Hi Marys,

Dave - in a recent thread you posted a link with the thought that paying off a mortgage isn't always the best way to go financially. So that's if your already down the road in a home. Mind a couple of questions specific to my situation?

Let's do it!

But what if your buying? Say you have the option of buying a small house cash, or something nicer for twice as much and a mortgage? (for example buy cash for 100,000 or buy with a mortgage; cash 100,000 and mortgage 100,000)
Factor in the fact that the potential buyer doesn't know whether they will be in the house as little as 2 years or possibly as long as 9 years. If an illness or something were to force the buyer to retire later - well then longer but not a planned option.
Midwest market, no appreciation.
Does cash give you more flexibility on how long you stay in the house? Or are closing costs, title insurance almost the same without a mortgage?

Retaining your cash ALWAYS gives you more safety & flexibility, certainly.

The closing costs on a cash-purchase may be a bit lower... but its wise to weigh how much risk you really want to carry to "save" those costs.

Doesn't saving on loan costs and interest equal what you MIGHT get in the market these days? Or does writing off the interest plus a few percent in a CD etc. come out ahead?
(I prefer to be conservative on what return can be gotten on money in the "market" as it has not served me well)
"Conservative" means avoiding unecessary and unprotected risks of loss. Given ONLY the information you provide above, you are far more conservatively protected (both in equity and in cash-access) by using a bank mortgage for the acquisition rather than self-financing 100% from your safety & operating capital.

Remember, *ALL* real estate acquisitions are 100% financed. Either the money comes from lenders, or it is starved away from your own alternative employment vehicles, at a very real cost. NONE of your money is "free," and all money has "access" costs to consider as well.

NOW... whether the proper mix of financing is 100% bank... or 90% bank and 10% personal, or 80/20, 70/30, etc... comes down to a balance sheet & portfolio balancing conversation. Unleverage primary residence equity is equal to very low yield treasury bonds... except much less liquid, and at greater risk of market loss.

If (for example) you are over-weighted in aggressive growth instruments (stocks, mutuals, etc.) and you're approaching a financial life stage needing more defense/maintenance of wealth, and can less endure the drawdowns of market volatility... *THEN* adding more self-financed real estate equity to the mix (by surrendering/paying-down your mortgage by that amount) is one way to get to the optimum balance.

Does that make sense for you?

Dave Donhoff
Leverage Planner

The closing costs on a cash-purchase may be a bit lower... but its wise to weigh how much risk you really want to carry to "save" those costs.

I'm not sure what risk your talking about?

And what about the time line factor?

Then of course there is the sheer massive frustration and complexity of trying to figure out mortgages. Frankly that's a huge issue.

Hi Mary,

The closing costs on a cash-purchase may be a bit lower... but its wise to weigh how much risk you really want to carry to "save" those costs.
I'm not sure what risk your talking about?

Your risks of losing your equity to;
Softening markets, depressed markets,
Litigation seeking your titled assets to attach/glom onto,
"Acts of God" that were unforeseeable or uninsurable,
Personal distress or tragedy whereby you needed the cash you had entrapped.

In addition to the risk of equity and/or home loss (which is "merely" a monetary loss of net worth... not to make too light of it, but numbers are not people,) there is the greater risks of living emotional distress from literally being illiquid... 'cash starved' in times of need.

Having a spouse or child or someone else in desperate need of support, and being unable to provide because your money had been trapped in real estate equity that no longer exists... that is tragedy.

And what about the time line factor?

Irrelevant. If someone believes they are going to occupy a residence long enough to make sense to buy instead of renting, they are staying long enough to protect themselves.

Then of course there is the sheer massive frustration and complexity of trying to figure out mortgages. Frankly that's a huge issue.

Do you want my help regarding that?

Cheers,
Dave Donhoff
Leverage Planner

Irrelevant. If someone believes they are going to occupy a residence long enough to make sense to buy instead of renting, they are staying long enough to protect themselves.

Not true in my case and a major part of my dilemma. I would be better off with the flexbility of renting, job wise, financially. But I hate it. No vegetable garden, no pets, no birdfeeders. I'm pretty much a homebody and laying on a couch in an apt or house rental where you can't do any of those things is killing me. But I may not be here long. So I feel very trapped. My one thought was to try to buy with cash, save some of the costs of a mortgage.

And if I owned - and ran into trouble - couldn't I take out a home equity loan?

Marys,

Not true in my case and a major part of my dilemma. I would be better off with the flexbility of renting, job wise, financially. But I hate it. No vegetable garden, no pets, no birdfeeders.

Why don't you consider renting a home similar to what you would have bought? There are many homeowner/landlords (I am one) who *LOVE* it when our tenants embrace our home as their own with gardens, birdfeeders, pets, etc.

And if I owned - and ran into trouble - couldn't I take out a home equity loan?

OH DEAR, NO! Nobody wants to lend money to a borrower in trouble... that's the cruelest irony!

It was Bob Hope who famously quipped;
"A bank is a place that will lend you money only if you can prove that you don't need it."

When you've been hit with surprise despair, loss, and trouble... banks won't touch you with a hundred foot pole.

Once again the refrain;
"Cash is King."

Sounds to me like you are the perfect candidate for a nice full-privileged housekeeping rental home.

Cheers,
Dave Donhoff
Leverage Planner

Sounds to me like you are the perfect candidate for a nice full-privileged housekeeping rental home.

Yes I know I would be better off renting. But its not that easy.
I've been looking.
I haven't been able to find a place that isn't a total dump to rent that will allow me to rip up 15 x 20 feet of sod to put in a vegetable garden, that will allow pets, that doesn't mind if I ruin a patch of lawn with a bird feeder. And if I can't have those I might as well stay in an apt which is probably 400.00 cheaper and auction all my stuff in storage, either way I'm unhappy. Twice I've put an ad in the paper seeking to rent small country property - not one call. Also on Craigslist. Then there is the issue - I move all my stuff to a rental....which is a fair amount of stuff and they decide to sell in a year, raise the rent etc.
Not that I wouldn't consider renting if I could find what I'm looking for but am just coming to the realization I'm going to have to up my price and end up with a lot more house, anything below 1200.00 just isn't worth looking at. I suppose if I keep waiting and looking the golden bb effect might turn something up.

Which brings me back to - if I want to buy - even though I know I might not be here very long and its probably not a smart move - which is better? Cash or mortgage?
It sounds like your saying mortgage regardless. Or does it depend on the mortgage?

I know someone that bought a decent house in Maineville zip 45039 for $163,000. They moved from NJ and are happy with it. Don't know if it's close to where you need to be but figured I'd mention it.

marys1000 - It sucks renting and it would be hard to find those things you want. Also since you don't know how long you'll be staying it might be hard to sell what you want in the future.

One other option you have would be to buy a house, not your ideal house, but one that would be a compromise. For example something like the below. I'm sure people that get transferred often has some good suggestions too.

1. Buy something in an area that will always be popular so it will be easier to sell when you are ready to move. (good school district etc.)

2. Something that will allow you to put the vegetable garden and bird feeders, but would appeal the a majority of the people if it was just lawn and regular plantings if you needed to sell.

3. A reasonable price range where the majority of the buyers would be in the area you are looking for an easier sale later. One that also would allow you to save money and this could include your commute if you drive due to gas prices.

This way you can have some of your most important things, but you may have to live with neighbors closer than you'd like for a while and a few other things, but still have what you can't with a rental and also enjoy it some with the gardening even though it wouldn't be your full wish list.

BTW when it comes to closing costs it depends on who the lender is how much you'd have to pay for the loan. For example we used a local bank to buy the lot next to us and we only paid the same closing costs as a cash buyer except for an extra $100. If you have to pay a loan origination fee then it could add up. A bank should be able to tell you what their fees are for a closing, however they can't tell you the full closing costs due to things like title insurance etc. Only things related to the loan.

I think it makes sense to invest your cash and use the bank to assume the risk. This way if you need the cash you have it available and if you have to sell for less than you owe and have to bring cash to closing at least you made money off your own cash until that point. Even though you will pay mostly interest to start it isn't much different than throwing the money away on rent except you have a tax deduction and you get to put the bird feeders and the vegetable garden you want.

Marys,

Which brings me back to - if I want to buy - even though I know I might not be here very long and its probably not a smart move - which is better? Cash or mortgage? It sounds like your saying mortgage regardless. Or does it depend on the mortgage?

Strictly financially speaking (and not emotionally/feeling speaking,) if you must take an ownership position on your primary residence, you'll be better protected against risks of the market and cash-losses by using the bank's money to buy, and keeping your OWN cash safely set aside.

What type of mortgage you may actually use definitely matters... but not as to whether buying with or without a mortgage makes better sense.

Assuming financial maturity and responsibility among owners, there is no time that buying your home all-cash is actually safer than using a mortgage.

REMEMBER; I am *NOT* referring to "returns" or "costs" here... but the conservative avoidance of unecessary risks of partial or complete devastation.

Sometimes a little "safety insurance budgeting" is a very prudent and most conservative choice... as opposed to dashing naked & wild flailing your financial arms above your head in the middle of winter (metaphorically speaking, of course ;~)

Dave Donhoff
Leverage Planner

The book that I mentioned in another thread, "House Lust" backs up your assertion that investing is a better choice than paying off a mortgage...

Well that certaintly changes my price point. Not sure how but I figure it does.

Here's the quote:

"Yale economist Robert Shiller has analyzed home price movements going back to the 1890's, and he's convinced that over the long term, houses appreciate at a rate only slightly faster than inflation-and well below that of stocks."

"Likewise, the Wall Street Journal's Jonathan Clements notes that people's smugness about the 'killing' they've made on their house annually usually ignores the closing costs, mortgage interest costs, annual maintenance expenses, and real estate commissions they've paid."