I believe in paying cash for large items like vehicles & homes.
Why? Because you never get dollar for dollar back from Uncle Sam & the amount you pay for your home over the 15-30 year period is 3 times that you've purchased it for.

If you paid 300k for your house now, you would pay approx 1M in 25-30yrs.
Do the math & see. My accountant said that you're always better off having your house paid for. The stock market & other are just not that great right now.

Besides, I got proof in my owm family. The ones who pay cash for stuff HAVE LOTS OF MONEY, the ones who make payments NEVER have money.
Remember with money, it's not the amount you make, it's not having bills that saves you money.

True story: I knew someone who had lots of payments who had a business. He made 250k gross & netted 40k.
My job paid 40k & I had my little monthly bills.
Geuss who had more money? I did. My bills were minimal. His bills were killing him!

"the amount you pay for your home over the 15-30 year period is 3 times that you've purchased it for."

That is simply not true at today's interest rates. A 15-year 100k mortgage at 6% (and the OP could probably do better than that) would cost less than 52K in interest if paid off over 15 years. And since the interest is deductable, the actual cost would be quite a bit less than that, depending on tax bracket.

The OP could probably do better than that just keeping his/her investments where they are now and adding to them gradually over time. That approach would also preserve liquidity, rather than tying everything up in the new house. Since this couple is only in their mid-forties, they have plenty of time to pay off a 15-year mortgage before retirement. I would call that strategy pretty conservative, actually, given their sound financial status.

OP here... score is tied 1:1!

I agree about the cost of money. 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.

This DOES make it a more feasible option to borrow long and invest short, but the problem is of course in the words themselves. The short term rate cannot be relied upon to stay where it is.

i believe you are better off with a "comfortable" mortgage..One that allows you the freedom of doing/buying what you choose, and keeps a nice chunk of cash available at all times..

I wouldn't be comfortable liquidating all my investments to pay cash. You've just 1. ensured you have very little cushion in case of problem (not just job loss--don't forget injury/illness too) and 2. have concentrated all your investments in basically one basket.

I'd do either the heloc or the 15-year. You can always pay either off if you want. Just get no-prepay-penalty loans.

housenewbie, I did mention using all cash but did not make clear that that was not one of my real choices. I am on the fence between the HELOC and the 15, which is why I started the thread.

There is the additional advantage of the HELOC, in that I save closing costs (some of which will get eaten by the higher rate, how much exactly depends on how much time elapses before it is paid off).

in that scenario, i'd choose the Heloc. 1) the cost to open it is just about zero,mine cost 40 bucks to register the deed/note with County..It gives you flexibility in the fact you can pay more or the stipulated minimum payment each month.The 15 yr mortgage locks you in at a lower rate,but the costs associated with it,from "your" financial standpoint,would make me believe the Heloc is your best option.it seems like you're financially astute, and it wouldn't be long before you pay off the heloc anyway

"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.

qdognj, I was figuring a bit more to close w/HELOC as I am buying a FSBO, and would want an RE attorney looking over the papers, doing title search, etc. Also a title policy.

Aren't the above must-haves? How did you achieve comfort in closing without them?

We just paid cash for a home, and took out a line of credit on it, for extra just in case. We have cash in the bank. But if you can afford to pay a low mortgage. why not pay for the house in cash andtake out a line of credit incase something disaterous happens. You have it if you need it and if you are savers why not use those funds if something bad happens pay the monthly line of credit with that until the problem resolves?

It may work out that you lose a bit of money, but if you can afford to pay cash for a house, why wouldn't you do that and avoid paying interest? (Especially if you are near retirement. Could be the income to pay that mortgage will decrease.)

The "maybe" riches of the stock market (8% maybes for conservative growth) vs. 6% interest over 15 - 30 years? What value peace of mind -- worth the 2% difference?

If you're near retirement, that's different. These people are in their mid-forties.

Two percent difference compounded over 20 years is a great deal of money. For example 100K at 6% interest for 20 years will grow to about 321K. But at 8%, it will grow to 487K. Many people would find a 166K for increased peace of mind too high a pricetag.

Hi Herus,

I know this is a nice 'problem' to have, but given our careful approach our whole lives (and some rather hard times when we were younger and starting out), I would rather avoid a mistake in this, our most expensive venture to date.
What would you do?

It's SO appropo that you are asking this... as I am helping another of our Community members navigate a similar (though not identical) challenge.

The BOTTOM LINE is that you don't want to find yourself deep into retirement with;
A) Most of your actual net worth trapped inside your real estate,
B) No employment for qualifying to re-access your money.

Here's a pretty good article that helps orient the thought process of those most successful at managing their retirement funding process.

http://www.nobullmortgage.com/cgi-bin/cblog/uploads/HowtheAffluentManageHomeEquity.pdf

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Here is a link that might be useful: How the Affluent Manage Home Equity

I would first look at the rate differences and calculate how long it would take to make up the closing costs based on the Two rates of the Helo v the mortgage. Surprisingly on a large enough loan it is not as long as you think, sometimes under 2 years. I realize you have no plans to keep a HELO that long

As for the mortgage itself, if you are willing to keep it for a few years as a hedge, might be interesting. In other words, depending on closing costs, I might gamble a little with the mortgage. Having a mortgage at 5.5 if rates go back to 7 pr 8 may mean that you can even put the spread into the bank if you were so inclined. Of course you need to run the numbers to see if it is worth it. You can always pay it if you have the cash

My gut says that you have too much in real estate and I would do the mortgage but that is without playing with numbers

Someone did touch upon this, part of the reason a bank is not awful is that they actually help protect your investement with their due diligence. If there is something wrong, another pair of eyes may find it (or often not but there is a possibility, if it is just you and your lawyer, that is a big burden. Title insurance you will need anyway and should have for your own benefit.

For example, a house I considered recently has a minot title problem (part of the yard belongs to the neighbor) they discolesed it but said it was no big deal. Bugged me a lot so I asked my attorney if I needed to mention it in the offer, she said no because the bank will pick it up, so they can be the heavies but the result will be it will get fixed before closing. In an all cash deal my attorney would have had to make a fuss about it

Just gettting a chance to revisit this after a few days. Thanks to Dave and everyone for chiming in.

We are almost decided to finance, and that too for more than we had originally planned and for longer (30 v 15).

The article Dave posted did open our eyes some. I daresay some could refute the assumptions/calcs made therein but the fact still remains that rates are near historical lows, and by and large they can only climb. Having the money to take advantage of those higher rates, not to mention life's big emergencies, could be advantageous.

Of course, this whole question really hinges on two things no one can answer to: individual preference, and prediction of the future. It's funny, when we had no money we worried less about the future. Don't know if it's just being older or because we have more to lose; probably both but it is a strange thing indeed.

Hi Herus,

The article Dave posted did open our eyes some. I daresay some could refute the assumptions/calcs made therein but the fact still remains that rates are near historical lows, and by and large they can only climb.

Actually, QUITE to the contrary... rates are at their Historical Median HIGHS! In the entire human history of all finance, interest rates climbed above 7% for only a very brief period due to political shenanigans. You can see the effects in plain picture graphs here;

http://www.nobullmortgage.com/cgi-bin/cblog/uploads/historyofusinterestrates.jpg

Having the money to take advantage of those higher rates, not to mention life's big emergencies, could be advantageous.

You are absolutely valid in having concerns about unforeseeable emergencies... but I would definitely warn against letting more likely emergencies drop behind anything as unlikely as interest rates over 7-8% in our lifetimes.

Cash Is King... the likelihood of needing that oxygen is exponentially higher than any of us seeing climbing interest rates into the double digits (in my mere opinion ;~)

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Here is a link that might be useful: {{!gwi}}