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What none of you math whizzes seem to be considering is that if the house buyer pays cash for the house they will then have their annual income money to invest in addition to having the house.
What none of you math whizzes seem to be considering is that if the house buyer pays cash for the house they will then have their annual income money to invest in addition to having the house.
Yep. This is what I think too.
My situation is this-- I am in my 30s, no kids, about to inherit a several hundred thousand dollars in a trust and as a beneficiary of an IRA. Its enough to pay cash for a nice home where I currently live, but not enough to get an equivalent home in say DC or San Diego (places I currently considering transferring to). I work for the fed, so my income is steady no matter where in the country I may go.
I am not in a hurry to do this, but when I decide where I want to stick for a while I really do plan on using this money for a house and nothing else. Otherwise, it will just sit there. I have to take a minimum distribution on the IRA each year but that is it. The trust will be completely paid out once all of the assets are distributed from the estate. There is no waiting period and once the money is in my account, it is mine to do with whatever I want.
I am not interested in playing the stock market, but the financial planners who deal with the trust have done a great job with the investments and want to continue to handle them (of course). They also want to try and loan me money, which of course, only creates more business for themselves.
I understand the tax shelter POV, but yes, I will still have an income and a pretty decent one at that if I want to invest. What I don't have is a house. And while I pay rent equivalent to a mortgage, it would be fantastic not to have to worry about that expense every month.
If you can understand basic finance and have financial discipline to handle that money than there are many options for you, otherwise at least you have a paid off house and peace of mind. I have seen big inheritances evaporate in bad investments, shopping sprees and what not so do what seems right for your personality. Age old debates of cash vs loan, rent vs own, work vs buisness, cash vs credit and egg vs chicken will go on.
Do not buy a house.
The transaction cost of selling a house starts at 7% and goes up. Ours came in at 10%.
House transaction cost is a lot and not worth it if one is not ready to stay put for a while... unless you are lucky enough to buy at bottom and sell at peak.
My situation is this-- I am in my 30s, no kids, about to inherit a several hundred thousand dollars in a trust and as a beneficiary of an IRA. Its enough to pay cash for a nice home where I currently live, but not enough to get an equivalent home in say DC or San Diego (places I currently considering transferring to). I work for the fed, so my income is steady no matter where in the country I may go.
I am not in a hurry to do this, but when I decide where I want to stick for a while I really do plan on using this money for a house and nothing else. Otherwise, it will just sit there. I have to take a minimum distribution on the IRA each year but that is it. The trust will be completely paid out once all of the assets are distributed from the estate. There is no waiting period and once the money is in my account, it is mine to do with whatever I want.
I am not interested in playing the stock market, but the financial planners who deal with the trust have done a great job with the investments and want to continue to handle them (of course). They also want to try and loan me money, which of course, only creates more business for themselves.
I understand the tax shelter POV, but yes, I will still have an income and a pretty decent one at that if I want to invest. What I don't have is a house. And while I pay rent equivalent to a mortgage, it would be fantastic not to have to worry about that expense every month.
Yes, I am not planning to buy a house until I know WHERE. So for those who expressed concern, don't worry.
...if the house buyer pays cash for the house
they will then have their annual income money to invest in addition to having the house.
Conversely, if they are willing to park that big wad in one spot for a long time (20-30 years?)
a responsible long term growth investment is far more likely to produce a better return over that
time period... during which they can (and probably should) still be paying down a mortgage.
The only unexplored aspect is how large the inheritance is vs the price of the house.
If they can buy the house with up to 20% of that pool then sure, go for it.
But if not, then they should probably do the fixed low rate mortgage.
All of which still assumes they'll have enough income for the next 20 years to afford a mortgage.
Suppose the investment pays 1.4% (less than half of 2.875% mortgage rate). Then you will earn ~$80,000 in 15yrs.
According to your logic, one should only payoff the mortgage if the investment yields less than 1.4%.
The $80k interest paid number you calculated is the cash flow (CF) not the future value (FV) but your $200k earned is the FV. Bad analysis, if you are comparing these two.
I don't think so.
If I'm almost guaranteed to make more money by holding investments instead of sticking it all in one place (the house), how does it make any sense not to consider this?
Y'all act like home values never go down.
Frankly, I think a good mix would be the way to go.
If I'm almost guaranteed to make more money by holding investments instead of sticking it all in one place (the house).
Why do you assume that someone that is paying off the house is using "all" their money on the house? Maybe they are only using 20% of their money to pay off the house, and then use the other 80% of their lump sum money in other investments. Diversification is the name of the game.
I doubt anyone that pays off their home uses "all" their money.
I don't think so.
If I'm almost guaranteed to make more money by holding investments instead of sticking it all in one place (the house), how does it make any sense not to consider this?
Y'all act like home values never go down.
Frankly, I think a good mix would be the way to go.
That's a totally different argument. And I agree with this one.
My previous post was to argue that your original analysis of comparing CF with FV was misleading.
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OMG! Don't buy a house
