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Whether it's a good idea to put the minimum amount down on a home purchase and finance the remainder for 30 years depends a great deal on the financial situation of the buyer. Some buyers have little or no choice in the matter, so it's either borrow money or continue to rent. Other buyers have more choices available to them.
Some buyers even have the choice of paying all cash for their house. For these buyers, it depends on what their risk tolerance is as to whether they pay all cash or finance part of it. I don't think there is any way of predicting with any certainty which is the better alternative because there is no way of predicting what the stock market or other investments are going to do.
For the past 10 years, the stock market has done rather well and interest rates have been fairly low, so it would have been better to finance a housing purchase and invest the rest of it in the stock market, but that is not true for every 10 year period. Some 10 year periods (such as 2000 to 2010) have actually resulted in a loss in the stock market. So if you borrowed money against your house in 2000 to invest in the stock market, you would not only be paying interest on the house loan (which is essentially lost money for most people), but you would also have lost money on your stock investment which makes it a double whammy.
So, is it a good idea to borrow money when you COULD pay cash for a house purchase? The answer is... it depends.
As a follow up to my post above, the question of "How much return do I need to make on my invested money to make it worthwhile to borrow money on my house?" is not as simple to answer as it may seem. Many people would think that if they borrowed money on a house at 3.5% and invested that money, then they would need to earn 3.5% on the invested money to break even. Unfortunately, that's wrong.
Most people will need to earn at least 30% higher return on their invested money than their borrowed money just to BREAK EVEN. That would mean you would need to earn at least 4.5% on your invested money year after year if you're paying 3.5% on your borrowed money. There are a couple of reasons for this.
First, about 90% of the taxpayers in this country take the Standard Deduction on their federal taxes. This means that they don't itemize their expenses which means that interest paid on loans is simply lost money. They'll pay the same tax rate as if they hadn't borrowed a dime.
Second, the invested money will be taxable. Some will be taxed at ordinary income rates and some may be taxed at long term capital gain rates. Also, this income will be taxed at the state level as well as the federal level for some (but not all) taxpayers.
So, for the average person, you'll need to earn at least 30% more on your investments than you pay on your borrowed money just to break even. If you're in a high income bracket and/or live in a state that has state income taxes on your investment income, you may need to earn 40% more on your investments than your borrowed money, just to break even.
So, don't let the stars get in your eyes when you contemplate all that money you're going to make by borrowing the max on your house for 30 years and investing it in the stock market. Yeah, if you're lucky, you might average (over the loooong haul) making a couple of percentage points more on your investments than you pay on your loan, but if you happen to hit a bad streak in the market, that house loan that looked so inviting might turn out to be more of a nightmare than a dream. Besides, I think that most people just sleep better at night knowing that home-sweet-home is paid for, and as long as they pay their taxes on it, no one can take it from them... and it's hard to put a price on that comforting feeling.
I have zero desire to pay my home off. If I could get a 99 year loan, I would. My investments earn 10%/yr easily, and the interest rate on my mortgage is 3.625%. Why on earth would I want to throw away $50k in investment income every year (assuming $850k home) just so that I can say that I'm debt free?
It's free money.
Quote:
Originally Posted by Chas863
As a follow up to my post above, the question of "How much return do I need to make on my invested money to make it worthwhile to borrow money on my house?" is not as simple to answer as it may seem. Many people would think that if they borrowed money on a house at 3.5% and invested that money, then they would need to earn 3.5% on the invested money to break even. Unfortunately, that's wrong.
Most people will need to earn at least 30% higher return on their invested money than their borrowed money just to BREAK EVEN. That would mean you would need to earn at least 4.5% on your invested money year after year if you're paying 3.5% on your borrowed money. There are a couple of reasons for this.
If you're only earning 4.5% on your investments, you're doing it wrong. And your point about paying income tax on the earnings- overstated. You only pay capital gains tax when you sell the investment, but if you die first, you pay no tax. I have no intention of ever paying tax on at least half of my accrued investment income, if not more.
Plus, again, 10% beats 3.625% even if you have to pay 15%/20% capital gains tax.
But this just highlights the difference in mindset between the "debt is good" and "debt is bad" camps. It's like arguing for a favorite color. Everyone has their own opinion. In my opinion, I prefer having more money. But some people prefer having no debt.
As a follow up to my post above, the question of "How much return do I need to make on my invested money to make it worthwhile to borrow money on my house?" is not as simple to answer as it may seem. Many people would think that if they borrowed money on a house at 3.5% and invested that money, then they would need to earn 3.5% on the invested money to break even. Unfortunately, that's wrong.
Most people will need to earn at least 30% higher return on their invested money than their borrowed money just to BREAK EVEN. That would mean you would need to earn at least 4.5% on your invested money year after year if you're paying 3.5% on your borrowed money. There are a couple of reasons for this.
First, about 90% of the taxpayers in this country take the Standard Deduction on their federal taxes. This means that they don't itemize their expenses which means that interest paid on loans is simply lost money. They'll pay the same tax rate as if they hadn't borrowed a dime.
Second, the invested money will be taxable. Some will be taxed at ordinary income rates and some may be taxed at long term capital gain rates. Also, this income will be taxed at the state level as well as the federal level for some (but not all) taxpayers.
So, for the average person, you'll need to earn at least 30% more on your investments than you pay on your borrowed money just to break even. If you're in a high income bracket and/or live in a state that has state income taxes on your investment income, you may need to earn 40% more on your investments than your borrowed money, just to break even.
So, don't let the stars get in your eyes when you contemplate all that money you're going to make by borrowing the max on your house for 30 years and investing it in the stock market. Yeah, if you're lucky, you might average (over the loooong haul) making a couple of percentage points more on your investments than you pay on your loan, but if you happen to hit a bad streak in the market, that house loan that looked so inviting might turn out to be more of a nightmare than a dream. Besides, I think that most people just sleep better at night knowing that home-sweet-home is paid for, and as long as they pay their taxes on it, no one can take it from them... and it's hard to put a price on that comforting feeling.
There are other factors too ...like I would not take mortgage vs invest if my choice was a balanced portfolio..
I would if it was a very high equity level .
Don’t forget deciding whether to take a mortgage and invest vs using your own money is a very different situation than just investing .
In effect you are borrowing money and using leverage to invest .....if one is using leverage you want to be rewarded for taking on EXTRA risk using borrowed money ...in down years not only are you down but you are paying thousands of dollars out in interest compounding that drop .
So if mortgages are 3-4% and a risk free ,govt bond is paying 2.50% you want a risk premium for using borrowed money .. I would want at least 3% over a risk free bond to take that risk with leverage ...that makes a balanced portfolio hardly worth doing with leverage to me
Doesn't matter. As long as the goal is to not pay rent nor mortgage when you retire.
This is an important consideration. Some suggest that carrying a mortgage in retirement is 'good use of one's capital,' (assuming that one will profitably invest these funds). But, in a sense, by NOT having a mortgage, one is paying the added interest cost and/or landlord profit, to themselves!
Even though I've got plenty of equity, like many, I simply don't want a mortgage payment hanging over my head in retirement.
This is an important consideration. Some suggest that carrying a mortgage in retirement is 'good use of one's capital,' (assuming that one will profitably invest these funds). But, in a sense, by NOT having a mortgage, one is paying the added interest cost and/or landlord profit, to themselves!
Even though I've got plenty of equity, like many, I simply don't want a mortgage payment hanging over my head in retirement.
That is a poor assumption... not only are you not getting the landlords profit but by consuming the house yourself it is costing you the rent you are not getting ....this is a silly premise .
The house costs you money — period , it is an expense and it brings in no additional income while you use it ..whether it cost more or less then renting is an individual issue . It merely effects cash flow as to better or worse than renting ....
Don’t forget millions live in apartment houses in cities ...rent can be cheaper than trying to maintain a single family home with real estate taxes and all expenses ..the economy of scale between an apartment house apartment and a single family home can be very different.
You can’t touch a single family home in our for under a million and that is a starter home ....we pay less in rent then the carrying costs of that single family home because there is such a difference in costs.
Consider the fact that by renting our money is not tied up in the house but generating loads of income we are considerably a head since it not only covers the rent but the bulk of our yearly living expenses ,while still growing itself.
So a house is an expense ..it does not generate any kind of income while you live in it.
It may improve cash flow if cheaper than renting but to think it is giving rent profits like an investment property is nonsense
Last edited by mathjak107; 01-30-2020 at 03:27 PM..
We put 20% down on our first house (30 year mortgage) and sold after 20 years. Our current house we paid cash for it and we plan to be here 20 years.
By the time 20 years is up we will be fully retired. My parents are already gone and by then hubby's parents will be too. He is an only child and yes, there will be a substantial inheritance. We'll sell and purchase, for cash, our final home.
When we all bought homes back in the 1970’s we paid about 35k here in Long Island .
That mortgage was crushing back then .
Today taxes are 9-12k a year on that house .
Well today those mortgages that we had are are gone but the amounts those mortgages were today won’t even cover the utilities on the house .
The best thing about a fixed mortgage is it gets cheaper over time .
The bad thing about it is , it represents less and less of costs over time .....
Today those paid off homes are really not affordable for those who thought a paid off home in retirement would be helpful ...it all depends how much all other costs rise in comparison
Last edited by mathjak107; 01-30-2020 at 04:00 PM..
I can understand people not staying in a house for long enough to pay it off. When people upgrade house or downgrade, one would assume they get assets from the sell of their previous house & that helps pay down the mortgage. With the upgrade they might have added another 5 -10 years of mortgage payment & ultimately when they downgrade they are mortgage free.
But it seems like people have no intention of being mortgage free regardless of whether they change house every 5 years or live in a house for 25 years. The comfort of being mortgage/rent free is not high on peoples list.
Why pay off a mortgage when rates are at historic lows and most working people earning a decent salary could use a write off while building their savings and liquid assets. Almost all mortgages do not have prepayment penalties so having the cash at your disposal is a great benefit.
Also, the average home ownership is around 13 years so having some liquid assets works in your favor when looking to relocate. There are some situations where owning a house outright might be an advantage and often works for retired people who are financially secure. Personally speaking, I’ve owned 5 homes and had a mortgage on all four that was never paid off (until sold) and they’ve all worked out very well financially.
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