Author Topic: All-cash purchase - missing out on benefits?  (Read 1170 times)

HovEratoTo

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All-cash purchase - missing out on benefits?
« on: February 16, 2018, 06:27:45 PM »
Hi everyone,

I'm having a hard time wrapping my head around this. We will be first time homebuyers in VA. I understand there are a lot of ways both federal and state governments help with mortgages for first time homebuyers. But what if we want to do an all-cash purchase? Are we leaving money on the table by not doing a mortgage? Will we still get tax benefits with all-cash, or do we have to have a mortgage? Should we get a mortgage, then pay it off in a month? Is that dumb?

I want to avoid debt (even a mortgage) if at all possible. But I also want to make the smartest (possible) financial decision.

Help?

Nate79

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Re: All-cash purchase - missing out on benefits?
« Reply #1 on: February 16, 2018, 07:05:25 PM »
What tax benefits do you think you are going to get? The odds of someone being able to deduct mortgage interest is now very low, and still even if you do if you compare to the standard deduction it will probably be peanuts anyways.

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HovEratoTo

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Re: All-cash purchase - missing out on benefits?
« Reply #2 on: February 16, 2018, 07:30:04 PM »
Honestly, I don't know. My parents asked me about getting a mortgage and what we would put down. When I said we were considering all cash, they seemed shocked (as would most people, I guess) and suggested I "make sure I'm not missing out on first time home buyer incentives".

I know the mortgage vs all cash has been debated ad nauseum, I just didn't know if there was something big here I'm missing. I guess it seems like a stupid question. But as a first time buyer, I'm willing to admit there's a lot here I don't know!

radram

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Re: All-cash purchase - missing out on benefits?
« Reply #3 on: February 16, 2018, 07:39:40 PM »
All the numbers say that due to current mortgage rates, you are best off to mortgage as much of the home as you can, for as long as you can, and invest the difference. Math says if you take out a loan at 4.5% and invest it for 30 years at the market average of 7%-10% (based on what numbers you want to use), you would be best off, based on AVERAGE returns. Of course, will the next 30 years be above or below? Your guess is as good as mine.

That said, we hated the idea of the mortgage hanging over our head. We paid ours off in 3 1/2 years and never looked back. To be fair, our 15 year mortgage was just shy of 7%, so we were only talking about a 1% advantage. Math says we did the wrong thing, and in fact we would probably be better off starting a mortgage today, but the relieve of that nugget never being a burden again is just too great for us.

The higher standard deduction only strengthens my opinion to pay it off now.

My vote is to pay in full and save like hell so you can FIRE ASAP.

Rich on Money

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Re: All-cash purchase - missing out on benefits?
« Reply #4 on: February 18, 2018, 07:51:36 AM »
I wouldn't call the interest deduction a tax benefit.  spend $1000 in interest to write off $250.  Give me a break!  You can still depreciate.

I paid off my mortgage is 6 years.  Radram's assessment is right on.  Technically, you will build wealth faster i in the long run in most cases using leverage as long as you invest the money you would have used for cash correctly.  That being said, there is a huge psychological advantage to not having a mortgage.  I actually have 20 rental properties that are also paid off. 

tralfamadorian

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Re: All-cash purchase - missing out on benefits?
« Reply #5 on: February 18, 2018, 08:09:26 AM »
Google first time homebuyer’s programs for your state, county and city. Some areas really bend over backwards to help people in your situation- low/no closing costs, downpayment assistance, low/no PMI, lower interest rates.

You’re only going to have access to those programs once so I would research thoroughly so you know what money you’re leaving on the table for the “peace of mind” of no mortgage. (Personally I feel much more financially secured with a low fixed rate mortgage and an investment account large enough to pay off the whole thing that grows at 7%+)

HovEratoTo

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Re: All-cash purchase - missing out on benefits?
« Reply #6 on: February 25, 2018, 05:58:54 PM »
All the numbers say that due to current mortgage rates, you are best off to mortgage as much of the home as you can, for as long as you can, and invest the difference. Math says if you take out a loan at 4.5% and invest it for 30 years at the market average of 7%-10% (based on what numbers you want to use), you would be best off, based on AVERAGE returns. Of course, will the next 30 years be above or below? Your guess is as good as mine.

That said, we hated the idea of the mortgage hanging over our head. We paid ours off in 3 1/2 years and never looked back. To be fair, our 15 year mortgage was just shy of 7%, so we were only talking about a 1% advantage. Math says we did the wrong thing, and in fact we would probably be better off starting a mortgage today, but the relieve of that nugget never being a burden again is just too great for us.

The higher standard deduction only strengthens my opinion to pay it off now.

My vote is to pay in full and save like hell so you can FIRE ASAP.

Thank you, this is definitely along my line of thinking and the validation I've been looking for. I think the concept of buying in cash is a little foreign to my parents so they're just trying to relate our purchase decision to their own experiences, I'm sure.

What I'm grappling with is sinking a sizable percentage of our liquid assets into a house, which doesn't really do anything in terms of help grow our net worth to achieve our FIRE goal. BUT, making the cash purchase will significantly increase our cash flow every month, which will help us otherwise accelerate savings. FIRE here we come!

HovEratoTo

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Re: All-cash purchase - missing out on benefits?
« Reply #7 on: February 25, 2018, 06:13:09 PM »
I wouldn't call the interest deduction a tax benefit.  spend $1000 in interest to write off $250.  Give me a break!  You can still depreciate.

I paid off my mortgage is 6 years.  Radram's assessment is right on.  Technically, you will build wealth faster i in the long run in most cases using leverage as long as you invest the money you would have used for cash correctly.  That being said, there is a huge psychological advantage to not having a mortgage.  I actually have 20 rental properties that are also paid off.

That's impressive. Did you use a lot of leverage in the beginning to amass those properties?

HovEratoTo

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Re: All-cash purchase - missing out on benefits?
« Reply #8 on: February 25, 2018, 06:14:34 PM »
Google first time homebuyer’s programs for your state, county and city. Some areas really bend over backwards to help people in your situation- low/no closing costs, downpayment assistance, low/no PMI, lower interest rates.

You’re only going to have access to those programs once so I would research thoroughly so you know what money you’re leaving on the table for the “peace of mind” of no mortgage. (Personally I feel much more financially secured with a low fixed rate mortgage and an investment account large enough to pay off the whole thing that grows at 7%+)

I could see that. When I took the chunk of cash out of my FIREcalc calculations (since it's no longer an asset generating growth) I was very, very sad. There's an argument to be made for leaving it in the market (or other active investments) where it can DO something for me.

We all gotta live somewhere, I just don't want my house to become the lions share of my net worth with no employees working for me.

SeattleCPA

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Re: All-cash purchase - missing out on benefits?
« Reply #9 on: February 26, 2018, 07:07:48 AM »
I think buying all cash so "without a mortgage" is a fine idea.

Essentially, you get a bond paying 4% interest and because of the new higher standard deduction, it's not really a taxable bond but maybe sort of partly taxable and partly tax-exempt. You'll also avoid paying loan fees. And then a hidden benefit, you may find yourself forced to be a little more frugal.

BTW, I get that the historical return on equities is better than 4%. But with astronomical valuations, I personally would be very happy with a chunk of my funds in something with a guaranteed 4%.