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That's one opinion, but can hardly be called the "smartest" thing to do (from a financial standpoint)..
Is that what some broke finance professor taught you?
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Originally Posted by Joe461
How do you arrive at that conclusion?
If you hit hard times and your nest egg is tied up in your home, you are out of luck. Can't pay the outrageous property/school tax bill. Can't pay the electric bill. All your money is in the house and there is no "investment fund" to fall back on. You simply lose your house.
You lose the house and you lose everything you put into it and the roof over your head. Sounds like a smart plan to me! I don't sweat the repo man coming to pick up my car when I lose a job because I couldn't make the payments. We pay cash for our cars. My goal is to have a paid off mortgage as quickly as I can. Also mortgage and rent payments can eat your potential wealth very quickly. Your most powerful wealth building tool is your income. Why you would want to tie that up in interest payments is beyond me. In my scenario that money that you would have been paying on the mortgage could go into an investment fund or funds. So you have a paid for home and money going into investment funds. Sounds like a win win.
Quote:
Originally Posted by Joe461
In my example, cash is invested in tax free bonds. You earn interest tax free. Your principal is secure (we're taking AAA+ ratings, not crap). You have a very liquid asset to generate cash if you do hit those hard times. You can sell those bonds at any time with no tax penalty (you will pay cap gains tax if the bond increased in value, but that is only a percentage of your gain).
If you don't fall on hard times, you profit from the deal - effectively making money on the loan instead of paying. If you do fall on hard times, sell the investments and pay off the mortgage. You are exactly where you would be had you not taken the mortgage. Of course, you are still ahead of the game for all the time you had the mortgage.
In my scenario you would have been putting away your mortgage payment into an investment instead of paying interest to a bank. In your scenario you had to dip into that account which brings your investment down greatly.
Let's say you want to buy a $200K home. You have $200K to work with.
A.) You put 5% down and mortgage for 30 years. Since you so investment savvy you intend to carry out the loan for 30 years. You put your $190K into a bond fund with a 4% yield. Let's say life keeps happening and you are strapped so much that you can't really invest any other money.
B.) You put 100% down and buy the home outright. You put $10K a year in growth mutual funds averaging 8%. You put what would have been your mortgage payment into the investment funds.
10 Years go by and you run into a financial hardship. Your job market has dried up and you are faced with the possibility of losing your home. Jobs are hard to come by and the housing market has slowed dramatically. Interest rates are nearing 10%.
A.) Your bond fund had grown to $280K. You have already sent the bank over $68K in interest payments and you still owe $149K on the principle. You withdraw the money to pay the house off. Now you have paid $217K for a $200K home. It's now only worth $190K. You have 131K in your investment and your net worth is $321K.
B.) You buy the house outright for $200K and on your 40K income invest 15% plus your would be mortgage payment. That comes to around 16,000 per year. You invest that into a good growth mutual fund at 8 percent average return for 10 years. At the 10 year mark you have over $231K in your investment fund. Your net worth is right at $421K. Worse case even if you return 4% your net worth is still $382K.
Quote:
Originally Posted by Joe461
However, it is a mathematical fact that the smarter financial decision is to get the mortgage when that money can be invested at a greater return than the loan percentage. Of course, everyone has a different situation and this strategy may not work for everyone, hence why I suggested getting a good financial advisor.
Life doesn't work based off of mathematical formulas.
However, it is a mathematical fact that the smarter financial decision is to get the mortgage when that money can be invested at a greater return than the loan percentage. Of course, everyone has a different situation and this strategy may not work for everyone, hence why I suggested getting a good financial advisor.
"Mathematical fact" is a pointless statement in this context. If you actually knew the rate of return on an investment ahead of time, that would be different. But risk free investments have way, way lower returns than any mortgage rate. That's why they are risk free. Somebody is taking FDIC-insured deposits, lending them to people buying houses, and paying themselves on the difference.
The job market is unstable and seasonal in Alaska at best. We would rather just own something and not have any major worries, and we have always had money for our rent, there have been a few close calls because of the slow winter months and businesses cutting hours.
If you have the cash to purchase upfront, and it offers you peace of mind, then I would do so. Amortize a "loan" repayment to your investment fund, and pay yourself each month. Relieving the financial stress of seasonally variable employment status is not a bad thing to consider, and should you come up short on your repayment schedule during the lean months, you can make it up during the busier months, something that you cannot do with a rental or mortgage, and have to be more keenly aware of seasonal budgeting, a forecast of which may not be easy as it could change in a given year. You're buying a family home, and the primary purpose is to shelter your family, so it should not be considered an investment.
I agree that I'd try to find a spec new home because the builder will want to deal on that, especially with a cash purchaser. Some may or may not discount the price, depending upon the market and the season, and the builder, but you may get upgrades and other incentives that you would not get with a longer time-frame purchase that was contingent upon financing. The only one that could be better than a spec purchase is one that fell through during construction as the builder will want to get that house sold ASAP, since work is underway with no buyer lined up.
An experienced agent who deals with new homes would be a very good resource to engage during your search, even if you have to pay out of pocket for a buyer's agent, as the skills needed to negotiate for the extras, knowing if the house has been on the market for a while, and whether or not a contract fell through on a house are all things that the builder's representative will not tell you. Just be sure that you notify any new home communities that you visit on your own that you have an agent, and register the agent with the new home representative on the first visit, even if he/she is not there -- have a few of their cards and note your agent's name/number on the registration card. I know someone who looked at a community on their own, not realizing that their agent needed to be with them (preferably) or registered, and the builder would not accept a contract through her because she was not registered, and that began a fight for a commission, in which my friend actually paid out of pocket to hire her as a buyer's agent, but got no credit for a co-operative sale to pay for part of the commission, but it was worth it in the end because she helped them to negotiate a good overall package.
You do not need a credit report run or pre-qualification letter when making a cash offer. You need to have the funds in a liquid account, and have the bank write you a letter on letterhead, signed by an authorized officer, indicating the amounts that you have on deposit in said accounts to attach to your offer documents. A builder will see the liquid assets and a quick sale as a benefit, since it's a much less complicated transaction, and they can offer a fast settlement if the house is ready for occupancy. Depending upon how fast houses sell, you may need to go to the bank upon making an offer to secure the proof of funds to attach to your offer, but the agent can present the offer very strongly with documentation as the builder knows you are a serious buyer, not just testing the waters to see if they will budge on price or options/upgrades.
Owning your primary residence allows you to control your expenditures and in many situations that can give extra piece of mind, regardless as to the potential investment gains that could be made while leveraging the funds against a mortgage on the property. You could also suffer investment losses and still have to pay the same fixed payment, depending upon the degree of risk. Turning yourself into your own mortgagee, paying back the cost of the house on an amortized schedule to your own investment accounts may make much more sense, especially given the seasonal variances in your region.
Good luck with the house search!
__________________
All the world's a stage, and all the men and women merely players: they have their exits and their entrances; and one man in his time plays many parts, his acts being seven ages.
~William Shakespeare (As You Like It Act II, Scene VII)
My wife has decided it was time to stop renting apartments.
We have some money coming in sometime in January - March/2016 (unsure of exact date), and other than student loan debt with excellent interest and a few minor medical debts that will be taken cared of by that time, we are debt free. She has no credit and mine is trashed because of a hospital mishap that sent me to collections for never paying a bill that was never received. Even to this day that bill has never been delivered and they would not take payments without it. They can not even give me a number owed.
Anyways, we feel it would be best to purchase our first house with cash. We are looking at some new constructions and are curious about the process with offering cash.
Is it smart? Not like we have any other choice.
How do you make the offer?
How long does it take to finish all paperwork on a cash offer?
Can you get a better deal because of cash and how much you pay under the asking price? Any particular percentages?
Anything else we should know?
What are your ages? What is your income? How solid are your jobs? What cost homes interest you?
Paying cash is not always a wise investment. Young, good income, soild jobs, etc. says to me get a mortgage and invest the cash elsewhere.
What are your ages? What is your income? How solid are your jobs? What cost homes interest you?
Paying cash is not always a wise investment. Young, good income, soild jobs, etc. says to me get a mortgage and invest the cash elsewhere.
I am 32 and she is 26 with a host of medical problems form an auto accident. She has another couple years to recover (major operations). I've been playing stay at home father and husband while she recovers because she can not be left alone due to seizures and unable to lift the children while she heals.
My education will grant a six-figure job within the next 2 years. I have three semester left, can probably get it down to two semesters if i take some summer classes. The hire rate is 100% within one year of graduation . Most students were hired by BP last semester at $120k each; however, this does not help us 'now'.
My wife will graduate in 18 months as well with a degree in the medical field. Pays about $48k to start and our friend is a Doctor who is getting his own office, both him and his wife want to hire my wife. They know about her seizures and are more than willing to work and watch over her.
The money we are coming into is from investments my grandfather left me when he passes. I can reinvest them or use the cash. Considering our situation and having been kicked out of an apartment because our son is rambunctious, we both feel it would be a wise investment to purchase a home flat out and not worry about a monthly payment.
If you buy, just don't go overboard on the purchase. Having inherited cash could lure you into buying more than you really need.
Want something simple, but overly large. Looking for an open floor plan with vaulted ceilings, and wife wants walk-in closet with a decent size bathroom that has a jetted tube with good natural lighting and a walk-in shower.
We have found a few places around here for less than 180k that matches this criteria, however, location is the issue with most of these homes being out of town. While we love living in the country and currently have an apartment located 8 miles outside town. Due to her seizures and not having a driver license currently, she has been stranded more often than not. Every time she has a seizure her time restarts to get her driving privileges returned. There is a 6-month period one has to wait after having a documented seizure.
Therefore, she wants something in town just in case she looses her license again she will be able to do things with our kids and have more independence without relying on someone driving her and the kids around.
Trust me, I would love to gift my wife a nice house. She really deserves it, but cleaning a large house would be more work for her than it is worth.
We are currently living in a two bedroom 650 sq/ft apartment and the kids go ballistic without much room to play on bad weather days.
Currently we think something in the 1200-2200 sq/ft range is ideal. Most homes on the large end of that scale have finished basement with roughly half that of topside livable space.
What are your ages? What is your income? How solid are your jobs? What cost homes interest you?
Paying cash is not always a wise investment. Young, good income, soild jobs, etc. says to me get a mortgage and invest the cash elsewhere.
Paying cash for a home is always wise choice. A primary residence is should never be treated like a mutual fund investment. For starters it assures you that the money will not be spent or lost on something else. Secondly you free up that income to do other things such as invest and handle emergencies that pop up. Let's say you have $200K to play with. You put the $200K into a house. Your net worth is $200K. On the flip side you sack away the $200K in a mutual fund and take out a $200K mortgage. Your net worth is ZERO. Borrowing money to invest is NEVER a wise decision. If that mutual fund tanks you lose money and have NOTHING to show for it. However on the flip side the house you bought with cash is still the same house even when the value drops. You could turn that house into a rental property if you wanted to and have it generate income to compensate for the financial loss. Income is your greatest wealth building tool. Why anyone would purposefully tie that up when they don't have to is beyond me.
I am 32 and she is 26 with a host of medical problems form an auto accident. She has another couple years to recover (major operations). I've been playing stay at home father and husband while she recovers because she can not be left alone due to seizures and unable to lift the children while she heals.
My education will grant a six-figure job within the next 2 years. I have three semester left, can probably get it down to two semesters if i take some summer classes. The hire rate is 100% within one year of graduation . Most students were hired by BP last semester at $120k each; however, this does not help us 'now'.
My wife will graduate in 18 months as well with a degree in the medical field. Pays about $48k to start and our friend is a Doctor who is getting his own office, both him and his wife want to hire my wife. They know about her seizures and are more than willing to work and watch over her.
The money we are coming into is from investments my grandfather left me when he passes. I can reinvest them or use the cash. Considering our situation and having been kicked out of an apartment because our son is rambunctious, we both feel it would be a wise investment to purchase a home flat out and not worry about a monthly payment.
Just remember ability to buy is not the same as ability to afford. I would buy based on your income level now and not what you might be making in the future. If you can pay cash do it. You will still need to do maintenance and pay the utilities, taxes and insurance. Far too many people that come into a windfall of money end up buy way more house than they can actually afford and end up losing it. BTW I think it's awesome that you had a grandfather with such insight and wisdom to do something for his family.
Paying cash for a home is always wise choice. A primary residence is should never be treated like a mutual fund investment. For starters it assures you that the money will not be spent or lost on something else. Secondly you free up that income to do other things such as invest and handle emergencies that pop up. Let's say you have $200K to play with. You put the $200K into a house. Your net worth is $200K. On the flip side you sack away the $200K in a mutual fund and take out a $200K mortgage. Your net worth is ZERO. Borrowing money to invest is NEVER a wise decision. If that mutual fund tanks you lose money and have NOTHING to show for it. However on the flip side the house you bought with cash is still the same house even when the value drops. You could turn that house into a rental property if you wanted to and have it generate income to compensate for the financial loss. Income is your greatest wealth building tool. Why anyone would purposefully tie that up when they don't have to is beyond me.
No. In order to get a mortgage for $200,000, the house would be worth more than $200,000. So, he would have a $200K mutual fund plus a house worth over $200,000. Buying a house with a mortgage does not reduce someones net worth.
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I don't sweat the repo man coming to pick up my car when I lose a job because I couldn't make the payments. We pay cash for our cars. My goal is to have a paid off mortgage as quickly as I can. Also mortgage and rent payments can eat your potential wealth very quickly. Your most powerful wealth building tool is your income. Why you would want to tie that up in interest payments is beyond me. In my scenario that money that you would have been paying on the mortgage could go into an investment fund or funds. So you have a paid for home and money going into investment funds. Sounds like a win win. 
