Author Topic: home purchase: cash vs mortgage?  (Read 3300 times)

thrify_85

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home purchase: cash vs mortgage?
« on: November 23, 2014, 12:43:00 PM »
Hi all,

I'm very new to this forum, and it's immediately obvious that there's a ton of great discussion going on. Thanks in advance for any feedback!

What are the pros/cons of buying a house/apt with cash instead of a mortgage?

It seems to me almost like a special case to the question of whether it optimal to pay off one's mortgage early, (like is discussed here:
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/ ) because some of the core issues seem very similar (eg market return vs mortgage interest rate, etc), but there are differences too -- like when you buy with cash then one avoids the mortgage process and at least some of those fixed costs.

What issues make this question different from the question of whether a mortgage - holder should pay down his/her mortgage early?

Thanks!

clarkfan1979

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Re: home purchase: cash vs mortgage?
« Reply #1 on: November 24, 2014, 04:35:42 AM »
The biggest advantage of cash is being able to buy a distressed property on the cheap. Banks know that cash offers are more likely to close. As a result, you can get a property for offering less than someone else who needs to get a mortgage. Some houses do not qualify for a mortgage, drastically reducing the buyers pool. After you pay cash, then you can decide to take out a mortgage or not.

Deciding on a mortgage probably depends on your personal goals. People who wish to acquire lots of properties will put the least amount of money down. If you do not wish to acquire multiple properties then don't take out a mortgage. If you think you might want to get one more then consider a 15-year mortgage.

For me personally, if I could get a 15 year at 3.125%, which is the current rate at my credit union, it would be difficult for me to pass that up. I would do it. Even a 30 year at 4% seems like a great hedge against inflation.

Skyhigh

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Re: home purchase: cash vs mortgage?
« Reply #2 on: November 30, 2014, 03:10:20 PM »
Interest rates are very low right now. Inevitably they will rise soon. I believe that it is best to use loans to buy more investment properties now. Example: one home for $200,000 in cash or five homes with $20,000 down on each. Time is on our side when it comes to investment properties. Assuming an average appreciation of 6% per year it is easy to see the benefit of five versus one. Owning more properties will increase ones ability to receive a meaningful benefit in time.

ShortInSeattle

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Re: home purchase: cash vs mortgage?
« Reply #3 on: November 30, 2014, 03:30:29 PM »
I've always been a "don't pay off the low rate loan - invest instead" type. Especially in times of ultra-low interest rates.

But then we decided to sell our expensive home and purchase a less expensive one. Rather than getting a loan, we paid cash. We had the cash available from our home sale and decided to roll it into our new property.

Even though the math wasn't on our side, I am so happy we did it that way! Having a paid off home has given us tremendous peace of mind. Our monthly fixed costs are really low now, and I'm dropping to part time work, while still saving a healthy amount for FI.

Low fixed costs = lots of flexibility and less worry.

I wouldn't have made the same call for an investment property, because that is less about your household expenses and more about generating an ROI on dollars invested.

Good luck with your decision.

Spork

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Re: home purchase: cash vs mortgage?
« Reply #4 on: November 30, 2014, 03:56:03 PM »
We paid cash.  There is definitely an argument for low interest/investing... but a paid off house is a de-stresser.   

It is also a serious limiter when you are buying/building.  It is extremely easy to spend an extra $500-1000 here and there when it only hits you for a few bucks a month.  But when you're sitting there with the cost-to-build and looking for stuff to trim, those $500 chunks start being reality checks. 

"Do I really need 3 brick columns out front or is 2 just fine?"
"Do I really need a 3 car garage?"
"Can we scale down the kitchen a little?"

You iteratively go through and make cuts that end up making big differences in the bottom line. 

Another way to look at it is:   If you had a paid off house, would you re-mortgage it, take money out and invest it?  (A lot of people would say yes... but... that's a question you need to honestly answer for yourself.)  If the answer is "no" ... then pay cash.