I think a mortgage is the least effective way of buying a house, Keep in mind, I am just your average Joe, I am not that smart, I have no finance or business background and that is why I want to read what you guys think. But my reason to believe that a mortgage is the least effective way of buying a house is because I am noticing that in a $300,000 mortgage over 30 years at 4% interest rate, I will pay around $100,000 the first five years.
I feel that people buying this $300,000 home end up paying for two or three houses over the lifetime of the mortgage, I would be inclined to buy the home in cash.
However, many people argue that having a mortgage has its benefits of tax deductions and/or write offs. And even argue that is better to invest the cash rather that paying off a home to avoid a mortgage.

My question to you guys, which one do you think is more beneficial? Paying the home in cash to avoid a mortgage or investing that cash somewhere else?

Do you, or most normal people have $300,000 available to pay cash for the house? If not, it's not even a question. But if you do...

What is the effective interest rate for the mortgage, given it's tax deductability? This will be lower the higher tax rate the buyer has.

What return can you get on the cash if you don't put it into the house? Look at the article below:

http://www.businessinsider.com...ns-impressive-2016-5

It shows the annualized 30 year S&P 500 return for each starting year. They are mostly over 10%, sometimes significantly. So if you're paying 4% - the tax deduction on your money, you're getting a good return. Now, could you get drop kicked, especially over short periods, definitely. But most likely now, especially if you invest long term.

So, in short, no, it is NOT better to buy the house for cash.

Often wondered that myself. Thinking both ways on the next home.

I know I sleep VERY WELL knowing I DON'T have a mortgage.

What is the rate on a mortgage now?

What can you earn on the money, with decent security? What about risk?

Remember, investments come and go, debt is forever.

Cash is the best way to buy a house but as indicated - do you have $300K burning a hole in your pocket book?

The next best way is to mortgage the home and pay an extra $100 per month.

It depends on the alternative investment....
Are you going to earn 10%, 4%, or 1%?
It also depends on the actual value, to you, of the tax deduction... which depends on how much you can deduct (must itemize) and what your tax bracket is.
Another factor is leaving yourself with some liquidity. Don't sink all of your cash into the house.

quote:

Originally posted by BBMW:
Do you, or most normal people have $300,000 available to pay cash for the house? If not, it's not even a question. But if you do...

What is the effective interest rate for the mortgage, given it's tax deductability? This will be lower the higher tax rate the buyer has.

What return can you get on the cash if you don't put it into the house? Look at the article below:

http://www.businessinsider.com...ns-impressive-2016-5

It shows the annualized 30 year S&P 500 return for each starting year. They are mostly over 10%, sometimes significantly. So if you're paying 4% - the tax deduction on your money, you're getting a good return. Now, could you get drop kicked, especially over short periods, definitely. But most likely now, especially if you invest long term.

So, in short, no, it is NOT better to buy the house for cash.

A couple of observations.

More money has been lost trying to take advantage of tax benefits than almost all other causes.

How do you get the exact return of the S&P? At what risk? Some years the S&A return has been negative. See the list found at Berkshire Hathaway annual report.

I Refinanced last year and got a 30 fixed at pretty close to the bottom and got 3.1%, 0 poinnts. The tax break which gets me Into the 2’s in my mortgage and paying back a fixed rate with ever cheaper worthless dollars which gets me into the very low 2’s and possible 1’s on my mortgage is why I use debt. Even if I toss an extra 100$ a month at my mortgage the opportunity risk for something much better in the market is too great for me. Especially in a year like 2017 in the stock market. Even If I keep that 100$ in my cash bank account and earn 1.25% before tax, it’s probly not quite a wash but knowing I can get that $100 any time is a better emotional value to me than crawling to my banker and saying hey I need some cash out of my house but guess what I just got laid off or whatever at a time that rates may not be as favorable . And him laughing and saying yeah so what, pay up on the 1st or else.

Every situation is unique but most people can use some form of debt as a financial tool. Just needs to be used carefully like all tools and not misused.

too many variables involved in the decision. Are you keeping the house forever or will you move again? If you'll move what if the housing market crashes and your 300k home is worth 150k. Now your stuck or you cut your losses. It all depends.

I'd be inclined to not spend 300k on a house where you one uses maybe 3 rooms tops 95% of the time.

A wise old man said to me once "Always collect interest, never pay interest".

Remember, that the one who asked the question still has to live someplace. That must also be taken into the equation.

Perhaps it was and I just didn't see it.

I don’t remember if it was Rockefeller, Carnegie, or another of those guys who said, “The difference between rich people and poor people is the direction of the compounding of the interest.” There is also tremendous peace of mind value to not having a monthly nut.

If you are in a high federal tax bracket and live in a high tax state, (at least until the rules change) you might get “the government” to pay up to 50% of your interest. That’s great, but you are still paying the other 50%.

Many folks have made lots of money in real estate using leverage. Many folks have also gotten crushed by leverage when the market turned and they ended up being overextended.

If you have the funds on hand to pay cash then you get to weigh the pros and cons. Not owing anyone anything makes sleeping well pretty easy, but doing that gives up the advantage (and the pitfalls) of leverage.

I’m not sure I believe that more money has been lost on trying to take advantage of tax benefits, but I know from personal experience that while one should consider tax efficiency, one should not let tax considerations drive the investment decision.

Kinda related, here in the workers paradise we pay property tax 2x a year once in November ( late in December ) and once In February ( late in April). So I just paid my 1st installment of the 2017-2018 fiscal year property taxes to my county. It looks like this tax law bill will pass and will change the deductions. so I emailed my CPA today and asked if I should pay my next tax installment in December 2017 to get it under the wire and deduct it this tax year vs n cut under worse rules. He replied that in his opinion it would be better for me (taxwise) for 2017 to pay that tax now vs paying in 2018.

So now I have decide if I loathe paying taxes 3 months early more than I hate likely paying more taxes in April 2019 as a result of the new 2018 law. What to do. The amount of property tax i owe won’t change. So that’s a bill that has to be paid. The 2018 feeeral taxes can be played with as more is learned about the new tax bill.

quote:

Originally posted by JALLEN:
What is the rate on a mortgage now?

What can you earn on the money, with decent security? What about risk?

Remember, investments come and go, debt is forever.

One example (your mileage may vary), a neighbor was a financial planner, rented his house and invested all of his money, encouraged me to borrow all the equity in my home possible, invest the proceeds with him, I would come out ahead. I have owned my home for ~33 years, paid off the mortgage 15 years ago, it is worth now about 10X what I paid for it. My neighbor went bankrupt.

Debt is a tool, in much the same way fire is a tool. Fire can be very useful when used properly and carefully. It can also burn you badly if you're stupid with it.

Download some Dave Ramsey podcasts to get the enhanced story.

Some highlights:
The only people who get foreclosed on are those with a mortgage.
People who say mortgage your house to the hilt and invest, never talk about risk. What if the housing market crashes, what if the market tanks, what if you lose your job, what if you are medically disabled? There are hundreds of things that can go wrong. If your house is paid for and all you have to cover is utilities, it's much easier to pay bills until you recover.

Now for the numbers:
If you get a 300,000 dollar mortgage at 30 yrs @3.5 percent you will pay 10,391 dollars the first year in interest. If you make 100K and are in the 25 percent tax bracket, you pay 25k in taxes. If you deduct your house interest you will pay taxes on 90k, or 22,500 dollars. So you will send the bank 10k in order to save 2500 from the govt. Doesn't make sense, and that doesn't even account for risk. These are simple numbers.

The best thing you can do is pay cash for a house. The next best thing is to put down the maximum down payment and get the shortest loan you can afford. 10yr/15yr/20yrs. If you wanna stay in debted to the man for the rest of your life, put no money down on a 30 or longer year mortgage.
Take a look at www.dinkytown.net and run the amortization schedules for 30/20 and 15 year mortgages. It is shocking how little you pay to principle on the longer mortgages.

I'm somewhat confused. If you can buy the house with cash then you can do the match on your actual loan interest rate (net of the tax deduction (soon ending)) versus your investment return. All really simple from a financial calculation perspective. But of course you have to also include future guesses over 30 years...appreciation on the property, tax policy, investment returns, holding costs etc.
If you have 300K cash for a house then this is all not relevant. If you don't then its also not relevant.
What's the point.

It depends, but you are right, you pay most all of your interest in the first half of the mortgage. Yes, you get a tax break but it depends what tax bracket and only 25% of the interest you pay I believe.

I paid cash for my house. It's amazing how quickly you could save up $300k again when you have no mortgage payment to worry about. Same if you lose a job. Also where I live you pay an extra 5% in closing costs when you buy a house with a mortgage, so add that into the price. You could lose your shirt tomorrow in the stock market, but a house you paid cash for with the same money you'll always have.

I agree with JeffJET EXCEPT for the mortgage advice. If you have to get a mortgage, get a 30 year mortgage (instead of the shortest) and pay as much extra as you can afford. Why, because if you do lose your job or have a temporary upset, the lower mortgage payment you HAVE to pay might be the difference between losing your house or not until you get back on your feet. Kinda hard to refinance your house if you lost your job or are in the hospital.

Really? Try not paying your property taxes and see how long you keep the house.

quote:

Originally posted by jeffxjet:

The only people who get foreclosed on are those with a mortgage.

Your analysis presupposes that the buyer has $300K to buy the house. If true, you ignoring the opportunity cost of tying up the money. If false, they're not buying the house.

quote:

Now for the numbers:
If you get a 300,000 dollar mortgage at 30 yrs @3.5 percent you will pay 10,391 dollars the first year in interest. If you make 100K and are in the 25 percent tax bracket, you pay 25k in taxes. If you deduct your house interest you will pay taxes on 90k, or 22,500 dollars. So you will send the bank 10k in order to save 2500 from the govt. Doesn't make sense, and that doesn't even account for risk. These are simple numbers.

To say this is always true is idiotic (which, BTW, buying/borrowing stupidly is also)

I bought by current home 20 years ago. I took out a mortgage, but not a huge one. I took an ARM (Gasp!) and a 30 year amortization (Gasp again) to keep the payment down. I did not have the cash at the time to buy it outright. Now it's twenty years later, I still pay the mortgage, which has been refied down twice to 3.25%. The property is worth more than three times what I paid for it, and has been my best investment. And I live in the most expensive locality in the country. If I hadn't bought when I did, I likely would have been forced out of here long ago (okay, that might not have been the worst thing in the world for other reasons, but at least I had the choice.)

Which brings up the next issue. If someone doesn't buy with a mortgage, they're likely renting. So they're then likely paying more for the equivalent property than if they bought it. And, of course, they're likely paying down someone else's mortgage.

quote:

The best thing you can do is pay cash for a house. The next best thing is to put down the maximum down payment and get the shortest loan you can afford. 10yr/15yr/20yrs. If you wanna stay in debted to the man for the rest of your life, put no money down on a 30 or longer year mortgage.
Take a look at www.dinkytown.net and run the amortization schedules for 30/20 and 15 year mortgages. It is shocking how little you pay to principle on the longer mortgages.

Given the option, I would buy a house all at once instead of placing all the money in the market (forget dollar cost averaging too).

Don't really care how the market changes, or perceived 'savings' in taxes, house is yours and the peace of mind is worth it.

After the house is done, max out all retirement.

--K