Pay cash for a home? WWYD?

[midwestlily]

I’ve been lurking on here for a while (and previously on the old board), and since I think the people on this board have better financial judgment than most of the people in know in the real world, I thought I’d ask you for opinions on this. I’ve been working in a small LCOL Midwestern college town for a couple years, and now that my job is finally turning permanent (hooray!), I’m ready to buy a condo. I’m 55, female, single, no kids or spouse, no one else to worry about. My salary is $38,000, and I’m looking to buy a place between $120,000 and $160,000 (still making up my mind about what I really want). Which would be more than I could afford on my salary, but my parents left money when they passed a few years ago, so I currently have about $940,000 in a discount brokerage account. I also have $70,000 in CDs coming due soon, and about $25,000 in savings for emergencies. No debt.

Since interest rates are low right now, I could use the $70,000 for the down payment and closing costs, and take out a 15-year loan for the rest. Or, if I wanted to, I could sell off enough stocks to pay cash for a home. I like the idea of not having a mortgage, and I hate the thought of paying all that interest over the years.

I expect to stay in the place at least until retirement, 10-15 years from now, and might end up staying permanently.

If you were in this situation (and yes, I know how lucky I am!), what would you do?

[Plain Old Petunia]

You can probably come out ahead taking a low interest mortgage and keeping your money invested. It just depends on what you want. It looks as though you can afford to just pay cash and not be bothered by a mortgage. If that will make you happy, then do it.

[Tiny]

I think it will come down to what makes you feel most comfortable. Locking in a low interest rate on money you owe is a sweet deal though... especially if the money you 'keep' is invested and potentially earning more (or you guesstimate it will earn more in the future).
I think I'd explore the cost of selling of stocks/investments and the tax repercussions and include that in your decision.

No matter what you do you're budget will need to have a Shelter Expense either:
Mortgage (which includes Taxes and Insurance) and HOA fees if there are any
OR Taxes and Insurance and any HOA fees.
So I'd probably also figure my finances under both senarios. Maybe a smaller yearly draw down (which suppliments your income to pay the mortage) will be less expensive than a big lump sum. Don't know. I'm sure you can do the math (or someone can help you with it).

[dancinmama]

If it were me (and it's not), I would take out a mortgage knowing that it COULD BE paid off at any time that I wish. Interest rates can't go anywhere but up, so that loan will eventually become a pretty decent hedge against inflation.

When interest rates were high and dropping, we paid off the mortgages on two different homes. We are in our third home and are not paying off this mortgage because rates are so low.

[midwestlily]

Thanks, everyone, that's all helpful. I guess I like the idea of paying cash because I remember what happened with my father. He retired (youngish) in the mid-80s, not long before that 1987 crash, and I remember he said that the reason he got through it without having to return to work was that he'd paid cash for his retirement home and had no mortgage. But I'm a long way from retirement, so maybe the situation's not comparable.

[hoops902]

Jun 6, 2011 17:07:17 GMT -5 midwestlily said:

Thanks, everyone, that's all helpful. I guess I like the idea of paying cash because I remember what happened with my father. He retired (youngish) in the mid-80s, not long before that 1987 crash, and I remember he said that the reason he got through it without having to return to work was that he'd paid cash for his retirement home and had no mortgage. But I'm a long way from retirement, so maybe the situation's not comparable.

It's not all that comparable since he was retired, and if he simply had the money to pay off the mortgage (as you do) he shouldn't have had all that much money in the market anyways. Not enough to cripple him financially and send him back to work at least. If it's gonna keep you up at night, pay in cash and don't have a mortgage...it's not worth worrying yourself to death over it.

FWIW I paid cash for my house at a young age. I'm glad I did. Had I not bought a $70K house I probably would have spent it on a $50K car eventually. If you've got more financial restraint than I did, the "smart" move financially is to put a small downpayment down, finance the rest at a good rate, and invest your money rather than pay off a house. Though that being said, the smart move for me is probably to refi and invest the proceeds, but I'm not doing that, so I'm not doing the "smart" thing financially either, I'm doing the thing that takes a psychological load off my mind.

[phil5185]

With the cost of capital at 50 yr lows, I would make a 20% DP and refinance the 80% on a 30-yr Fixed Rate mortgage, probably at 5% or less. In 5 or 10 or 15 yrs when others are paying 10% for new loans you will be pretty happy with your locked-in 5% 30-yr rate.

At the high end of your range ($160,000) the mortgage payment would be under $700/m, that is well within the "28% of gross income" rule that lenders use to qualify you. (And of course the million dollar Net Worth doesn't hurt either.)

And let the million stay where it is, safely invested and earning way more than you will be spending on mortgage interest. (I got a 30-yr mortgage refi on a house when I was age 64 so I doubt that you'll have a problem).

[phil5185]

so I'm not doing the "smart" thing financially either, I'm doing the thing that takes a psychological load off my mind.

Yes, humans are interesting beings. You are afraid to own cash because you are afraid that you will lose it or blow it on $50,000 cars.

I'm the opposite. We once worked hard focusing on paying off our home and rental houses. And then our Return On Equity dropped. And that is when I found out that I am uncomfortable when my money is not working for me - so I refinanced all of the houses and invested the money elsewhere.

I was as surprised as anyone, I had always thought that having all of our real estate paid for would be great - but it made me absolutely uncomfortable.

[debtheaven]

You have enough to pay it all off (your future house). Our house is all paid off now. It feels GREAT to have it paid off. But it was paid off month-by-month.

So I'd try to find a compromise. Maybe put 50% down, and take out a low-interest loan for the rest. Work as long as you'd like to, then reevaluate as you approach retirement.

[Deleted]

I would put 20% to avoid PMI and invest the rest as Phil suggests.

Get a 30 year fixed rate loan to give you the most flexibility. If you want a paid off home in retirement you can sloooowly pay down the mortgage so your home is paid off when you retire.

Although we too recently paid off a mortgage (we're about a year away from retirement) I really don't recommend that folks have more than 10% of their NW in one investment including their home.

[debtheaven]

Hoops
If you're not comfortable pulling out equity to invest in the market, since you and your family all seem really close and really handy, what about either pulling out enough or saving enough to buy a rental? Or maybe buying a new place and keeping your old place as a rental?

None of my business, just a thought.

[2kids10horses]

I am going to suggest something COMPLETELY different!

Pay cash for the Condo. Then go and get a home equity line on it. As large a line as you possibly can.

Banks will write Home Equity lines for free. No costs. They will even pay for the appraisal. A typical mortgage carries 3 or 4% closing costs. The closing cost to buy the condo should be about $750 if you pay cash. Possibly even less. Shop around.

Now you have a line of credit you can use for investment at really low interest. True, it WILL be at a variable rate. So, at such time rates go up, pay it off. Meanwhile, I would use the money to buy an ETF based on the Russell 2000 small cap index. Small stocks are where the growth is. Phil likes the SP500. That's ok, too. Big stable companies, but less growth.

You don't have to borrow the entire amount to see if you like it, you could just try it out with say, $50,000 or so. If if works, great! Bank the profit!. If not, well, then just pay it off.

I use this strategy to buy houses I intend to buy, fix up, and resell. My home equity line is my source of working capital.

[bobbysgirl]

Jun 6, 2011 18:20:15 GMT -5 2kids10horses said:

I am going to suggest something COMPLETELY different!

Pay cash for the Condo. Then go and get a home equity line on it. As large a line as you possibly can.

Banks will write Home Equity lines for free. No costs. They will even pay for the appraisal. A typical mortgage carries 3 or 4% closing costs. The closing cost to buy the condo should be about $750 if you pay cash. Possibly even less. Shop around.

Now you have a line of credit you can use for investment at really low interest. True, it WILL be at a variable rate. So, at such time rates go up, pay it off. Meanwhile, I would use the money to buy an ETF based on the Russell 2000 small cap index. Small stocks are where the growth is. Phil likes the SP500. That's ok, too. Big stable companies, but less growth.

You don't have to borrow the entire amount to see if you like it, you could just try it out with say, $50,000 or so. If if works, great! Bank the profit!. If not, well, then just pay it off.

I use this strategy to buy houses I intend to buy, fix up, and resell. My home equity line is my source of working capital.

I agree with this. Very smart move.

[Gardening Grandma]

What would I do?

I'd take the 70K and put it down. I'd take out a 15 year mortgage and plan to have it paid off by retirement.

No way in hell would I take the equity in my home and put it in the stock market. Especially at the age of 55. Were you invested in the market during the 2008 bear market? Some folks were down 40%. How much risk are you comfortable with?

You already have nearly $1M in a brokerage account. I would not put the equity in my home there as well.

[Deleted]

"No way in hell would I take the equity in my home and put it in the stock market. Especially at the age of 55."

Yeah, I agree with you GG. My folks went bust at 60 (but due the real estate market not the stock market). Not a fun place to be.

This lady could probably leave her money in CDs and draw down the balance and have enough for retirement when she adds in SS. There's no reason to invest in anything wildly aggressive or exotic. My advice is a boring middle approach by making her money work without having it all tied up in one investment and giving her options (30yrs vs 15yrs).

I wonder how the other part of the 900k is invested?

[2kids10horses]

No offense to GG, patstab, or bonnap, but your skeptisim and fear is EXACTLY why I have been able to double my assets since 2008. By doing exactly what I said in my post. I am able to do what others wish they could do but are too afraid to do it. I'm not bragging, but remarking on the psychology of market participants and non-participants. The common wisdom in real estate right now is "this is not a market to buy and flip". Guess what? I am buying and flipping, and being hugely successful at it. I guess it's because I seem to be the only one doing it!

Look, if the person already has a million invested in the market, another $50,000 or so is immaterial. The value of her portfolio goes up or down by that much in a week under normal conditions.

Normal life expectancy of women today is 80.5 years. At 55, that's another 25 years. (My mother is 97. And still going strong.) You still need growth in your portfolio.

Shoot. You guys would probably have her invest in CDs. $1M at 1% is $10,000. That's a GREAT return on her investment. NOT!

[Plain Old Petunia]

Midwestlily,

As several posters have mentioned, it is VERY important that your investments make sense for YOU, not the person from whom you inherited them. If you are not knowledgeable about investments, you should learn. If you are working with an advisor, make certain they are a fee-only planner (you pay them for their time, they do not make a profit by selling you anything).

You have enough money that if it is managed well, you will be comfortable for the rest of your life. You do not have enough money that if it is not managed well, you will still be comfortable for the rest of your life. Make certain you are managing it well.

[❤ mollymouser ❤]

I'd pay cash.

[morrisr2d2]

If this were me, I'd consider taking out a mortgage for my primary residence, and then pay cash for another condo to rent out, and use that to pay my mortgage. Seems like you have the capital to do that.

[Gardening Grandma]

Jun 6, 2011 23:15:00 GMT -5 2kids10horses said:

No offense to GG, patstab, or bonnap, but your skeptisim and fear is EXACTLY why I have been able to double my assets since 2008. By doing exactly what I said in my post. I am able to do what others wish they could do but are too afraid to do it. I'm not bragging, but remarking on the psychology of market participants and non-participants. The common wisdom in real estate right now is "this is not a market to buy and flip". Guess what? I am buying and flipping, and being hugely successful at it. I guess it's because I seem to be the only one doing it!

Look, if the person already has a million invested in the market, another $50,000 or so is immaterial. The value of her portfolio goes up or down by that much in a week under normal conditions.

Normal life expectancy of women today is 80.5 years. At 55, that's another 25 years. (My mother is 97. And still going strong.) You still need growth in your portfolio.

Shoot. You guys would probably have her invest in CDs. $1M at 1% is $10,000. That's a GREAT return on her investment. NOT!

2kids,
No offense taken. but what you call "sceptism and fear" are what I call "a realistic opinion based on experience". I''ve been invested in the market since the mid 80's. I know, first hand, that sometimes the market crashes. I've learned what my own risk tolerance is and to invest accordingly. I remember friends in the early 2000's, who got caught up in the tech bubble, took out home equity loans to "invest" and lost everything.

The OP can choose a middle ground between risking the roof over her head and putting everything into CD's. She also has enough that there is no need for her to take unnecessary risks, especially as she gets closer to retirement age.

[runewell]

Jun 6, 2011 16:57:28 GMT -5 dancinmama said:

Interest rates can't go anywhere but up, so that loan will eventually become a pretty decent hedge against inflation.

But if interest rates go up, house prices will have to come down as a result. I'm not sure how much "hedging" really exists.

[morrisr2d2]

"But if interest rates go up, house prices will have to come down as a result. I'm not sure how much "hedging" really exists."

If interest rates rise, there will be inflation with it. In the long run I would expect housing to keep pace. In the short term prices may dip until wages increase to keep pace with inflation as well.

[Deleted]

DH and I were in a similar position in 2003 and chose to go with a 20% down payment and a 15-year mortgage at just under 5%. We get the tax deduction on the mortgage interest (although that's diminishing as we pay off principal) and the investments are returning just over 6% per year on average, even after the mess in 2008/2009. The mortgage will be paid off when I'm 65, which is perfect.

[Peace77]

I would avoid the writer's cramp caused by buying a home with a mortgage and pay cash for it.

If you buy a condo, check their documents including recent meeting minutes and financials. You should be able to see if there are any serious problems and if they are adequately funded. If they do not have enough reserves, everyone could be hit with assessments when it is time to do major work such as roof replacement.

[DVM gone riding]

I would split the difference, 50% down (or the 70k in your case) and a low low rate on a 15 yr mortgage. Rates on mortgages esp 15 yrs are just amazing right now most likely you can easily beat that over the next 15 years in your brokerage acct---if not maybe you need a different advisor. but I could understand where you would want to lock in the security of a low mortgage. And it will be paid for if you do nothing else before you retire.

[brdsl]

To the OP. You have assets to do either. whatever makes you sleep better at night.

"I am buying and flipping, and being hugely successful at it. I guess it's because I seem to be the only one doing it!"

2kids,

I would say you are in a good area....I can find the houses, and fix them, but the customers to buy too few here. One house has sold in a 15 mile radius...in the last month.

[qofcc]

Midwest,

Do you have any interest in real estate other than owing your own condo? How comfortable are you with investing in the stock market or do you want to diversify part of your assets in real estate by owning your own home?

Personally, I would be nervous about having that large of a percent of my net worth tied up in the stock market and I would be spending the money on down payments on multiple rental properties and locking in mortgages at today's low interest rates. But you might not be interested in being a landlord.

Paying cash would diversify your portfolio between stocks, CDs and real estate.

But if you're confident with your stock investments and want to keep the money there, 15 year mortgages are at very low rates right now and your home would be paid off at the time you would be expecting to sell it.

[midwestlily]

Okay, I'm back.

Aside from the CDs, the money is mainly in stocks, mostly large-cap stuff that my father left me. So I don't need to add more to that area. In fact, I'd eventually like to put more into bonds, but not now when interest rates are so low.

I was down pretty far in 2008, like everyone else, but most of that has come back to around where it was before the crash. During that time, I sold one bank stock at a big loss (should have sold sooner), so even if I sell things now at a profit, it will be a long time before I have to pay capital gains taxes again.

I'm not very interested in being a landlord, but if things change and I have to move elsewhere, I should be able to rent the place out pretty easily, since this is a college town with lots of rentals.

As for buying a house rather than a condo, that's the same advice some friends keep giving me, and I do understand the logic behind it. But I'm small and lazy and not the least bit handy, and I have no desire to mow the lawn and clean the gutters and shovel the snow, or even pay someone else to do it for me. It's possible that I'll stay here permanently, and I'd like to buy a place that will last me till death or assisted living.

You've given me a lot to think about. And it's comforting to know that, whichever choice I make, at least a few people will think it was the right one!

[Gardening Grandma]

midwestlily,
I bought a condo back in the 80's much for the same reasons. I did not want to deal with exterior maintenance or yardwork and I did not need a large place. My condo was a townhouse style: living room, dining area, kitchen and 1/2 bath on the main level (with an attached 1car garage). I had a small patio off the dining area. Upstairs were two bedrooms and a full bath. The kids shared a bedroom. It was perfect for me at the time.

When the time came that I wanted to sell it, It did not take long. It was in a nice neighborhood and across the street from a supermarket.

If I were a single person, the is no way I could keep up the maintenance on this house. I'd probably sell it and buy another condo.

[2kids10horses]

midwestlily,

Sounds like a condo is the right option for you!

brdsl,

Houses when I LIVE are not selling well at all. I haven't checked the stats (although I could, I'm a real estate agent), but I'm not trying to buy and sell here in my small town. I go to the suburbs of Atlanta. There's 6 million people there. SOMEBODY wants to buy a house. I buy the foreclosures at DEEP discounts, and fix them up better than they ever were, and can still sell them under what the homeowners are trying to sell for.

Grandma,

I've been investing in the market since I was in college. Way back in the early '70's. I well remember the day in '87 when my portfolio dropped 25% in a day! I now play both sides. I make money when the market drops by buying the inverse ETFs.

Here's the thing about the market: When the cabbies and bellhops are talking about what stocks to buy, it's time to sell. Or, if Business Week magazine has a picture of snorting Bull on the cover, SELL!

On the other hand, when you hear people saying things like, "I never want to own stocks again!", that means it's time to buy.