SHOP BY DEPARTMENT
Houzz Logo Print
carolbrandywine

Cash or Mortgage

Kendrah
7 months ago
last modified: 7 months ago

If you had more than enough money to purchase a second home, still have a robust retirment account, rainday fund, enough to maintain to properties properly, and no debt at all aside from her mortgage on her primary home, would you pay in cash or take out a mortgage?

I'm helping a family member figure this out. We are meeting with her financial advisor but I always love getting additional opinions and folks on Houzz often have good ones.

She will keep the home long-term. It is not an investment property or a flip.

Thanks!

Comments (70)

  • Kendrah
    Original Author
    7 months ago

    Update - Cash makes most senes. Interesting thing learned from bankers about changes in tax law- if you own over X amount of dollars in property, you can longer take the interest payments as a tax deduction. Therefore in my family member's situation there is no tax benefit to a mortgage.

  • Elmer J Fudd
    7 months ago

    "if you own over X amount of dollars in property, you can longer take the interest payments as a tax deduction."

    Bankers shouldn't give tax advice - this statement is wrong.


    There's a limit on the deductibility of qualifying mortgage interest that looks to the total amount of mortgage debt owed, not what the value of property is.

  • Related Discussions

    Extreme M.O. foreclosure

    Q

    Comments (3)
    The home at 5489 Ahyoka Dr. has 5,500 square feet after the 2005 makeover, WGCL CBS46 reported. Well something just does not add up here. The ad says it was built in 2005 and has 1,549 sq ft. It's presently for sale by someone for $950K. I've often wonder how the recipients of the makeovers were ever able to afford heating, cooling, taxes, and insurance on the bigger much improved homes. I'm sure all those things would be considerably more than they were when it was just a small humble abode. Sue Here is a link that might be useful: Real Estate Ad at Zillow-5489 Ahyoka Drive, Lake City, GA
    ...See More

    Should I stop paying the Mortgage occasionally?

    Q

    Comments (30)
    Well, I know 2 Accords or Camrys will set you back 53K. A suburban and a camry could be more like 70K. If financed, she is probably upside down, and would lose money selling them. Anyone here ever sold a car on her own? Its one thing to trade in, but quite another meeting strangers for test drives. I guess there is carmax, but I'm quite sure they are in full lowball mode in this economy. You are making several assumptions: 1. Toyota only sell Camrys. They actually sell less expensive models, such as the Corolla. Honda also sell the Civic for far less money. Are they fancy cars? No. 2. New car purchases. The OP can buy used cars. There lots of used cars selling for $10k-15k - heck I saw 2 year old used Saabs going for $15k. 3. Carrying $53K in auto debt is the default and it's not worth lowering debt if you can't erase all of it. Sure, she may be underside down and may still have some debt afterwards but likely it'll be less than $53K. She needs to run the numbers to figure out if it's worth it. Finally, I would take a course at the local community college about basic auto mechanics. Learn how to change a tire, check the oil, change the oil, check tire pressure, etcs. I learned a long time ago that basic auto care is necessary. Ten years ago, I got a flat tire on I-95 so I changed the tire myself - not one person stopped to help me (maybe I looked a bit too competent). We've sold a car to CarMax. I'm sure we didn't get the absolute best price for the car but it was a fair price (I had done some research on the internet to get a ballpark price). It was amazingly easy to sell to CarMax. I would recommend it to people who don't want to do it themselves.
    ...See More

    Remodeling saga, the the path of here to where?

    Q

    Comments (31)
    instead of insults how about posting something that will help? Im guessing at approximate costs to try not to get screwed. For example I had two pool guys come in and said minimum of 150K for a basic pool with spa. How is a homeowner supposed to not get screwed unless they understand the cost of the pieces? A basic pool with a spa in a generic area should be about 40K. We have solid limestone so magically that adds 110K. Really though it takes a backhoe about 14 days to chisel out the pool and it costs about 1K/day for the backhoe + crew. The beam then needs to be more heavy duty. But not to the tune of 110K. My original bids for just the kitchen came in at 140K. I was able to get my contractor to agree to about 60K by leaving all walls in place, cabinets were done by another company at 23K. Building a wall and removing a wall in theory was about 65k, really? Most builders around here wont build a custom home for less than 250/sq ft. My last renovation was really nicely done and was about 11K for the master not including vanities or touching the tub.
    ...See More

    If I Default on a House Mortgage, Can they...

    Q

    Comments (32)
    My tenants are a great example. They pay rent but still have to maintain the property and are responsible for any damage they have caused. Everything you type is wrong. I mean like everything. Really just resist the urge. Tenants are responsible for the terms of the lease and excessive damage to the property. In fact, tenants are less responsible for damage than a stranger off the street. If a stranger off the street walked into your property and caused an amount of monetary damage equal to normal wear and tear on a leased rental property he would be held financially responsible even though a tenant wouldn't be. Tenants have diminished responsibility to maintain your property and virtually none without the lease. A mortgage is pretty much the same. Your paying rent until an agreed certain $X amount until its yours. It isn't even close. It isn't that we don't understand your point, you don't need to give more examples, we completely see what you are saying. The problem is that you are WRONG. Not a little bit wrong, a whole lot of absolutely incorrect, and no explanation out there is going to make you right. A mortgage creates certain obligations and if you want to be free of those obligations then you must pay off the note. Your assertion that an obligation subverts ownership is absolutely ridiculous. Someone might feel freer without that obligation, but I would argue that is nothing more than false assurance. Realistically, simply being born creates certain obligations and if you want to be free of those obligations then you must die. It doesn't mean you are not alive right now just because you are obligated. Maybe it this mentality why so many damn Americans are in debt. They buy something on credit and actually think its theirs. Realistically, your misconception of debt is probably more indicative of the problem with this country than any misconceptions about ownership. Debt is a tool, and just like many tools, it can be used creatively or destructively. Give an experienced carpenter a hammer and watch him turn a pile of wood into something of significant use and value, however, give that same hammer to a 7 year old and set him free in something of use and value and watch the destruction. Debt isn't the problem and it never has been, and the people who believe it is are just tiresome. Spending is the problem. There are lots of people who have debt and wealth, and there are lots of other people who have no debt and nothing to show for it.
    ...See More
  • Angel 18432
    7 months ago

    That's why it's important to do your own due diligence and/or hire a professional.


    Taken from the IRS site.


    Home mortgage interest. You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.



  • Kendrah
    Original Author
    7 months ago

    Angel and Elmer, I stand corrected. What you posted is what the banker said, I misremembered it.

  • judianna20
    6 months ago
    last modified: 6 months ago

    Why are you asking for a family member who has a financial advisor? Stay out of it, as it is none of your business.

  • chisue
    6 months ago
    last modified: 6 months ago

    I'd be thinking about the current low interest rate on mortgages...and inflation. It's nice to pay off a loan in less valuable dollars. IMO the fiscal answer here is to take a mortgage, provided the rate and costs are low. The *emotional* one may be different.

    You say the home in question isn't listed yet. She should get 'a deal' from a seller who won't be paying commissions...and who won't have to wait to close. Have you ascertained the true value of the property? Will you want a home inspection? I'd be using a RE attorney -- and possibly an appraiser.

    As someone who just sold a 'second home' -- a Maui condo -- I'd question about how often the buyer will use the place and the distance between homes. Our condo was in a complex where it was legal to rent it to vacationers.. That worked very well for us, financially. In addition to the rental income, there are tax deductions. (Travel to maintain the condo is one.)

  • worthy
    6 months ago
    last modified: 6 months ago

    Mortgage interest deductibility should be calculated, though it may be a lot less attractive than you think, according to Investopedia.


  • Connecticut Yankeeeee
    6 months ago

    I’m in this almost exact position. I’m getting a mortgage, probably 80%. This all based on the advice of our financial advisor. We know there’s no tax advantage on a second home. We’re in great shape financially and I want to be near my kids, so it’ll actually be my primary home. I haven’t found my home yet but will be making a house hunting trip next month. Wish me luck, I’m very excited!

  • chiflipper
    6 months ago

    True story. It's 1998, Mom has inherited a modest amount of money and, being retired, using half of the money, buys her first-ever home in an upscale active adult community. The home selected is modest in size with mid-range finishes, she can easily afford paying all her expenses using her SS and pension. Her "new friends / neighbors" often tell her how foolish she was to pay cash, they have mortgages and are enjoying the benefits of the soaring stock market. It's now 2008 and those same "friends" (who managed to survive the dip of 2002) can no longer afford to keep their homes and are desperately trying to sell - often for less than they originally paid. Yes, debt can be a tool but, it can also become a nightmare.

  • worthy
    6 months ago

    There are lots of other investments than securities.


    I pay cash, re-mortgage to the hilt and buy investment real estate, private mortgages, private business loans. The mortgage interest is deductible as a business expense in the jurisdiction I operate in. Not for everyone.

  • Caroline Hamilton
    6 months ago

    Both our primary home and our vacation home were purchased in cash. For us, it's another asset class and a part of a well-diversified portfolio of equities, fixed income, precious metals, collectibles, etc.

  • Lyndee Lee
    6 months ago

    I would buy with cash as an offer with no mortgage contingency is easy for a seller to accept. After you own the home, you can always take out a loan to fund your next adventure. However you choose to fund the purchase is separate from your long term financial plan

  • Tara
    6 months ago
    last modified: 6 months ago

    IF I had to have a mortgage at all, I would only want one at a time. So I'd pay cash for the second home. You never know what could happen down the line and then you would lose that house. You may think you have enough, but what it the bottom fell out of everything (remember the Great Depression?), then you would lose that house and not have a place to live. I'd opt for the security of knowing you would always have a place to live if all hell broke loose. Less worries.


    Having more security matters more the older one gets. If the house is free and clear, the heirs wouldn't have to worry if THEY could afford to keep the house.

  • Elmer J Fudd
    6 months ago
    last modified: 6 months ago

    If you buy a house for cash of 100 and it goes up to 120 and you sell it, you have profit of 20. If it goes down to 90 and you sell it, you have a loss of 10.

    If you buy the house with a mortgage of 80 instead of all cash and insert the same price changes, your profit or loss are the same numbers. No extra gain or loss either way.

    If you bought the house with a mortgage of 80, at an interest rate lower than the rate of return you earn on other investments, your net worth after the house is sold (whether for a gain or loss) will be higher.


  • bry911
    6 months ago
    last modified: 6 months ago

    @Elmer J Fudd and I often disagree, but in this case I second everything he said.

    I would add, financial security is gained by access to cash, not access to bricks. You will be more financially secure with a mortgage on a home and access to the cash to pay it off, than you will be with a paid off home.

  • Kate
    6 months ago

    You never really own your home, the government does! Just try not paying taxes, even when they have increased so much to price you out of your own home.

  • Elmer J Fudd
    6 months ago

    Huh? You don't own your real estate yourself? I own mine and I think most everyone else who has some does too.

  • Mrs Pete
    6 months ago

    "I would also look into any penalties on the mortgage for paying it off early" - Smart. Never thought about this!

    I specifically remember my high school algebra teacher making us repeat over and over, "I want a simple interest loan with no prepayment penalty." Thanks, Mrs. Barringer.

  • bry911
    6 months ago

    I specifically remember my high school algebra teacher making us repeat over and over, "I want a simple interest loan with no prepayment penalty." Thanks, Mrs. Barringer.


    While there may have been some utility in teaching this to high schoolers looking at credit cards, it really doesn't work for installment loans. Since the interest is paid every compounding period then it really doesn't matter, there is no interest to compound. A better mantra would be to make sure the installment period on an installment loan matches the compounding period.

    We often call mortgages simple interest loans because of people teaching about the evils of compounding interest on loans, but in reality home mortgages are not simple interest loans and we don't ever want them to be. In a simple interest loan there would be no benefit for extra payments until the end of the loan, in a compound interest loan, extra payments have an immediate effect. In a multiple year installment loan we want extra payments to reduce our interest immediately and reduce the number of payments.

    In reality, mortgages are compound interest loans that don't actually compound.

  • worthy
    6 months ago
    last modified: 6 months ago

    in reality home mortgages are not simple interest loans

    Tell that to the investors for whom I administer a portfolio of simple interest non-amortizing mortgage loans. (Yes, there is sometimes confusion when, after five years, the borrowers discover that they still owe the same amount they borrowed.)

  • bry911
    6 months ago

    @worthy - What does that have to do with simple or compounding?

  • worthy
    6 months ago
    last modified: 6 months ago

    My response is to a statement that is incorrect in certain not uncommon circumstances. I have been on both sides of simple interest mortgages--as borrower and as lender--and don't find them a frightening place to be.

  • bry911
    6 months ago

    Rather than having an academic discussion on definitions, let's just say this... there is nothing to compound as long as your payment exceed your interest... a.k.a. installment loans.

    So why bother caring whether interest you don't have is added back into terms loan? Your principal + zero accrue interest = your principal

  • worthy
    6 months ago

    Your principal + zero accrue interest = your principal


    Can't argue with that.


    And in a simple interest mortgage loan, there is typically no such thing as extra payments. Only payment(s) if allowed to reduce the outstanding principal.

  • apb0
    6 months ago

    'I'm with Mrs. Pete above (and Dave Ramsey), not gargamel. I read a book decades ago that influenced my thinking, "The Millionaire Next Door" by Stanley, PhD. Personally, I wouldn't take financial advice from anyone who isn't worth at least 7 figures in investable income, meaning net worth not including their primary residence. If this lady had both mortgages paid off, would she borrow to invest in the market?

  • Elmer J Fudd
    6 months ago

    "I wouldn't take financial advice from anyone who isn't worth at least 7 figures in investable income, meaning net worth"


    Income and net worth are two very different things, and are mostly unrelated. What are you trying to say?

  • Elmer J Fudd
    6 months ago
    last modified: 6 months ago

    "I specifically remember my high school algebra teacher making us repeat over and over, "I want a simple interest loan with no prepayment penalty.""

    There have been times in my adult lifetime that it's been possible to get loans with no prepayment penalty. Years ago, there were times it was mostly not possible.

    Lenders do what lenders do, based on their markets, what they want for returns, and based on what their competitors do. If at a given point in time lenders were not making loans without prepayment penalties, then that was what they offered, take it or leave it.

    Prepayment penalties typically lapsed after a few years, it was a way to insure a set rate of return for loans not outstanding long enough. An alternative was to charge more points or higher interest rates. To the lender, it's all the same.

  • bry911
    6 months ago
    last modified: 6 months ago

    I'm with Mrs. Pete above (and Dave Ramsey), not gargamel.

    Dave Ramsey is an entertainer who makes his money entertaining people. He often pitches front-end loaded mutual funds on his program, I am sure that has nothing to do with one of his big sponsors being in the front-end loaded mutual fund business.

    IMO, Dave Ramsey gives great advice on spending and bad advice on investing. The only thing I have to back up that assertion is the math.

    I read a book decades ago that influenced my thinking, "The Millionaire Next Door" by Stanley, PhD. Personally, I wouldn't take financial advice from anyone who isn't worth at least 7 figures in investable income, meaning net worth not including their primary residence.

    Do you really believe that Thomas J. Stanley had a million dollars when he wrote The Millionaire Next Door? Also a million dollars in investable wealth isn't that much and if you think that you need a million dollars in investable income to be savvy, then you need to read Thomas J. Stanley's book again.


    ETA: If you want to talk about investing advice here is mine. Invest into a no-load ultra low maintenance fee index fund (e.g. Vanguard). Invest early, invest often, and leave it alone.

    Personally, I invest monthly and will always accept payment deferrals to increase investing. This includes no interest credit cards, six month same as cash offers, and even low interest loans.

  • apb0
    6 months ago

    Elmer J Fudd:

    What Is Net Investment Income (NII)?

    "Net investment income (NII) is income received from investment assets (before taxes) such as bonds, stocks, mutual funds, loans, and other investments (less related expenses). The individual tax rate on net investment income depends on whether it is interest income, dividend income, or capital gains." A simple but well received definition from Investopedia.


  • apb0
    6 months ago

    Bry 911, I have been successfully investing since the 80s and have done well. I can tell you that for the majority of people debt is not the way to increase your net worth or become wealthy (the ability to live off your investments). See the studies on American millionaires--The proof is in the pudding. Just saying...

  • Caroline Hamilton
    6 months ago

    Not all people are better off using mortgage debt. For high income, high net worth individuals with passive income streams and highly diversified portfolios, this is not always the right move. For a myriad of reasons, the wealthy do not have to leverage their homes in order to meet their financial goals. It appears the OP is in that category.

  • PRO
    Beth H. :
    6 months ago
    last modified: 6 months ago

    I guess it would depend on the price of the home. I would never advise someone to pay cash for a home in my area, unless they are very, very well-off and secure financially.

    700-900K is the average home price around my area. further into LA and it's over a million.

    who has a mil lying around to buy a home, and why would you? better off putting money down, financing the rest and taking the tax write off (if you can w/your purchase) I have a rental prop that we bought w/ 'cash', but half of it was from the equity in my first home. I just refinanced (HELOC) w/a very low interest rate at 15 years. and I get to write off the interest (which I really need because I have no other write-offs except the rental property) and no pre-payment penalty. (credit union lender)

    The rent easily covers the monthly mortagage, so I get a positive cash flow.


    Obvisouly the down side to financing is when the market tanks (like 08 or the early 90's) and home prices decrease, leaving you upside-down. Yes you can take a short sale, but the IRS will nab you w/the difference and add it as extra income. (ask me how I know this)

    But, if you're talking about 100K home then I'd ask, "does she need that 100K or can that 100K be used for something else?"

    I just don't see the need to tie up large sums of money if that money can be used elsewhere to make more money.

  • Elmer J Fudd
    6 months ago

    apb0, I know what net investment income is. My question to you had to do with your comment that somehow tied together it with net worth. My response was, these two aren't directly related.


    You said:


    "I wouldn't take financial advice from anyone who isn't worth at least 7 figures in investable income, meaning net worth"

  • bry911
    6 months ago
    last modified: 6 months ago

    There are no tax brackets or income flows that make cashing in properly diversified investments for low interest home loans a good idea.

    -----

    The wealthy generally finance homes. I have never seen a study that shows the wealthy have less debt per capita. In fact, the wealthy are more likely to have debt than the poor or the middle class. It tends to be lower as a percentage of overall wealth, but that is largely a function of their wealth and the availability of low interest debt.

    When I purchased the home I am currently in, I had two choices (1) withdraw the entire amount ($425,000) from my mutual fund and purchase the house in cash, (2) withdraw 20% and finance.

    Because of capital gains taxes I would have had to withdraw more, so let's say $467,500 vs. $93,500 for 20%. Which, by the way, is one of the big reasons wealthy people don't pay cash for big ticket items, the interest premium is actually less than the tax penalty.

    Feel free to math it out if you want, but that extra has grown to $1,137,000 today without the drip. Wealthy people tend to get professional advice and so they tend to make fewer financial mistakes, such as sacrificing investments to buy a house.

    -----

    I don't know what "successfully investing" means. I am not that savvy an investor. I invest in Vanguard index funds (VIGAX is my current favorite) and since I invest every month, I have accumulated some decent amounts, but make no mistake, you could train a ten year old to take the money they have at the end of the month and invest it in a mutual fund.

    I would argue that ten year old will be successfully investing when they start using math to make decisions, but that is just my argument.

    ETA: In reality, the best way to accumulate wealth for most Americans is through disciplined spending and consistent investing. When debt is used as a financial tool, it can be incredibly powerful. However, too many confuse debt as a financial tool with debt as a tool to finance your wants. There is a difference! Financing a house that you could buy five times over is not the same thing as financing a house five times your wealth or income.

  • Caroline Hamilton
    6 months ago
    last modified: 6 months ago

    There are no tax brackets or income flows that make cashing in properly diversified investments for low interest home loans a good idea.

    Which, by the way, is one of the big reasons wealthy people don't pay cash for big ticket items, the interest premium is actually less than the tax penalty

    ***

    I am not talking about cashing in investments. Many wealthy people have cash, in addition to a well-diversified portfolio with which to purchase big ticket items. For these people real estate is another asset class, not a tool they need to leverage.

  • apb0
    5 months ago

    Would you borrow money to play the stock market? This is what you're doing when you get the second mortgage because you make more in the market. I sleep better with no debt and a substantial portfolio in the market. If this were another home for rental income, then the scenario might be different. It's a risk question. How much risk can this lady accept in uncertain times?

  • bry911
    5 months ago
    last modified: 5 months ago

    Would you borrow money to play the stock market?

    Yes, even though you are asking the question in a somewhat biased way... I would borrow money to invest in the stock market in order to have a better future. In fact, I have and still do.

    I have a $100,000 second mortgage that was taken just before the pandemic and invested in the Vanguard large cap growth fund. After all payments and fees I will have to pay back $131,400. Today that $100,000 investment has grown to $155,259 while paying more than $1,800 in dividends. As of today I have made $22,170 in payments and my balance on the loan is $86,290. So if I were to pay it off today my total out of pocket will have be $108,460 and my return would be a bit over $48,600.

    This is not theoretical, this is actually $48,600 (pretax) of wealth I have created in three years just by being smart about leverage.

    I also have a substantial credit card balance that I transfer between credit cards that offer no interest for 18 months on transfer balances. Any time I can get an 12 or 18 months of free interest I take it and invest the money. I have been doing this my whole life in addition to investing some of my income, I sleep pretty well.


    ETA: Just to be clear luck is really not a factor when investing in a broad market index fund. The market has never been negative over a five year period and there are only a few months where the market has been down over a three year period.

    You can check your fund's performance by finding its best and worst three year return.

  • summersrhythm_z6a
    5 months ago

    Professor bry911, you rock!!!

  • Elmer J Fudd
    5 months ago

    I've known and worked with a lot of financially astute people over the years and few would ever crow about results coming from the dumb luck of good timing, something completely out of their control. Or suggest it to have been anything other than dumb luck.

    And funny thing, those same ones who have benefitted from serendipity out of their control talk about their bad outcome serendipitous outcomes too. Most people who are long term investors experience both good luck and bad luck readily admit that trends are usually not foreseeable.

    I used to have relationships with several large account private portfolio money managers that worked for their own smallish firms. The kind whose clients were people with investable portfolios starting in the high 8 figures and beyond. The standard promise in their line of work was that while they always hoped to do better, their objectives were to preserve capital and provide returns over time that would beat inflation primarily. Nothing more. These were people with Top-10 big name MBAs and most with Wall Street experience among other things.

  • judianna20
    4 months ago

    This is family member's business. I looks like she has covered her bases.

  • anna_682
    2 months ago

    I agree with Elmer Fudd. I worked with very wealthy clients as a wealth manager. The majority paid cash for their houses. Their investments were geared towards less risk. They did not want or need risk. Most of the very wealthy families were heavily invested in Treasuries.


    Billionaires leverage their stock because it is a large portion of their net worth. They have to avoid selling due to capital gains taxes. They take loans against their stock to finance their lifestyles. Doing so allows them to ultimately pass their wealth to their heirs on a stepped-up cost basis.


    Young people use leverage to build wealth. Older people tend to have paid off houses due to time. I would not purposely leverage my house to invest in the stock market. The lost decade, anyone? The dot-com bust? The Great Recession? Etc.




  • apb0
    2 months ago

    I also have to agree with Elmer Fudd and Anna above. After over 30 years investing in the stock market, we have never timed the market. We have many wealthy friends who have all done the same. None has leveraged to gain, and all are debt free. Debt free is a very freeing feeling in this time of extreme 70s-style inflation. But as someone above noted re. leveraging, I'm not talking about billionaires, just multimillionaires who once were like most other people. Interestingly, most of these people you would never guess were wealthy from their cars or their houses.

  • bry911
    2 months ago
    last modified: 2 months ago

    Just because "wealthy people" do something doesn't mean it is the best thing for non-wealthy people.

    Much of this comes from a misunderstanding of risk. Houses are more risky than a properly diversified investment portfolio. The problem is diversification... more people lose money on houses than mutual funds. An individual stock may go down, while the fund as a whole performs well. Likewise, while real estate may be a safe investment, your property may lose money. It is not at all unusual for a property to lose money over ten years and it is unheard of for a mutual fund to lose money over ten years. We all know someone whose house was a money pit.

    There is no doubt that access to low cost capital generates wealth. Our entire economy is based on that certainty. There is also no doubt that houses are illiquid assets. I think we can all agree that liquid assets are inherently less risky (you can't eat bricks and the pharmacy will not accept drywall as payment). So why don't "wealthy people" do this?

    The answer is probably that it isn't worth the trouble, because it isn't worth the trouble even for me. I largely do this with students to demonstrate the power of leverage and using math to make math decisions. I really don't care about making $48,000 in three years.

  • anna_682
    2 months ago

    Bry911 are you kidding me? You have never heard of mutual funds losing money? Janus Funds, anyone? ARK ETFs? QQQ? There are lots of funds that have lost investors' money over a ten-year period. There is a much smaller number of funds that have gone bankrupt. Most investors do not buy in at the all-time low.


    Anything can lose money. Geez. That is why real estate is predicated on location, location, location, for success. Wealthy people LOVE investing in real estate. They don't have the same POV as you do.


    You are leveraging your house to invest in the market. It's called mortgage risk arbitrage,

    It needs to be carefully considered and is usually not in the best interest of most people. Do you use margin to purchase equities? Does your FA advise you to do so? I bet not. Yet they will advise people not to pay off their mortgage and invest excess money; effectively creating mortgage risk arbitrage. FAs do this because they make money off of you! You are taking on risk that may not be beneficial to you.


    You are using a small snapshot of time. Let me do the same, I invested all of my house equity in Nasdaq Index fund QQQ back in 2000 and took out a mortgage loan. I am planning to use gains to pay the monthly mortgage. Ooops. QQQ took 15 years to get back to ATH. Or, last October, I downsized, took a loan, and put my equity in VTI. Ooops, down 20% YTD. I had to sell some to pay the mortgage payments. OOOPs. Who knows how long this bear market will last? Stressful times when you need to make payments to keep a roof over your head.


    Every individual needs to assess their own risk profile. There is no right or wrong answer when someone properly assesses the risk involved. If you want to leverage your house equity to invest in the market be sure you understand mortgage risk arbitrage and the true cost of borrowing against your house.


    The power of leveraging a small down payment to buy a house is much different than taking your home equity and investing in the market.



  • bry911
    2 months ago
    last modified: 2 months ago

    @anna_682 said, "Wealthy people LOVE investing in real estate. They don't have the same POV as you do."

    With all due respect, my commercial and MFU real estate portfolio is substantial, I turned 18 in the middle of March and closed on my first investment property on March 30th, which was more than 30 years ago. I have inherited a couple of office buildings along the way and some MFU developments. That is not really on point here, commercial real estate is not what we are talking about and "wealthy people" don't typically count their homes as real estate investments. I wouldn't count any of my homes as a real estate investment, even though one of them is a working stud farm.

    What we are actually discussing is the question of whether you should pay for a home in cash or finance it. I responded to a question about fungibility. I didn't respond to a question about what "wealthy people" do with their money and will argue that it is still not on point. I still argue that you haven't contradicted my point, only specific information in it.

    So instead of focusing on what wealthy people do, let's focus on the risks and benefits of someone buying a home using substantially all of their liquidity, which is going to be the situation for most people. The most common scenarios for this are likely an inheritance or the sale of an existing property to fund a new property. For most people, this is likely going to represent a large portion of their non-retirement assets. Should those people pay cash or finance?

    The answer to that question is that on the whole you are at less risk with access to liquidity. Financing a house has some other financial benefits (really stop-gaps) but on the whole those are not material. What is material is access to liquidity. When this post was made interest rates were lower than they are now, so I addressed the question of whether I would take money out of my house to invest, which is really the same thing as asking would you cash in your investments to buy a house with it. Nowhere in this has anyone said that you would be using the invested funds to make the mortgage payment.

    Can we come up with scenarios where people should use their liquidity to buy a house? Yes, absolutely. Will those scenarios fit most people? No. Most people are not better off cashing in investments to buy a house that they can get low interest financing on assuming that have an income to make the payment (the situation most people asking this question will be in).

  • anna_682
    2 months ago
    last modified: 2 months ago

    Bry911 "The most common scenarios for this are likely an inheritance or the sale of an existing property to fund a new property. For most people, this is likely going to represent a large portion of their non-retirement assets. Should those people pay cash or finance?"

    Nobody said anyone should cash in their investments to buy a house....I said they should not leverage their house to buy equities. It's odd that you cannot understand the difference given your insistence on expertise in the subject, Do you understand sequence of risk when needing the investment to pay the mortgage? Risk arbitrage?


    The majority of people should pay cash if they move and have the equity to do so. They should not take a mortgage and invest their home equity. Most people are not savvy investors and should not leverage their primary residence to invest in the market. If someone is concerned about access to their home equity they can get a line of credit.

    Most houses can be liquidated in a reasonable amount of time, if necessary. Most people only liquidate during a down market if forced to do so. Unlike equities, where a fair share of people get spooked by down markets and "buy high, sell low." The emotional aspect is there and repeated over and over in bear markets.

    Any forced selling of assets is unlikely to produce a desirable result. A paid-off house probably provides flexibility in those situations.

  • bry911
    2 months ago
    last modified: 2 months ago

    @anna_682 said, "Nobody said anyone should cash in their investments to buy a house....I said they should not leverage their house to buy equities."

    There is no difference between these two positions, this was the entire point of the fungibility tangent. (Note: of course this ignores any possible tax consequences of liquidating investments and any tax benefits of a mortgage as that isn't the point of the fungibility discussion).

    Not cashing in $100,000 of investments and financing a house is the exact same thing as financing a house to buy $100,000 in investments. The end position is $100,000 in mortgage and $100,000 in investments. So there is no logical reason for your position.

    ---

    Houses are not liquid, they are far from liquid. In fact, when liquidity is most important houses tend to have fewer options for liquidity. Items like job loss and major repairs can both be destructive to options for liquidity. Medical conditions can also impact the availability of liquidity while drastically increasing the need.

    A paid off house provides no flexibility in situations where liquidity is needed. You can't eat your drywall.

  • anna_682
    2 months ago
    last modified: 2 months ago

    @bry911 You clearly have no idea what you are talking about. You should leave the financial advice to the experts.

    There is most certainly a difference between using equity in a house to purchase another house VS. cashing out an investment to pay for a house. Cashing out an investment has tax consequences or advantages that must be considered.

    If you take the equity out of your house and use it to buy equities you are most certainly leveraging your house to buy stock.

    Who cares if you can eat drywall? What a silly argument. The vast majority of people aren't all in on their house and have no other investments.

    You haven't addressed risk arbitration, sequence of risk on returns on the invested money needed to pay the mortgage, etc.

    You are taking on a lot of risk to get a small gain on interest rates. You need to earn well above the interest rate on the note, the associated loan costs, the costly front-loaded interest on the loan if you decide to sell in the first decade, etc.

    Peace guy. Learn to keep an open mind. It will do you well in life. I feel bad for your students.

  • bry911
    2 months ago
    last modified: 2 months ago

    There is most certainly a difference between using equity in a house to purchase another house VS. cashing out an investment to pay for a house. Cashing out an investment has tax consequences or advantages that must be considered.

    I didn't make my last point well, that was my fault. However, you are just adding in conditions that are outside the bounds of the stated conditions. I am obviously not advising you cash in investments, if you look back in this very thread I stated, "There are no tax brackets or income flows that make cashing in properly diversified investments for low interest home loans a good idea."

    My entire participation in this thread has been against neglecting other investments to pay off a home. I am simply stating that you shouldn't neglect other investments in order to pay off a low interest mortgage faster.

    So let me try to make my point a different way if you will allow.

    Money is fungible and because of that any combination of debt and investments becomes interchangeable, we often call this avoidable interest but more formally it homemade equity or the Modigliani-Miller theorem.

    So let me explain how this becomes relevant. Suppose you own a home with a $100,000 mortgage and a payment of $500. Assume after all other bills and expenses you have $1,500 left each month for mortgage and savings which are currently zero. It might be completely reasonable to want to save $1,000 per month until you have saved $5,000. That $5,000 is a levered investment in reality, because you could have used it to avoid interest.

    Therefore all debt becomes fungible and all savings are levered when you have any debt. People have an illogical need to protect their home even at the expense of investments or higher interest rate debt. Mathematically, you should favor borrowing money on your home over credit cards, car loans, etc., because it is typically a lower interest.

    Also mathematically as long as your interest rate is better on investments, you should favor investing over paying off a home. However, people resist this logic even though it is 100% mathematically correct. There is a risk your investments could lose money, but there is also a risk that your home could lose money. People often neglect to properly recognize the risk on their house and overemphasize the risk of investments.

    Would you advise someone to forego all savings and investing until their home is paid off? If not, at what point would you draw the line? Suppose I am making $18,000 per month, have no debt other than a $1,500 house payment at 2.75% interest and $500,000 in equity investments... would you advise I stop contributing toward equity investments until I pay off my mortgage?

    ----

    We can absolutely disagree on whether or not most people would be better with money saved and a paid off home. All I can say is that we have very different experiences, I rarely meet people who invest their marginal savings and meet a lot of people who paid off their house 20 years ago but have no other significant investments.


  • bry911
    2 months ago
    last modified: 2 months ago

    This may be unnecessary, but I thought another example might explain better.

    1.) A client with a decent job has no savings and a mortgage. Would you advise they make their payments and invest some money every month until they had accumulated $30,000 in savings?

    2.) A client has cash to buy a new home but will have no money left over. Should they invest $30,000 in savings and get a small mortgage instead of paying for the house in cash?

    3.) A client has a paid off house but no savings should they take a $30,000 mortgage on the property to put in savings?

    In reality, all three of these are the same, there is no difference between them. However, people will often think of them differently.

    As a follow up, if you had a client with $30,000 in a savings account would you advise they invest it in something, whether a money market, equity securities, or anything?

Sponsored
Nova Exteriors
Average rating: 4.7 out of 5 stars22 Reviews
Window, Doors, Roofing & Siding Experts in the DC Metro Area