Cash or finance? (loan, credit, rate, finance)

[blademan]

Home buying: Which is best........finance or cash if one has the money?

[cdelena]

Depends upon your mindset and tax situation. Some people get peace of mind by not having a mortgage. If you have taxable income the mortgage interest deduction is quite valuable effectively providing a subsidy that can make you mortgage cheaper than the return you get on the money when invested. I chose to have a mortgage and use my capital elsewhere.

[ChipL]

Hell, I'd love to be mortgage-free

[tstone]

Hmm... sounds like the choices are:

Pay 9,000 a year in interest to save 1,500 in taxes.

Pay 0 a year in interest to save 0 in taxes.

The choice seems pretty obvious to me.

Remember that the standard deduction is raised every year, and as you pay off your mortgage, you pay less interest every year. Eventually you'll come to an equilibrium point where there will be no tax benefit to itemize.

You never win paying interest of any type to the bank.

[cdelena]

Originally Posted by tstone

Hmm... sounds like the choices are:

Pay 9,000 a year in interest to save 1,500 in taxes.

Pay 0 a year in interest to save 0 in taxes.

The choice seems pretty obvious to me.

Remember that the standard deduction is raised every year, and as you pay off your mortgage, you pay less interest every year. Eventually you'll come to an equilibrium point where there will be no tax benefit to itemize.

You never win paying interest of any type to the bank.

I think you have missed the point. If I am paying $9000 in interest I have over $200,000 to invest I would not have if I paid cash for the house. The earnings on that capital will cover the interest (especially since the deduction drives down the effective rate) and provides a positive return.

[Humanoid]

The earnings on that capital will cover the interest

If you're just an average Joe, its unlikely you are going to get more earnings after tax than the mortgage interest - tax savings. Also there is the issue of risk. The only risk free way to invest your money is in treasury bonds, but the yields on these will not cover your interest and provide a positive return. When you have debt paying it off is risk free also and it will net you a higher return, than the other risk free alternatives. The only way to get higher returns is to subject yourself to additional risk, needless to say if you tried this strategy today you'd be in the red.

[tstone]

I didn't miss the point. You are just assuming more risk than I would. By that I mean being paying interest. You're also assuming your other investments will appreciate fast enough to offset home appreciation + interest paid + capital gains taxes on that 200k. You can say a certain mutual fund might gain 15% long-term, but honestly the only thing guaranteed in the future is you'll be paying mortgage interest. Again, it boils down to philosophy - taking a risk. IMO, I'd rather eliminate debt and be comfortable w/o the banks expecting a payment. Debt is never a positive thing.

[Daddys///M3]

Originally Posted by tstone

Hmm... sounds like the choices are:

Pay 9,000 a year in interest to save 1,500 in taxes.

Pay 0 a year in interest to save 0 in taxes.

The choice seems pretty obvious to me.

Remember that the standard deduction is raised every year, and as you pay off your mortgage, you pay less interest every year. Eventually you'll come to an equilibrium point where there will be no tax benefit to itemize.

You never win paying interest of any type to the bank.

If you pay $9000 a year in interest, minus the $1500 you save on the taxes, your total outlay per year would be $7500. If you had $200K invested, and you earned an after tax return of 5%, you would see a net of $10K a year, or a total net of $2500 a year factoring in your interest outlay. 5% after tax return is extremely feasible. You are focusing too much on the tax break and not enough on the opportunity cost. The tax break is not the main reason people choose to mortgage a home when they have cash to pay it off. Many people with that kind of cash are financially savvy enough to invest their capital and earn a high enough rate of return that it offsets the interest paid on the mortgage substantially.

Also, let's look at this another way. Let's say that you bought your home with cash, leaving little capital reserves, and you lost your job or fell ill. What would you live on? Obviously noone wants to be house poor, but being cash poor is not a viable alternative, IMO.

[Rose Red]

[Also, let's look at this another way. Let's say that you bought your home with cash, leaving little capital reserves, and you lost your job or fell ill. What would you live on? Obviously noone wants to be house poor, but being cash poor is not a viable alternative, IMO.[/quote]

I don't know much about the tax laws and interest deduction. I have a simpler mindset.

I don't like to be cash poor either - we were in the same position pay cash or finance when we sold our house in CA and moved to TX. We chose to keep enough from the sale of our CA home (equal to one year salary) and use the rest to purchase a home. We chose to keep one year salary because my husband works and I stay home and raise our daughter.

Since our loan in relation to value on our new home was only 20% we got a equity line of credit and put the checks in the safe for just in case.

That was how we chose to handle it and it helps me sleep at night since there is only one breadwinner in the family.

I'm of the Suze Orman mindset - I don't like debt of any kind. I would prefer to have no mtg but everyone needs reserves.

[Daddys///M3]

^^^ And there is absolutely nothing wrong with that. It's just that others may have a different opinion, and it just so happens that many share the same opinion on this one. Of course every situation is different and leveraging and opportunity cost is not for everyone, but it does work for those that choose to make it work.