is unique, but at the core I would say the main factor is what kind of return can you get on your cash if it's working for you as opposed to using it to pay your mortgage?

So say you are paying 5% on your mortgage, but you can deduct the interest on your mortgage if you itemize and therefore the effective rate is less than 5%.. lets say 4% for arguments sake.

Can you make more than 4% on your cash without taking excessive risk? If not, you can make an argument to pay cash. If you can, then it would be better to have the mortgage and employ your cash in some other endeavors.

Assuming you aren't dipping into your emergency savings, I personally like having a house free and clear. For me it's a intangible benefit in my mind knowing it's paid off.

[cheryjohns]

Originally Posted by CaroleF

If a buyer can afford to pay cash for a home , it sounds like that would be better than taking out a mortgage because the house would be yours and you wouldn't have a monthly mortgage payment, which would just be the interest on the loan anyway.

Can any of you knowledgeable souls out there explain why a mortgage would be better? What does it mean to be able to claim your interest on your tax return? How much do you get back?

Situations differ from person to person. Do you have a financial advisor? If so, they know your personal situation and can show advantages vs. disadvantages on paper. Interest rates are very low right now - so bear that in mind.

[SteveArmy]

I'm no investment guru when it comes to purchases I'd do maximum comfy downpayment, short(er) term and pay the principal along the way. Looking at how my 401k is performing I think I'm not ready for that kind of investment, I dont really see the "~8% growth" people are taking about.
on a side note, I was going to dump $40k into my principal early this year but for some reason the bank only takes $5k at a time. bastards stole my thunder

[City Love]

Originally Posted by ewhiz123

Everyone's situation is unique, but at the core I would say the main factor is what kind of return can you get on your cash if it's working for you as opposed to using it to pay your mortgage?

So say you are paying 5% on your mortgage, but you can deduct the interest on your mortgage if you itemize and therefore the effective rate is less than 5%.. lets say 4% for arguments sake.

Can you make more than 4% on your cash without taking excessive risk? If not, you can make an argument to pay cash. If you can, then it would be better to have the mortgage and employ your cash in some other endeavors.

Assuming you aren't dipping into your emergency savings, I personally like having a house free and clear. For me it's a intangible benefit in my mind knowing it's paid off.

I was going to chime in to say this. But this is pretty much right on.

If you were to get a mortgage on your home, would you invest the rest? Or would you just leave it in the bank for a rainy day?

Regardless, if you were NOT going to invest it, I think it would be a good idea to put a nice downpayment and save the rest. It's always good to have liquid funds for an emergency. Maybe you could put down 50%.

[Texascrude]

Originally Posted by ewhiz123

Everyone's situation is unique, but at the core I would say the main factor is what kind of return can you get on your cash if it's working for you as opposed to using it to pay your mortgage?

So say you are paying 5% on your mortgage, but you can deduct the interest on your mortgage if you itemize and therefore the effective rate is less than 5%.. lets say 4% for arguments sake.

Can you make more than 4% on your cash without taking excessive risk? If not, you can make an argument to pay cash. If you can, then it would be better to have the mortgage and employ your cash in some other endeavors.

Assuming you aren't dipping into your emergency savings, I personally like having a house free and clear. For me it's a intangible benefit in my mind knowing it's paid off.

That's about as good a description as you'll get. The benefit of having a mortgage is that it is the cheapest money you can possibly borrow. To put it in perspective, credit cards often charge 20%+ to loan you money... after tax deductions your mortgage will be under 4%.

Although I could probably earn more money investing it in the market, as a previous poster said, I'd pay off my mortgage as soon as possible. I prefer the security of knowing, "No matter what happens, I have a house to live in". Even so, you'll find people with millions in the bank taking out mortgages, simply because it's cheap money to borrow.

[EasilyAmused]

It depends on your personal comfort, and the location of the property, and if it's a second home or only home.

We are in such flux right now, I couldn't imagine paying all cash for a satellite burb home. I agree with a larger down payment. In an established area, with a several decades long reputation of resale, I think it's a more secure situation. Having a home free and clear, without threat of a major property value collapse gives great piece of mind.

PS-Second homes should always be cash, it's a toy.

[CaroleF]

Originally Posted by cheryjohns

Situations differ from person to person. Do you have a financial advisor? If so, they know your personal situation and can show advantages vs. disadvantages on paper. Interest rates are very low right now - so bear that in mind.

I only have someone who does my taxes. Maybe I need a financial advisor. Does anyone have a recommendation?

Plus how much emergency funds should one have?

[EasilyAmused]

Originally Posted by CaroleF

I only have someone who does my taxes. Maybe I need a financial advisor. Does anyone have a recommendation?

Plus how much emergency funds should one have?

That again is personal. But I always suggest a years salary as a starting point.

[chris_ut]

Emergency Fund: 3 months at a minimum, 6 months is recommended and 1 year if you can really afford it.

As to cash or not the above posters have pretty much covered the criteria: Is there a better use I can put this money to that will get me a better return than what the interest will cost me.