Here's a question for those who pay with cash
Elmer J Fudd
9 years ago
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Acadiafun
9 years agoemma
9 years agoRelated Discussions
Better to pay cash or get loan to build custom home?
Comments (38)So it's May 2015 and I am just joining this conversation with the same plans to build with plenty of cash to do it without compromising our retirement and other investments. I have already gained some new insights by reading everyone's comments here so thank you! We also have our current house almost paid off which will be used to recoup some of our costs when it sells. And like several of you, we don't want to sell and move two times so we'll wait until new construction is near completion. But something just keeps nagging me about having some kind of safeguard in case something happens along the way. We know and trust our builder, but hey, anything can happen expectantly along the way. So I Googled Beth's original headline and came across another blog that revealed something very reassuring to me. Everyone knows about construction-to-permanent loans, but how about just taking out the initial construction loan and then paying it off in full at the end with no permanent loan? The lender assumes responsibility for getting an accurate appraisal, inspections, approvals for builder draws and final title. A 12-month construction loan would involve miniscule interest costs for the peace of mind in return. And what say you? An inquiring mind wants to know!...See MorePay cash or not - what would you do in our place?
Comments (17)"Short term (savings) rates (eg 5+% available at many online banks) and long-term rates (eg mortgages) are very close together right now, a phenomenon known as an inverted yield curve (or approaching it). Tax effects are approximately the same in both cases (cancel each other out) so they can more or less be ignored." Not really. The mortgage rate is locked in. The short-term savings rate is not. As I said, you should easily be able to beat the current interest rate on a 15-year mortgage with even a conservative long-term investment approach. If I understand you correctly, if you go the HELOC route, that menas you're going to buy the new house with cash. If you take a mortgage, you're not. In the first instance, you're going to have to liquidate some of your investments. In the second, case you're not. You're most likely to wind up further ahead if you keep more of your money invested, and that's true even taking the closing cost of the mortgage into account. Of course, it could be that the security you feel from not having to pay a mortgage is worth a financial sacrifice to you. You'll have to decide what that's worth to you. But since you want to know what I'd do, I'll tell you -- I'd go for the mortgage....See MoreAre we better off paying Cash or getting a Mortgage ????
Comments (67)The idea of front loaded interest on mortgages is a bit of a misconception, while you pay more interest in the early years that is only because you owe more money (If you have a 3.9% mortgage then you pay 3.9%/12 on the outstanding balance you owe each month). While that may sound pertinent, the discussion is really about effective interest versus compounding interest. As you pay on your principle you pay less interest, so over time the interest charges are smaller because your principle is smaller. While on an investment you start with a principle and if left alone for some period of time the interest continues adding to the principle and therefore pays more interest. This discussion is largely around the idea of people who have some income coming in and some ability to make payments. While, I could note that guaranteed payment annuities are about equal to house payments, they are no more liquid than houses so not really an investment that is better than a house. In the end, we are discussing people who want to be done with the headache of a mortgage and not people who simply don't have the income to continue paying a mortgage. Edit: It is also important to remember that a 15 year mortgage doesn't mean you have to make 15 years of payments. Making even a few years of payments before liquidating the investments to pay off the balance will typically result in gains. I think a lot of people focus too much on the stress of coming up with the money for monthly payments and forget that any time you get tired of stressing over payments, you can simply liquidate your investment and pay off the loan. While I have said the same thing jn3344 has many times, I have a completely different conclusion. When you have a paid off house and little money in the bank you have no options for dealing with uncertainty. Cash gives you options, the farther you get from cash the less options you have, and nothing is farther from cash than a house. Think of it this way. My father was just this week presented with a treatment option for a medical condition that was not covered by Medicare, the time sensitive treatment was going to cost $35,000, but it would greatly improve his quality of life. What allowed my father to make that decision was having access to $35,000, if he paid for his house outright and didn't have any money then he couldn't make that decision. Now suppose spending this $35,000 means my father will not be able to continue paying his mortgage and will have to move out of his house into a smaller apartment. I feel confident he will tell you walking around his smaller apartment beats not being able to walk around his bigger house. Edit: Many people have a false sense of security from a home. The only real security a paid off home provides is the equity (the access to cash). Homes are fairly inefficient domiciles, the taxes, maintenance and less efficient utilities minimize any real savings over renting. The path to homeless has nothing to do with a paid off house and a lot to do with not enough cash....See MoreCar loan for recent college grad vs paying cash?
Comments (25)I'm out of the shadows again on this one. 600 is not that great considering sub prime lending can start at 650. But at her age, she is just building experience on her file. The FICO algorithm models for the likelihood of delinquency within 24 months, so the factors going into that calculation correspond with the model value. The only way to improve credit score is to have credit activity. And installment credit is considered more favorable than revolving credit. Also impacting interest rates and loan approval is the ability to pay. Permanent employment is less risky than sub work, so you get a more risky loan for a higher rate. That only changes when you have a consigner who reduces the risk. My first solo car loan came with a 10% rate in the early 90's. Living debt free is great. However few people can afford a home with cash, at least where I live. Establishing credit with 7% interest on a $5,000 auto loan makes a lot more sense when you decide to buy a home with a 30 year amortized loan at a less favorable rate based on your lower credit score. Finally, there are several industry modifiers available with FICO, auto being one. So the version of your score the dealer pulls is different than the one you receive when you go online. And many lenders will have custom models that may, or may not, act as an overlay to FICO. They model for a number of factors including delinquency, bankruptcy and retention. FICO is to credit modeling as Kleenex is to tissue. Although I know the deal is done, I thought this might add some clarification for others.....Just some additional information for consideration from experience....See Morechristopherh
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