Hold onto my cash or take smaller mortgage?

9 years ago

Looking for a little advice on which way to go here. My wife and I are in our mid 30s with 3 children building a new home. I have lived in a small older home for the past 15 years which has allowed me to save up a substantial amount of cash. My plan was to use this and my equity in current home as a large down payment on the new build. This would obviously leave me with smaller payments and potentially the option to finance at 15 years (lower interest) vs 30. I've started to question whether I'd be better off holding on to my money and financing a larger portion of the new home with the current historical low rates. After reading a previously thread I've seen opinions in both directions. I've never had a lot of debt. I paid off my current home by age 30. Pay my credit card every month, and have bought all my vehicles and toys with cash. I can live with the idea of a large mortgage if it makes financial sense. Would this make any sense if I were to just leave this money in a low interest savings or would I need to invest it in something with returns over the present interest rate? I also take standard deductions every year so larger interest payments may allow me to itemize. Thoughts?

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Jake The Wonderdog

9 years ago

last modified: 9 years ago

Tom: So here's my .02:

Money will probably not ever be this cheap again in our lifetime. I would go for a 30 year mortgage and invest your cash.

I was intent on paying off my new 30 year mortgage in 15 years until I ran the numbers. I was much better off investing the additional principal payment in my retirement plans. Again, thinking about it from a general sense , pre-paying 3.5% money is crazy.

Here's another point about that...

So pre-paying a mortgage (or putting lots of money down) ties up your cash and limits your flexibility. If anything happens (lose job, etc.) then you can't go to the bank and say, "Hey, I'd like those extra payments I made back". Neither can you re-finance (because, hey... you are unemployed). If you are able to refinance you are back to the new - higher rates.

With record low interest rates it doesn't make sense to do any of that. If interest rates return to normal, it could make sense again... but not right now.

You can always pre-pay a mortgage if you change your mind at some later date. I may not let mine play out the entire 30 years (I"d be 84), but for now what I'm doing makes the most sense.

Note: You want to put at least enough money down to avoid Private Mortgage Insurance (PMI). That's usually 20%.

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Comments (11)

User
9 years ago
Could you sell your old house for what your equity is? Many old houses on paper look really good but selling them for that amount is sometimes difficult. If you are planning on keeping the old house and renting? it or selling. Do you have money in the bank for extras that always happen when building?

As far as taxes you need to set down with your last years taxes and do a itemized deduction calculation based on your projected mortgage, taxes, etc.
bry911
9 years ago
Math is great is for these type of questions, and so I did some for you. At the current 3.375% rate for a 30 year mortgage, the total you pay in interest over 30 years is $591 per $1,000 (in other words your total payments are $1,591 for every $1,000 you borrow). To put this into perspective, ignoring any tax implications, you would need to get 1.565% on your savings account to end up with more money than you are paying in interest.

Personally for that little amount annually ($19.70 per year per $1,000 if you straight lined the interest) I would rather have the cash, even if I didn't invest it. Remember while our home is, and should be, a place of comfort and safety for us, it is not exactly without serious financial risk. Houses are much more risky than most investment portfolios. You wouldn't invest in any investment that had the same risks and returns as a house. Note I am not saying you shouldn't buy a house, I am just saying think about houses as cash outflows and inflows rather than investments.

As a financial adviser I would tell you to keep the mortgage as high as you can afford and invest the money in a mutual fund that matches your risk profile, personally I prefer Vanguard funds. You will generate free money by doing this.

As for your taxes - if your new mortgage without holding out additional funds is going to get you past the standard deduction, then the entire additional funds will be deductible. I wouldn't even bother considering it to be honest, how much better do you need than 1.565%?
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User
9 years ago
You've asked the great question: Does it make financial sense?

Only you and your advisors can know for sure. For example, what is your current family income? Does it put you at a level where mortgage deductions will begin to phase out?

What does your "rainy day" fund look like? You're young, and can probably weather any economic storm to come, but what do you need to protect you and your family in the event of something like the Great Recession of 2007?

So- stay liquid with that portion. Sure, it doesn't earn a ton (if any) interest, but trust me on this- when you need it, and it's there, you don't care. Nothing erases the idea of "no earnings" faster than knowing that if push came to shove, you can pay your bills for a certain amount of time.

Conventional wisdom says leave a 6 month cash "cushion" to live on. So- if you have a very big mortgage, you'll have to put that much more aside, to protect both your family and your asset. And be aware that that asset, itself, could be a money loser for years, in the worst of "dips". It's happened before, it will happen again.

Are you and/or your wife employed in any industry vulnerable to economic downturns? If you lost your job due to huge swings in your industry/consumer demand etc- would you rather have a big mortgage OR a big reserve fund?

I'm a big believer in liquidity for a year, and one of the ways we do it is to keep our "monthly nut" small. No debt, save for a small mortgage against big equity. Great credit lines. We can weather any financial storm, with this approach.

Finally, do make sure you're diversified. This is one place that some of the cash from your build could help. Just be smart, judicious and stay true to your own goals.
jakkom
9 years ago
Hope you've made your decision as interest rates are going up. And do be aware that one of the proposals for the Repubs' new tax plan is to double the standard deduction, which would render the mortgage deduction essentially useless for most people except very high income folks.
hooked123
9 years ago
We did a 15 year mortgage on a rental home and put every extra penny towards it. The day it was payed off it had beyond tripled in its worth- it's in California. I had just turned 40 and that was one of my happiest days, it felt great.
Elmer J Fudd
9 years ago
last modified: 9 years ago
Paying a mortgage off sooner is fine if that's your preference, but it limits how much money you have to do other things (including buy more real estate, if that's what you like to do) or to invest elsewhere to have a risk-diversified portfolio.

And, of course, the presence or absence of a mortgage, or the balance of same, has no effect on the value or appreciation of the property. If it went up, it would have done so with or without a mortgage. Same is true for going down, which would have happened to this property and others many owned 10 or so years ago.
FeatherBee
9 years ago
I would have my cake and eat it too. Wait, you can't do that. Or can you?

hehehehe...

I would find my "happy medium" as I like to call it and do the best of both. In other words, don't put all the cash down (that way you still have a nice stash) and do a 20 year note opposed to 15.

For me personally, I want zero debt, including my home paid off. So that is my #1 goal. The stock market and home values will tank again some day but when that happens and I don't have to make a mortgage payment then I wont have to worry. Plus, I'll have nice "stash" to hold me over...
dchall_san_antonio
9 years ago
I had a variable rate mortgage back when they were the worst thing you could get. It worked out GREAT for me, because I could afford it even in the worst of time. During the low interest rate years I made the same payment as when the interest was high. If I had money left over at the end of the month, I added that to the payment. We had it paid down to about $10,000 within 10 years. As time went on the mortgage companies sold and resold the mortgage. One of them refinanced my remaining loan (about $7,000) over another 30 years. This made my principle and interest payment almost nothing although taxes and insurance grew way out of proportion to the rest of the country. So my payment actually grew. After 25 years we still owed about $7k. I don't feel obligated to pay it off. My last two houses I paid cash for, but again, I don't feel obligated to own them outright. I just lowered my housing needs. It's a lot simpler to buy a house without a bank involved.
User
9 years ago
The OP has no doubt made up their mind by now. but to respond to today's posters. Having changed our 30 year to a 15 after 10 years thinking only about shortening the time I should have left it at 30. The interest was similar so only the length was different. If I had left it as 30 years if I had financial problems the lower payment would have allowed more money for other things. As it was with continuing paying additional each month the house was paid off in 18 years rather than 30. The second poster mentioned that they had a variable interest rate. Having seen in California where many lost their homes because the interest rates made their payments impossible I could never suggest a variable interest rate. One downside with paying off your house is that not having that debt can lower your credit rating. Mine dropped 5% and AAA increased insurance rates by 10% because of the drop.
Tom
Original Author
9 years ago
As the original poster I am still following this thread. I still have the option to go either way as were still under a construction loan. I'm leaning towards paying as much out of pocket as I can while leaving a comfortable emergency stash. Financing over 30 or 20/15 will depend on whether our current home sells. Thx for the input!

Hold onto my cash or take smaller mortgage?

Jake The Wonderdog

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Hold onto my cash or take smaller mortgage?

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