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We are moving from Europe (US/UK couple) and purchasing a home in Scottsdale and fortunate enough to be able to do so in cash. However, we've been advised by one real estate agent that this may not necessarily be a good idea and that there are significant tax advantages taking a mortgage (not sure I understood correctly but he indicated that up to 417K we could could write off any interest paid). Is this correct? Can someone point me to where I can find the definitive info or advice on this?
Speak with a financial adviser. I'm a Realtor, and can tell you that a real estate license does not qualify one to provide financial advice.
This is tax season so getting an appointment with a good tax accountant or financial adviser to discuss this issue for an hour, may be difficult, it is what you should do.
Paying cash does have the advantage of usually being able to negotiate a better deal than if getting a mortgage.
One option would be to go ahead and pay cash; then if a tax adviser says it's better to have a mortgage, then go and take out a mortgage on the home.
If you take out a mortgage (get a loan), you can deduct the interest from taxes you owe.
Example, you take out a loan and during the year you pay $12,000 in interest. And lets say you made $50,000 that year too.
Well, you effectively can subtract $12,000 from $50,000 and get $38,000. $38,000 would be taxable, not $50,000.
That is what your agent is telling you. However, you will be paying $12,000 as interest money instead of not having to pay any money by buying the house outright with cash. But paying the house out-right means you don't have that cash in you hands.
It all depends on your financial situation whether to pay all cash or take out a mortgage.
Just rememeber taking out a mortgage still involves paying 2.5%-5% interest.
Interest on a 300-400k loan still involves $800-1400 a month in interest payments. Even with the 25-35% tax deduction. You can still paying $500-1000 a month out of pocket in interest.
My advice. (an this depends how conservative or aggressive your financial portfolio is).
If you are self employed. You should set aside anywhere between 12-18 months cash savings. Thats cash. Not investments. Not retirement. Cash.
Your months expenses including rents, mortgage, insurance for health, auto, disability, life etc, gas, electricity, food.
If you are W2 than you should have anywhere between 6-12 months cash savings set aside.
Than factor in "opportunity costs". Your home investment is very ill liquid. Once money is put into the home it's hard to realize any gains until selling as opposed to reinvesting that same money into bonds or dividend yielding stocks.
So the real question is. How much cash do you have sitting around? And how much does the new home cost?
Let's say new home costs $500k. You have $800k liquid cash/investments sitting around around. You could liquidate half you investments and some of your cash. To pay entire home off with cash. That may deplete you cash savings to say $200k and your investments to $100k.
Would you feel comfortable with that?
Or you could feel that instead of paying $500k cash you could put down $100k and take out $400k mortgage.
You could take that $400k and use it in "safer but still assume risks" dividend yielding stocks like Verizon or AT&T that pays out 5-5.5% dividend. But remember those stocks still have risk. Verizon stock has floated between $32-40 while AT&T has floated between $26-31 the past 12 months.
But 5-5.5% dividen paying stocks still beats the 3-4% interest you pay for your mortgage should you elect to go with mortgage.
So there is no easy answer.
Most important is do what you feel is comfortable for your family.
We are moving from Europe (US/UK couple) and purchasing a home in Scottsdale and fortunate enough to be able to do so in cash. However, we've been advised by one real estate agent that this may not necessarily be a good idea and that there are significant tax advantages taking a mortgage (not sure I understood correctly but he indicated that up to 417K we could could write off any interest paid). Is this correct? Can someone point me to where I can find the definitive info or advice on this?
Thanks in advance...
Well you won't be able write off 100% of the interest so that advice doesn't hold water. It's like burning a 10 dollar bill so the government can give you back 3 ones. Does that sound like a deal?
A better way to think about it is to consider whether you can earn a higher rate of return on that money compared to your mortgage rate.
Well you won't be able write off 100% of the interest so that advice doesn't hold water. It's like burning a 10 dollar bill so the government can give you back 3 ones. Does that sound like a deal?
A better way to think about it is to consider whether you can earn a higher rate of return on that money compared to your mortgage rate.
The issue is nothing guarantees a rate of return. Many "safe" bonds may be in trouble especially munipical bonds.
The fed has kept interest rates low to encourage borrowing and spending.
It all depends on the OP's risk tolerance.
Even a safe REIT (paying 7% yield) fund I invested in now has closed off funds to new investors. Now I find out they cut it to 5% and closed off redemptions indefinitely. Which means fund is in big trouble cause i can't get my money out right now.
It's not either/ or. Consider a sizable downpayment and keeping a sizable cash reserve. This gives you nearly as strong a position when making offers as cash. (Assuming that you will be working in the US) consider that continued employment here is a good bit less certain than it typically is in Europe.
I'm no financial or tax expert but for me the benefit (mentally and financially) of not having a mortgage far outweighs any tax benefit I could gain by getting a mortgage.
I suggest you put 50% towards your down payment. The other 50% invest in a conservative mutual fund. Your age is going to determine who aggressive the fund is. Figure at least 3 to 6 months keeping money close to you, then work on a retirement portfolio for your future.
On the issue of driving your credit report. Here in America, when it comes to anything financial, a persons credit report is reviewed. It is simple to understand that a lower credit score, that individual will be charge more, compare to a person with a high credit score being card less.
If you pay off everything - there is nothing driving your credit report, after which a short period the rating becomes "N/A" - no activity. By having regular payments on a mortgage, this is an installment type of debt. This is the best kind, if fact sending extra with an intallment payment towards to priciple. This is something you can do to manipulate your credit score very high.
G.L.
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