best approach - mortgage loan vs. paying cash? (insurance, interest rate, escrow)

[gonefishing4awhile]

Hi, I'm contemplating the advantages and disadvantages of taking out a mortgage loan. Since I've delayed my first home purchase for so long, I have enough savings at this point to buy a property outright by selling some investment stock.

I recall talking with an investment advisor/agent a few years back and she thought it would be best to take out a mortgage loan to take advantage of tax breaks and such. With all the turmoil in the financial/banking sector, I'm not so sure it wouldn't be less of headache and perhaps even better financially to simply pay for a property in full at purchase. How much that would lower closing costs (perhaps 30-50%?). A tangent thought - I hear that closing costs run 5-6%? Why would closing costs on a 200K house be twice as much as that on a 100K property? Seems like closing costs shouldn't fluctuate much no matter what the value of the property is.

Your thoughts? Thanks.

[captain_hug99]

The tax reduction you get for paying interest on your home doesn't offset the actual interest you pay. It isn't dollar for dollar. If you have the money, pay cash and put that money away.

[MrRational]

The question and reasons to do one vs another isn't that simplistic.

Assuming that you are still working and will be able to comfortably meet the mortgage obligation
out of your regular earnings for all or most of that period of time (a 10? 20? 30? year loan term)...
then the question may turn on what else you could do with that large lump of cash.

But rather than going through all the possible reasonings for doing X or Y or Z here...
I'll suggest that you go back to the financial planner or maybe even better to your regular CPA...
to talk it all out with someone who knows your financial situation even better than you do.

(and with far more detail than you should reveal on the internet to strangers)

hth

[Themanwithnoname]

Originally Posted by captain_hug99

The tax reduction you get for paying interest on your home doesn't offset the actual interest you pay. It isn't dollar for dollar. If you have the money, pay cash and put that money away.

This. Fire your 'Investment adviser'

Are you going to make more (AFTER taxes AND RISK) on an investment than your mortgage?

Sleep as sound?


I looked into a short term mortgage. Interest was so great I decided to go cash.

[Jkgourmet]

Before you buy any house, I'd suggest you do some reading about closing costs. SOME of the costs vary depending on the value of the house. For example, title insurance premiums are based on the price of the house. Taxes and homeowners insurance will be higher on a more expensive house; therefore, your prepays are higher.

With minor exceptions, Paying cash will only reduce closing costs IF you are getting a mortgage that includes an origination fee or points. If you shop around and do your homework, you should be able to avoid those expenses.

[Philbert]

Originally Posted by captain_hug99

The tax reduction you get for paying interest on your home doesn't offset the actual interest you pay. It isn't dollar for dollar. If you have the money, pay cash and put that money away.

the rate of return of putting more money down on the house (to the point of buying it outright) is equal to the net after-tax cost of the mortgage. with 30yr rates currently at around 4%, if for example, your marginal tax rate was 25%, you would earn 3% on your investment by paying cash, rather than putting "just" 20% down. (and "earn less" on a shorter-term mortgage with a lower rate)

what type of investment strategy do you currently have? (what type of investments would you have to sell to purchase the house?) if primarily equities, your expected long run return, after taxes, would likely exceed 3%, and you might opt to take the mortgage. if you are invested in US Treasuries, your expected long run yield would perhaps be less than 3%, and you might opt to pay cash.

most people have an investment strategy somewhere between 100% "risk free" (questionable these days...) and 100% equities, so the point about consulting with a financial planner, if you haven't already done so, to review your unique situation is a wise one. i would suggest looking for someone who operates on a fee for service basis.

[Philbert]

Originally Posted by Jkgourmet

Before you buy any house, I'd suggest you do some reading about closing costs. SOME of the costs vary depending on the value of the house. For example, title insurance premiums are based on the price of the house. Taxes and homeowners insurance will be higher on a more expensive house; therefore, your prepays are higher.

With minor exceptions, Paying cash will only reduce closing costs IF you are getting a mortgage that includes an origination fee or points. If you shop around and do your homework, you should be able to avoid those expenses.

right, you must first separate "lender expenses" that only come with involving a lender, and "transaction expenses" that are incurred in any tansfer of real estate. for the latter, each jurisdiction (city, county, state...) has different real estate transaction costs, and rules or customs as to which party pays what.

and regarding prepays, even if you get a mortgage, you can opt to waive escrows, especially if you'd be putting down 20%.

[jghorton]

I've been wrestling the same issue on a new house/condo purchase ... and (given current interest rates, ROI rates and tax write-offs) ultimately decided to simply pay cash ... and sleep better without worrying about the stock market, interest rates or a retirement-income-based mortgage.

With substantial equity and an excellent credit rating, we have no problem getting a low-interest, line-of-credit, should the need (or improved investment opportunity) arise.