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| I believe in the principle of Due Process  |
This neglects use of the property which is valuable and risk of loss with investing the money that you have instead of no mortgage. If you have none, there is no choice. If you can, you buy the house with a big mortgage, make payments in lieu of rent. If you can, you chose to pay cash, and the cost of use is its rental value. Maybe you save what the rent would be, keep it in a savings account for liquidity. If you chose to mortgage, you occupy it, make the payments and invest your cash in something to earn something with it. The risk is what may happen with that investment. I had wealthy customers who invested in real estate mortgages for decades, earning anywhere from 10 to 15% in those years. Several dozen had quite a few millions each in these mortgages, secured by California real estate. When the music stopped in ~2006 or so, they began to lose. Some lost everything, sold their houses and moved in with their kids. One, an older fellow near 90 who at one point had about $20 million in these loans, was moved into an old folks home where he cried himself to sleep every night. I have kind of a PTSD about risk sometimes. It happens. Luckily, I have enough willpower to control the driving ambition that rages within me. When you had the votes, we did things your way. Now, we have the votes and you will be doing things our way. This lesson in political reality from Lyndon B. Johnson "Some things are apparent. Where government moves in, community retreats, civil society disintegrates and our ability to control our own destiny atrophies. The result is: families under siege; war in the streets; unapologetic expropriation of property; the precipitous decline of the rule of law; the rapid rise of corruption; the loss of civility and the triumph of deceit. The result is a debased, debauched culture which finds moral depravity entertaining and virtue contemptible." - Justice Janice Rogers Brown | |||
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| I am a leaf on the wind... |
This presupposes people have the discipline to make the extra payments. I don't, and most people don't. It will always be the case of "i need to pay for X, X got broken, X needs new shoes/backpack/school fees" There is ALWAYS something tugging at extra money. If you take it off the top, you can find a way to squeeze the budget to get it to work. If you plan to pay "extra" a lot of times that extra gets spoken for. _____________________________________ "We must not allow a mine shaft gap." | |||
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| Green grass and high tides  |
There are no absolutes. Every situation and circumstance is different. Debt is neither the answer nor the devil. Each our own situation and experience would confirm this. While I respect Dave Ramsey I do not think his thought process is and absolute either. Nothing risked, nothing gained is a contrary thought process. Going out on a limb can both be a recipe for success or failure. Many have started with little and done well for themselves by risking it all by borrowing. If all you had was 300k basically it would not be prudent to spend it to pay cash for a home. IMHO. "Practice like you want to play in the game" | |||
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| I am a leaf on the wind... |
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. He never stated if he had the money or not, just asked for advice. If you have the money, it's always best to pay for things fully. You are ignoring the risk factors of both the mortgage industry and the financial markets. If everything goes ok, yes there are opportunity costs, when there is a hiccup of any kind, you're better off in a paid for house.
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. You have totally discounted the risk. What if the market tanked and you could not afford the refi? You would be singing a different song. You played the game and won. I would say that was a risky move, but it worked out for you. I could fill volumes with people who were not so lucky. [/QUOTE] _____________________________________ "We must not allow a mine shaft gap." | |||
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| Member |
There's a word for that. Either Maturity or discipline in getting ones priorities right. Losing your job and HAVING to pay that extra mortgage payment might be just so much tougher that you won't be able to pay it. | |||
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Member |
Let me be straight with you and not answer your question. Your house is NOT an investment. Period. Stop thinking like that. Compare apples to apples. ========================================== Just my 2¢ ____________________________ Clowns to the left of me, Jokers to the right ♫♫♫ | |||
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| Page late and a dollar short |
From jeffxjet  ownload 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 ho use is paid for and all you have to cover is utilities, it's much easier to pay bills until you recover. How true. We bought this house in 2004. About one month after closing daily we were getting solicitations for second mortgages. Most all touted "making your equity work for you by investing it" together with a couple business cards, one a mortgage broker and the other a investment broker. See how well that would have worked out during the crash. Every one of those solicitations were treated the same way any offer that was made to us when we refinanced to take advantage of lower interest rates to cash out our equity, declined. From BBMV:Really? Try not paying your property taxes and see how long you keep the house. True, technically you are never free and clear, you will always owe something to somebody, some company or entity but in conjunction with a mortgage free residence that will probably be the cheapest you will pay for housing. Thousand dollars a month is probably the cheapest rent around here for an apartment. Last rental in this subdivision I am aware of was $1800 per month, average 1400 sq ft house. My father would never take advantage of a VA loan despite being a veteran of WWII. Always wanted to "wait for another crash" to buy a home so we always rented. Despite the fact that all of his siblings owned their houses he did not believe in ownership. When he passed his legacy was sixteen years of rental receipts and my mother and I living in a house that the owner refused to fix a failed hot water heater and a failing well. Sounds dramatic but I swore not to live like that again. -------------------------------------—————— ————————--Ignorance is a powerful tool if applied at the right time, even, usually, surpassing knowledge(E.J.Potter, A.K.A. The Michigan Madman) | |||
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His Royal Hiney |
Looking at it from a pure numbers, there are several considerations. I'm assuming you have the $300,000 on hand. I will also set up the options as two extremes so that the comparisons will be more pronounced and for simplicity. The comparisons will still apply at realistic scenarios. Option A: Buy the house fully with $300,000 in cash. Option B: Buy the house with 1 cent and a mortgage of $299,999.99. I'm assuming simple interest rate, no buy down, no origination, no private mortgage insurance. Let's also just round up the mortgage to $300,000 but leave the 1 cent as equity in the house. 1) The first consideration is leverage. Leverage is a two-edged sword. Here's how it works under the normal assumption that houses eventually sell for more than the purchase price and the stock market eventually keeps increasing. Let's assume one year later, the value of the house goes up to $330,000 and you sell it. Under Option A: you made $30,000 on $300,000 investment. That's a 10% return. Under Option B: You pay off the mortgage. If the interest was 5%, You made $15,000 on an investment of 1 cent. Let's say the down payment was $3,000 and you still net $15,000, the return is 500%. Let's introduce Option C: You bought 2 houses with downpayments of $1,500 each and you net $15,000 each. That's a total of $30,000 against an investment of $3,000 for a return of $1,000% after you pay off the mortgages on both houses. That's leverage or OPM (Other People's Money). Of course, the reverse works in the same manner. Your outlook regarding the direction prices will take will steer you to buying outright or taking a loan. 2) Next consideration is the opportunity cost. The question in buying the house outright versus mortgaging it is can you get a higher rate of return for your money than the mortgage interest rate? Let's say the mortgage rate would be 5%. If you bought the house fully with cash, you would be saving yourself 5% each year. Your $300,000 invested in the house is making you avoid the mortgage interest of 5%. On the other hand, if you bought the house with a one cent downpayment, is it possible for you to earn more than the 5% that you'd be paying each year over the life of the loan? Let's say it's a 30 year loan. The common proxy for alternative investments would be the S&P 500. Over 30 years, it's a sure bet the S&P 500 will grow over that long time period. Even at a conservative 7% average projection, you're netting a 2% rate of return compounded annually over the life of the loan. Another component of this second consideration is that current deductibility of the mortgage interest. Roughly, the 5% mortgage interest nets out to 2 1/2% mortgage interest. This effectively gives you 4 1/2% spread as a rate of return compounded annually assuming you only sell a portion of the stock investment to pay off the mortgage interest. "It did not really matter what we expected from life, but rather what life expected from us. We needed to stop asking about the meaning of life, and instead to think of ourselves as those who were being questioned by life – daily and hourly. Our answer must consist not in talk and meditation, but in right action and in right conduct. Life ultimately means taking the responsibility to find the right answer to its problems and to fulfill the tasks which it constantly sets for each individual." Viktor Frankl, Man's Search for Meaning, 1946. | |||
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| His Royal Hiney |
My dad was a WW2 and Korean veteran too. His reason not to buy was he thought he had more flexibility financially paying rent than being tied to a mortgage. The landlord was getting old and was selling off his properties and he wanted to help my dad buy the three apartment building we were staying in San Francisco on Haight and Ashbury for $75,000 in 1975. Fortunately for me in my second year of marriage, the owner of the in-law apartment we were renting in San Francisco was going to raise our rent. My wife figured out the rent money could support monrtgage payments using a zero down, zero closing VA loan which we got. "It did not really matter what we expected from life, but rather what life expected from us. We needed to stop asking about the meaning of life, and instead to think of ourselves as those who were being questioned by life – daily and hourly. Our answer must consist not in talk and meditation, but in right action and in right conduct. Life ultimately means taking the responsibility to find the right answer to its problems and to fulfill the tasks which it constantly sets for each individual." Viktor Frankl, Man's Search for Meaning, 1946. | |||
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Member |
How many 28 year olds buying a house have $300k in cash? Just cuz you take out a mortgage, doesn’t mean you have to only pay the minimum for 30 years. Look at what the stock market did THIS YEAR, compared to your theoretical 4%. May not do it next year, but consider historical averages. While saving up for that $300k wad of cash, where are you going to live?? How long do you plan to live in the area? How is the housing market? There are a host of variables, often different for each of us. Then you have the individual investment mindset. In other words, it all depends. | |||
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Don't Panic |
Nothing inherently wrong with having a mortgage. Or inherently right. Most people do not have the alternative of paying cash, so the math isn't a factor in that case. If they want a home, they need to borrow. In that scenario, the Dave Ramsey stuff is right on. Pay it off as soon as you can. For someone with sufficient capital available, it's just a choice of doing X or Y with the funds. Classic capital-allocation question companies address all the time making choices: compare the after-tax result of option 1 (mortgage) with a forecast of the after-tax returns from option 2 (investing) over the relevant timeframe (how long you're likely to be in the house). If one's fiscal nature is on the edge - think Las Vegas, Bitcoin, IPOs, Pork Bellies, Life In The Fast Lane - perhaps a thumb on the scale addressing the risk of foreclosure is warranted. However, if one has sufficient capital to be making this decision in the first place, and is financially conservative (i.e. always keep sufficient cash to meet obligations, with a safety factor) then the risk of foreclosure is probably minimal and you'd just make the call based on the numbers. | |||
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| Member |
Totally this. The key is to crunch the numbers objectively. Taking on reasonable debt has made millionaires / billionaires. Taking on unreasonable debt has crushed people also. -------------------------------------- Proverbs 27:17 - As iron sharpens iron, so one man sharpens another. | |||
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Nullus Anxietas |
We're retired, so our investments are low-risk, and, consequently, low-yield. But, even with that, we've averaged something like 8-1/2% on our initial investment, month-after-month, since I moved the bulk of my 401K into it a year-and-a-half or so ago. If my mortgage was 4%, any money I leave in my investments is giving me a net gain of 4-1/2%. Furthermore: I don't pay tax on my gains, as long as I leave them where they are, and I do get to deduct mortgage interest. So even more net gain. I recently bought a new-to-me Jeep. I was going to take out a car loan only long enough to get me to next year (marginal tax rate reasons), at which time I was going to haul all that money out of our investments and pay it off. Then I thought "Waitaminute. The car loan is at ±2.5%. Our investments are getting us ±8-1/2%. Wouldn't it be better to keep the loan and let the balance earn us ±5%?" Called our retirement account's manager. Pitched the question to him. "Good thinking, " he replied, and agreed with me. Now, he's got a good record with knowing which way the wind's blowing. If he at any time thinks things may take an unavoidable turn for the worse he'll tell me "Best take your profits while you have them and pay off that loan." In our case the mortgage thing is a bit different. The house is almost paid off and we want to protect the roof over our heads no matter what happens in the financial world. So next year I'll be cashing out what's left of my 401K and paying off the mortgage. "America is at that awkward stage. It's too late to work within the system,,,, but too early to shoot the bastards." -- Claire Wolfe "If we let things terrify us, life will not be worth living." -- Seneca the Younger, Roman Stoic philosopher | |||
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| I believe in the principle of Due Process |
I’d like to know what investment you are talking about that gives you 8 1/2% a year month after month. How do you evaluate the risk of loss? Luckily, I have enough willpower to control the driving ambition that rages within me. When you had the votes, we did things your way. Now, we have the votes and you will be doing things our way. This lesson in political reality from Lyndon B. Johnson "Some things are apparent. Where government moves in, community retreats, civil society disintegrates and our ability to control our own destiny atrophies. The result is: families under siege; war in the streets; unapologetic expropriation of property; the precipitous decline of the rule of law; the rapid rise of corruption; the loss of civility and the triumph of deceit. The result is a debased, debauched culture which finds moral depravity entertaining and virtue contemptible." - Justice Janice Rogers Brown | |||
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| Nullus Anxietas |
Investments, plural. I'd have to look them up, but it's mostly low-to-moderate-risk, low-to-moderate-yield stocks, bonds and the like. (I'm not an investment guru, obviously, which is why I let somebody manage this stuff for me.) I don't understand why you find that so surprising, when, not long ago there was a thread with members talking about much higher returns than that. Maybe I'm misstating things? Only way I know to put it: We moved the bulk of my 401K over to this plan about 18 months ago or so. He made recommendations on how to divvy it up. We agreed, with minor tweaks (which he found reasonable). After a few months of it wobbling a bit while he tweaked things to conditions the thing hit its stride. Right now it's up 16% from the point at which we invested, and that's with us taking a moderate amount of cash, each month, to supplement our SS income. Like I said: Maybe I'm stating things incorrectly?
That's why we have A Guy. This is something at which he's the expert. Occasionally we have a phone or f2f meeting, he talks about where things are, where he sees things going, makes recommendations. Sometimes that's just "I'm happy with where things are." We discuss pros, cons, risks vs. rewards, etc. and the agreed-upon changes, if any, are made. (Usually, after him explaining his reasoning, we just go with his recommendations.) I believe in letting experts do what they do best. Same reasoning we use in paying a tax consultant each year. Same reasoning I consult a lawyer if I have legal questions. "America is at that awkward stage. It's too late to work within the system,,,, but too early to shoot the bastards." -- Claire Wolfe "If we let things terrify us, life will not be worth living." -- Seneca the Younger, Roman Stoic philosopher | |||
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| I believe in the principle of Due Process |
That’s fine. From your description, I wondered if you had come across a new means of investing. I don’t think there are any, so my curiosity was overflowing. If I could come up with a way of investing for a return I could count on, of even 6% with minimal risk, I would be all over it. You realize that you have had the benefit of one of the steepest increases in stock market history, one that may continue for awhile but not indefinitely. There have been other years, or even multi year stretches in which increases were not large or even non existent resulting in debilitating declines. It is hard to measure with exactitude, as portolios are different, few contain the exact portions of the popular averages. When one measures results by increases in prices, it induces uncertainty when prices start to go the other way. Is it a momentary dip, a pause or correction, or the beginning of the end turning into a devastating decline in stock prices. These are imponderables. What's worse, pondering starts a vicious cycle of buying and selling, leading in very many cases to disaster or near disaster. I went through the bear markets of the 70’s, watching the Dow go from ~930 to ~620! After a bit of recovery, it took another plunge below 600 which I couldn’t bear to watch. In those days investment geniuses were hard to find! Luckily, I have enough willpower to control the driving ambition that rages within me. When you had the votes, we did things your way. Now, we have the votes and you will be doing things our way. This lesson in political reality from Lyndon B. Johnson "Some things are apparent. Where government moves in, community retreats, civil society disintegrates and our ability to control our own destiny atrophies. The result is: families under siege; war in the streets; unapologetic expropriation of property; the precipitous decline of the rule of law; the rapid rise of corruption; the loss of civility and the triumph of deceit. The result is a debased, debauched culture which finds moral depravity entertaining and virtue contemptible." - Justice Janice Rogers Brown | |||
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Alienator |
I'm poor. There is no way that I could pay cash for a house. It is a much more sound investment to buy a house with a $900 mortgage vs. throwing away money renting one for $1400. I hope to continue paying down principle on mine and rent it out if and when I decide to build my own. Also, I bought a short sale and immediately gained about $45,000 in equity. It's all in how you play the game. SIG556 Classic P220 Carry SAS Gen 2 SAO SP2022 9mm German Triple Serial P938 SAS P365 FDE Psalm 118:24 "This is the day which the Lord hath made; we will rejoice and be glad in it" | |||
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| Nullus Anxietas |
Yes, I know. That is why next year the remainder of the 401K will pay off the mortgage, rather than being re-invested. As for the risk issue: That's why we're invested very, very conservatively. The investment profile is not unlike that of my 401K: Very diversified and very conservative, for modest, but fairly steady gains and lower risk of catastrophic loss. That was invested in such a manner that, even when the 2008 recession hit, we took an almost imperceptible hit, and soon started making it back. Don't ask me for details, because I couldn't provide them if I wanted to. My wife is better at that kind of thing than I, so I let her handle it. Apparently she got it right  It's the same philosophy I applied when buying a home. I had friends protest "But you can afford so much more!" I didn't need any more, and buying well within my means reduced the odds of my ever losing it. "America is at that awkward stage. It's too late to work within the system,,,, but too early to shoot the bastards." -- Claire Wolfe "If we let things terrify us, life will not be worth living." -- Seneca the Younger, Roman Stoic philosopher | |||
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| Green grass and high tides |
E, you sound like you are on the right track. Even if you are not a trained professional  Give yourself credit and determine how much your "trained professional" if costing you for telling you your'e on the right track. "Practice like you want to play in the game" | |||
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| Nullus Anxietas |
It's not a question of training, so much as experience and track record. Our Guy has years, perhaps decades of experience doing what he does for his clients. And he has an excellent track record. He was one of two financial managers that came to us highly-recommended by people we know whose judgement we trust. (We liked his plan the better of the two, which is why we went with him over the other.) We're having great success. I'm not going to screw with it. "America is at that awkward stage. It's too late to work within the system,,,, but too early to shoot the bastards." -- Claire Wolfe "If we let things terrify us, life will not be worth living." -- Seneca the Younger, Roman Stoic philosopher | |||
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