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Old 12-23-2008, 12:19 PM
 
Location: Lebanon Heights
459 posts, read 363,507 times
Reputation: 238

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My long-term girlfriend and I are considering purchasing a home at the low end of our price range (about 100% of our combined yearly salaries).

We've been renting/saving since we got out of college and can afford to pay cash for this home. Morever, this amount would only be about 40 to 50 percent of our savings -- so we wouldn't necessarily be "betting the farm" on the home.

Should we consider paying cash -- even if we can get a mortgage below 5.5 (or perhaps even lower)? If we decide to pay cash, and later want to get a mortage (for example, if rates really drop in the coming months), will our mortage interest be deductible (we're concerned regarding whether this mortgage interest will be tax deductible, since it wouldn't technically be for the purchase of a home, and wouldn't be for home improvement, and we'd likely (conservatively) invest the money).

Any thoughts?
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Old 12-23-2008, 01:28 PM
 
Location: central, between Pepe's Tacos and Roberto's
2,086 posts, read 6,393,481 times
Reputation: 958
Quote:
Originally Posted by Doowlle34 View Post
My long-term girlfriend and I are considering purchasing a home at the low end of our price range (about 100% of our combined yearly salaries).

We've been renting/saving since we got out of college and can afford to pay cash for this home. Morever, this amount would only be about 40 to 50 percent of our savings -- so we wouldn't necessarily be "betting the farm" on the home.

Should we consider paying cash -- even if we can get a mortgage below 5.5 (or perhaps even lower)? If we decide to pay cash, and later want to get a mortage (for example, if rates really drop in the coming months), will our mortage interest be deductible (we're concerned regarding whether this mortgage interest will be tax deductible, since it wouldn't technically be for the purchase of a home, and wouldn't be for home improvement, and we'd likely (conservatively) invest the money).

Any thoughts?
You will get a better interest rate if you just use a mortgage to purchase the home rather than cash out later down the line. Mortgage interest is always tax deductible. Rates are in the very low 5% to high 4% range right now depending on credit, property type, location (declining market will see a hit in pricing), and loan to value. If you can invest your money and see a return greater than 5% (probably a tall order in this bear market) I would suggest getting a lower loan to value mortgage, perhaps 70% loan to value or so. However, the fact that you are not sure if you would even cash out at a later date makes the decision a bit more complicated. If you didn't plan on cashing out at all I would say that cash (especially if it does not wipe out your savings and your price point is conservative) is probably the better play.
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Old 12-23-2008, 01:41 PM
 
28,461 posts, read 76,075,824 times
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Nice position to be in.

Just pulling some hypotheticals together. You say the houses you are looking at are around 100% of combined annual income, so maybe $160-200K. You have a total cash position of about $300K.

The whole think for me would be TOTAL net potential for "growth" both in the house (rather unlikely in most markets for some time) VS growth in whatever vehicle those funds are currently invested. While taxes right now are low, they might not stay that way AND there are the potential property taxes and such that MIGHT not exceed you basic deduction so you'd need to analyze your potential deduction / itemizations.

The other thing that is a factor, is houses are VERY illiquid. If you lock in even 40% of your CASH it severely limits your opportunity for investment. Even those who do not foresee huge declines in real estate would almost certainly agree that other investment are likely to present greater opportunites for growth over almost any period...
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Old 12-25-2008, 10:07 PM
 
Location: Land of Free Johnson-Weld-2016
6,472 posts, read 14,835,094 times
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Please pay cash. You can't live in money. Banks are evil.
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Old 12-26-2008, 09:10 AM
 
28,461 posts, read 76,075,824 times
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Default Very helpful...

Quote:
Originally Posted by kinkytoes View Post
Please pay cash. You can't live in money. Banks are evil.

What other sectors of the economy are on your list of "evil"?

Do you happen to have a list of "non evil" sectors?
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Old 12-26-2008, 06:22 PM
 
3,269 posts, read 9,226,590 times
Reputation: 2020
Quote:
Originally Posted by kinkytoes View Post
Please pay cash. You can't live in money. Banks are evil.
Some of the worst / most paranoid advice I have ever read. Much better to have your money in your bank.

Do not pay cash when you can get such a low interest rate on a 30 year fixed. Put the lowest amount of cash down you can to avoid PMI. Keep your money in safe investments. With the interest write off, depending on your salary, you will be close to breaking even. When interest rates go up you will be making money each month. It's much better to play with the bank's money. If the SHTF you can walk away from your house and it's not your problem.

Google about the mega rich and why they keep mortgages when they could easily pay cash. It's a difficult concept to grasp - because there is an emotional draw to paying off your mortgage. I'm sure someone will come along after me and say there is nothing better than having your house paid for.....
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Old 12-26-2008, 06:27 PM
 
28,461 posts, read 76,075,824 times
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UKOK:

Rational people can type thousands of well reasoned arguments about total return, liquidity, tax consequences, opportunity cost, reserve funds and an infinite number of actual circumstances but the "Sky Is Falling" crowd won't have it. To them the world is black and white, you're either 100% behind their nutty rant or completely wrong...
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Old 12-26-2008, 07:53 PM
 
Location: Land of Free Johnson-Weld-2016
6,472 posts, read 14,835,094 times
Reputation: 6469
Quote:
Originally Posted by chet everett View Post
UKOK:

Rational people can type thousands of well reasoned arguments about total return, liquidity, tax consequences, opportunity cost, reserve funds and an infinite number of actual circumstances but the "Sky Is Falling" crowd won't have it. To them the world is black and white, you're either 100% behind their nutty rant or completely wrong...
(Gives indignant look)
Speechless!
Okay I have never been speechless Well, go ahead and get a mortgage, then. Sheesh.
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Old 12-26-2008, 08:40 PM
 
11,369 posts, read 46,998,707 times
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There's no doubt that many folks with business/investment smarts will be able to calculate the monetary advantage of having cash liquidity for investment purposes and a tax deductible mortgage rather than a paid-for house (within one's conservative financial means).

What's left out of that cold hard calculation is the satisfaction and peace of mind of owning your home. I don't know how you can put a "value" on that, except to say that for me it's been a totally liberating place to be.

Instead of looking at a substantial chunk of my monthly cash flow going to a major expense, I'm able to "play" at other business opportunities as they arise ... some months, I go without positive cash flow. But that's OK, because my costs of living are very low and I can hang on without worry. I've even paid off all of my investment properties, which gives me a lot of freedom in seeking out quality tenants and weathering the times when I've got a vacancy (which is rare, I've had some tenants for over 15 years at competitive market rates). Again, it's a peace of mind issue, not a strictly "dollars and cents" calculation.

I'm perfectly happy to go fishing, play around with my horses, take care of my livestock, work on farm infrastructure, or do nothing .... without the cash flow worry hanging over my checkbook every month. If there's a few dollars in investment potential I pass up every month because of this situation, so be it.

FWIW, most of the folks I know with substantial net worth don't carry mortgages. They pay cash for their houses (in the $2 to 25 mil range), cash for their boats, cash for their cars, cash for their aircraft (OK, we're talking the propeller set, not jets ...), and cash for their furnishings, art work, interior decorating, and discretionary travel. They have enough liquidity for their businesses and professions and investments that they don't need to aggravate themselves with every last possible deduction and investment scheme to make ends comfortably meet.
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Old 12-26-2008, 08:59 PM
 
3,269 posts, read 9,226,590 times
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Quote:
Originally Posted by sunsprit View Post
What's left out of that cold hard calculation is the satisfaction and peace of mind of owning your home. I don't know how you can put a "value" on that, except to say that for me it's been a totally liberating place to be.

.
Sun - I've never understood why people get better peace of mind out of having the house paid off vs having enough money in the bank to pay it off anytime they felt like it. I'm not arguing, just wondering. It always seems like having the money in the bank would give more peace of mind, no? I could pay my mortgage off tomorrow but there isn't a chance I'd do it. Maybe it's just less hassle not having to write the check each month?
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