Author Topic: How Much Did I Lose By Paying Cash For House At Age 25?  (Read 3062 times)

steevven1

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How Much Did I Lose By Paying Cash For House At Age 25?
« on: March 11, 2020, 06:54:58 AM »
My wife and I went into our decision to pay cash with eyes open...Definitely willing to admit that taking a low-interest mortgage and investing the excess cash is more likely to perform better over the long run. Since we've been in a bull market for so long, that's certainly been the case, but we were risk-averse and ultimately have no regrets about it.

Recently did the math though, to be honest with ourselves. Figured out that we've lost out on $19,000 over the past 50 months on a condo we bought for $71k.

Anyone else ever do the math on how much you actually lost out on by accelerating mortgage payments or paying cash? I feel like it's important to face the reality, as a sanity check for your decision-making process.

All the math here for those who are curious: https://www.tripofalifestyle.com/money/paying-cash-for-a-house-at-age-25/

SeattleCPA

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #1 on: March 11, 2020, 07:14:27 AM »
I wouldn't beat yourself up on this. The rate of return on a home can actually be pretty good.

Only time will tell if your home turns out to be better or worse than investing in stocks.

BTW, a number of people (some I respect a lot) say a home isn't an investment. But your question points to something really important. You can calculate the return on a home. So, like an internal rate of return. Or a net present value.

When you do that, and maybe even when you start thinking that way, you'll see that home ownership can become a good even great investment.

Sometimes, when folks want to argue homes aren't an investment, they create these elegant essays, packed full of witty observations. Anecdotes that illustrate their points.

The two problems, though. You can calculate standard return measures on a house. And when you do that, the numbers often turn out to be pretty good. Also, history says housing often is a good investment.

Here's a longer discussion of these issues: Are Houses Good Investments?

Here's a country-by-country graphical summary comparing stocks, housing and bonds: Line Charts from the Rate of Return of Everything research.

P.S. If you really want to fall down the rabbit hole, here's the very excellent big study which is well worth reading: Rate of Return on Everything: 1870 - 2015.


steevven1

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #2 on: March 11, 2020, 07:34:58 AM »
I wouldn't beat yourself up on this. The rate of return on a home can actually be pretty good.

Only time will tell if your home turns out to be better or worse than investing in stocks.

BTW, a number of people (some I respect a lot) say a home isn't an investment. But your question points to something really important. You can calculate the return on a home. So, like an internal rate of return. Or a net present value.

When you do that, and maybe even when you start thinking that way, you'll see that home ownership can become a good even great investment.

Sometimes, when folks want to argue homes aren't an investment, they create these elegant essays, packed full of witty observations. Anecdotes that illustrate their points.

The two problems, though. You can calculate standard return measures on a house. And when you do that, the numbers often turn out to be pretty good. Also, history says housing often is a good investment.

Here's a longer discussion of these issues: Are Houses Good Investments?

Here's a country-by-country graphical summary comparing stocks, housing and bonds: Line Charts from the Rate of Return of Everything research.

P.S. If you really want to fall down the rabbit hole, here's the very excellent big study which is well worth reading: Rate of Return on Everything: 1870 - 2015.

Thanks for the detailed response, but actually, I explicitly calculated the return on our home in the article. It came to about 14% per year, which is amazing! So I agree with you on that part.

The issue at hand isn't whether our house was a good investment -- it is over whether we should have taken a mortgage and invested the cash instead (double dipping on returns through leverage).

Omy

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #3 on: March 11, 2020, 08:15:45 AM »
Most people at age 25 have zero (or negative) net worth (there was just a thread on this recently).

You are far ahead of the game and can start throwing more savings into investments without a mortgage to tend to. And there is peace of mind in owning your own place.

If the math concerns you, however, feel free to take on a mortgage at historically low rates!
« Last Edit: March 11, 2020, 11:37:35 AM by Omy »

steevven1

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #4 on: March 11, 2020, 11:10:23 AM »
Most people at age 25 have zero (or negative) net worth (there was just a tread on this recently).

You are far ahead of the game and can start throwing more savings into investments without a mortgage to tend to. And there is peace of mind in owning your own place.

If the math concerns you, however, feel free to take on a mortgage at historically low rates!

Appreciate the kind words.

theoverlook

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #5 on: March 12, 2020, 08:12:16 AM »
I think you're right that it's important to look at the numbers honestly and consider the true costs of decisions - otherwise later decisions are never really made with knowledge of the full impact they can make. But I also think you lost zero by paying cash for a house and just moved the gains from monetary gains to other less tangible gains. And I say that as someone that intentionally carries a mortgage on his primary residence. There are benefits to both sides.

srad

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #6 on: March 13, 2020, 10:06:47 AM »
I'd rerun your calculation now,  I think the results have changed.  Which is why i like real estate, its very slow and steady.

The fact that you don't have a mortgage now you can crank up your savings rate and if you keep with it, you will be doing amazing things in 20 years. 

OR

Cashout refi now at a low 3% rate and invest heavily in the recently discounted market :)  Your timing couldn't of been better.


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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #7 on: March 14, 2020, 03:39:35 PM »
The issue at hand isn't whether our house was a good investment -- it is over whether we should have taken a mortgage and invested the cash instead (double dipping on returns through leverage).

Ok now you're comparing apples with oranges. It's not right to compare levered and un-levered returns and again on different asset classes. Because the risk measures are vastly different.

You can't change the past, but you can take decisions for your future. What's stopping you taking a line of credit against the house now and investing that?

ender

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #8 on: March 14, 2020, 03:43:18 PM »
You probably bought a much smaller place than you would have otherwise.

Make sure you add this back into your analysis.

steevven1

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #9 on: March 14, 2020, 11:10:29 PM »
The issue at hand isn't whether our house was a good investment -- it is over whether we should have taken a mortgage and invested the cash instead (double dipping on returns through leverage).

Ok now you're comparing apples with oranges. It's not right to compare levered and un-levered returns and again on different asset classes. Because the risk measures are vastly different.

You can't change the past, but you can take decisions for your future. What's stopping you taking a line of credit against the house now and investing that?

Of course you are correct. Risk is exactly what's stopping me, and will continue to stop me. That's the majority of the discussion at the conclusion of the article :-)

steevven1

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #10 on: March 14, 2020, 11:11:34 PM »
You probably bought a much smaller place than you would have otherwise.

Make sure you add this back into your analysis.

Yes, buying what the bank says you can "afford" is definitely a dangerous game. Good point.

Dicey

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #11 on: March 15, 2020, 02:06:07 AM »
Though my opinion of mortgages is reasonably well known in these parts, I gotta say that avoiding a mortgage that's so far below $100k doesn't seem like a terribly unwise thing to do. A wrinkle that interests me more is buying a Condo instead of a Single Family Home (SFH). Condos typically don't appreciate as well as SFHs, particularly in LCOLAs. Condos also have HOAs and assessments, as you've discovered.. What if you'd spent just slightly more and purchased an SFH? Or used the same amount of money to buy a smaller SFH?

I suspect that even if you'd needed to take on a mortgage to buy a SFH, you would come out even further ahead than you realize.

Tl;dr -
Decision #1 was buying a condo instead of a SFH.
Decision #2 was paying cash instead of getting a mortgage.
Decision #1 may have been more costly than Decision #2.
« Last Edit: March 15, 2020, 10:56:24 AM by Dicey »

Halfsees

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #12 on: March 15, 2020, 03:03:30 AM »
Mistakes or not, you're doing much better for yourself than I did at your age so don't regret your choices. We bought our first house when we were around 28 in 2007 right before the Great Recession and lost as much on it as you spent to buy your current place when we had to move in 2015 if you add in fixing it up to sell and closing costs to our loss. So in comparison you are making great decisions in your 20s that will set you up better for your financial future than we did. Just invest the money you'd be putting towards a mortgage each month and you'll be fine.

Chris Pascale

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #13 on: March 17, 2020, 10:35:51 PM »
You probably bought a much smaller place than you would have otherwise.

Make sure you add this back into your analysis.

Yes, buying what the bank says you can "afford" is definitely a dangerous game. Good point.


When I was getting a mortgage at 25, I was approved to borrow $220k. I opted to borrow only $110k.

I thought I was so smart until the mortgage needed to be paid and the payment was 25% of my take home.

Here, I thought I was a genius. Turns out, I was merely smart enough to save myself.

Which is not so bad.

Cb1234567

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Re: How Much Did I Lose By Paying Cash For House At Age 25?s
« Reply #14 on: April 15, 2020, 03:08:09 PM »
You probably bought a much smaller place than you would have otherwise.

Make sure you add this back into your analysis.

Yes, buying what the bank says you can "afford" is definitely a dangerous game. Good point.


When I was getting a mortgage at 25, I was approved to borrow $220k. I opted to borrow only $110k.

I thought I was so smart until the mortgage needed to be paid and the payment was 25% of my take home.

Here, I thought I was a genius. Turns out, I was merely smart enough to save myself.

Which is not so bad.

Good for you. It’s amazing how folks can quote the great return being made when the market is up using funds leveraged via a mortgage.

Except when you lose a job or get laid off, unemployment covers the heat, electricity and some food plus a tank of gas...or you voluntarily leave an horrible work environment (I.e. q-u-i-t)...and then not having a mortgage payment or rent is a lifesaver. Been there, done that with DH more than once.

So I say, you and your wife go ahead and do the math. Don’t forget to include the lack of closing costs to secure the loan when you bought. Sincerely, I hope that as time passes you’ll both come to appreciate that true ownership offers You incredible freedoms: you can sell whether the market is up or down, sell and use that appreciation for your next place, invest your would-be payment, take a trip or enjoy little extras with the extra money, make needed repairs or desired updates... or save up for the next purchase. And sleep well at night knowing that if the stock market tanks and one of you loses a job and the other one is on maternity leave or between jobs, you’ll not be worrying about your house being foreclosed on.

Sorry for the rant. Folks who tout the wonders of mortgages and leveraged money (have 5 rentals that are “owned”, but every single one has a loan on it - what a mess, sure it’s “cash flow positive”, they say - so what, that blasted payment is Still Due). Those folks have not had hard times where your cash is precious, jobs few, and you must find a way to get through for your family, and everyone around you is in the same boat.  I don’t know the year, but anybody remember when pharma hit a bad spot and all the big ones were laying off 1000s of highly educated, highly skilled scientists? No? It was bad. A PhD with 15 years experience would be willing to work as a lab tech. And good luck competing with them if you’re fresh out of school...

****The people with loans on real estate probably make up the vast majority of everyone you know...people who own aren’t necessarily  fact....so take what others say with a heap of salt. Yes, I am biased by the fires of experience. ****

Wrenchturner

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #15 on: April 15, 2020, 03:53:44 PM »
Most people at age 25 have zero (or negative) net worth (there was just a thread on this recently).

You are far ahead of the game and can start throwing more savings into investments without a mortgage to tend to. And there is peace of mind in owning your own place.

If the math concerns you, however, feel free to take on a mortgage at historically low rates!

I kind of feel this way.  If you can throw the cash down to buy a house in full before you're thirty, you're in good shape regardless.  You have many decades of working life ahead to save for retirement, and it gives you options to reduce income in the event of having children or whatnot.  I know this argument(pro/con carrying a mortgage) basically never ends though.

Dicey

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #16 on: April 15, 2020, 03:58:06 PM »
Most people at age 25 have zero (or negative) net worth (there was just a thread on this recently).

You are far ahead of the game and can start throwing more savings into investments without a mortgage to tend to. And there is peace of mind in owning your own place.

If the math concerns you, however, feel free to take on a mortgage at historically low rates!

I kind of feel this way.  If you can throw the cash down to buy a house in full before you're thirty, you're in good shape regardless.  You have many decades of working life ahead to save for retirement, and it gives you options to reduce income in the event of having children or whatnot.  I know this argument(pro/con carrying a mortgage) basically never ends though.
Hey WT, you're in Canada. It's a totally different situation when your mortgage interest isn't tax deductible. That would kill me, too!

Wrenchturner

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #17 on: April 15, 2020, 04:23:58 PM »
Most people at age 25 have zero (or negative) net worth (there was just a thread on this recently).

You are far ahead of the game and can start throwing more savings into investments without a mortgage to tend to. And there is peace of mind in owning your own place.

If the math concerns you, however, feel free to take on a mortgage at historically low rates!

I kind of feel this way.  If you can throw the cash down to buy a house in full before you're thirty, you're in good shape regardless.  You have many decades of working life ahead to save for retirement, and it gives you options to reduce income in the event of having children or whatnot.  I know this argument(pro/con carrying a mortgage) basically never ends though.
Hey WT, you're in Canada. It's a totally different situation when your mortgage interest isn't tax deductible. That would kill me, too!
Fair enough.  It's also true that we have very high taxes that are mitigated by reducing income as well as benefits for lower income, which you could do in a mortgage-free environment more easily.

shinn497

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #18 on: May 01, 2020, 01:32:40 AM »
Where did you get a 71k condo? I want a 71k condo. HEck.

Much Fishing to Do

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #19 on: May 02, 2020, 07:54:33 AM »
That's the beauty of owning a house you 'can' pay cash for, whether you do or not.  You get to make this decision every day and change it if you want (you can always get a mortgage on it...and you can always pay off a mortgage on it). 

spartana

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #20 on: May 02, 2020, 10:32:42 AM »
Most people at age 25 have zero (or negative) net worth (there was just a thread on this recently).

You are far ahead of the game and can start throwing more savings into investments without a mortgage to tend to. And there is peace of mind in owning your own place.

If the math concerns you, however, feel free to take on a mortgage at historically low rates!

I kind of feel this way.  If you can throw the cash down to buy a house in full before you're thirty, you're in good shape regardless.  You have many decades of working life ahead to save for retirement, and it gives you options to reduce income in the event of having children or whatnot.  I know this argument(pro/con carrying a mortgage) basically never ends though.
Or not if he/she plans to retire in their 30s or early 40s. And that leads to the pay off or don't pay off (aka Boarder 42's Law) your mortgage debate and that's a road I won't go down. For me personally, I paid off my mortgage shortly before I FIREd and have never regretted it. Then bought my next place with cash after I was retired and in my early 40s. No regrets.
« Last Edit: May 02, 2020, 10:34:23 AM by spartana »

steevven1

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #21 on: May 06, 2020, 06:33:43 PM »
Where did you get a 71k condo? I want a 71k condo. HEck.

Gainesville, Florida, although the place is worth about $100k now (4 years later).

JoJoP

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #22 on: May 19, 2020, 08:55:45 PM »
I view this so differently.  I'd ask, "How much did I GAIN paying cash for a house?"  You surely, guaranteed, gained the interest you would have paid to the bank.  So, minimally 3-4%.   You also gained the closing costs and points that you would have paid for the loan.  That can be $5000 or even more.   You then gained, presumably, using the money that you're not spending on the mortgage to invest elsewhere.   Don't regret it!  It's a sure bet to not have to pay for borrowed money. 

I figure mine out by the month. I just paid off a mortgage simply because the interest on an aging loan was over $300 per month.   I decided I'd rather keep that money in my wallet than give it to the bank.

 Let's do the math for $100,000 for 30 years at 3.5%.  It's $61,656.09.  So you definitely saved that much! 

Payment Summary
Number of Payments
Monthly Payment
Total Principal Paid
Total Interest Paid
Total Paid
360
$449.04
$100,000.00
$61,656.09
$161,656.09

steevven1

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #23 on: May 20, 2020, 03:21:54 AM »
I view this so differently.  I'd ask, "How much did I GAIN paying cash for a house?"  You surely, guaranteed, gained the interest you would have paid to the bank.  So, minimally 3-4%.   You also gained the closing costs and points that you would have paid for the loan.  That can be $5000 or even more.   You then gained, presumably, using the money that you're not spending on the mortgage to invest elsewhere.   Don't regret it!  It's a sure bet to not have to pay for borrowed money. 

I figure mine out by the month. I just paid off a mortgage simply because the interest on an aging loan was over $300 per month.   I decided I'd rather keep that money in my wallet than give it to the bank.

 Let's do the math for $100,000 for 30 years at 3.5%.  It's $61,656.09.  So you definitely saved that much! 

Payment Summary
Number of Payments
Monthly Payment
Total Principal Paid
Total Interest Paid
Total Paid
360
$449.04
$100,000.00
$61,656.09
$161,656.09

Definitely! But to be clear, the number I calculated includes all of that (over the 50-month sample period). We came out $19k short versus mortgage + investing AFTER considering the things you mentioned.

LWYRUP

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #24 on: May 21, 2020, 07:37:25 AM »
You probably bought a much smaller place than you would have otherwise.

Make sure you add this back into your analysis.

This is a great point.  Availability of debt warps purchasing decisions.  Some people are more susceptible than others but everyone is susceptible.

This is one of the reasons I would not take a loan for a car even if it was offered at zero percent.  I need to see the pain of all the money disappearing right away to make sure I'm spending the right amount.

Also why my saving plan is basically a shitload of auto-deductions.  Everything is auto-deducted and then the remaining money is a lot less so things feel a bit tight even though it's just a psychological trick part of my brain set up to fool other parts of my brain.

Dicey

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #25 on: May 21, 2020, 08:12:54 AM »
I view this so differently.  I'd ask, "How much did I GAIN paying cash for a house?"  You surely, guaranteed, gained the interest you would have paid to the bank.  So, minimally 3-4%.   You also gained the closing costs and points that you would have paid for the loan.  That can be $5000 or even more.   You then gained, presumably, using the money that you're not spending on the mortgage to invest elsewhere.   Don't regret it!  It's a sure bet to not have to pay for borrowed money. 

I figure mine out by the month. I just paid off a mortgage simply because the interest on an aging loan was over $300 per month.   I decided I'd rather keep that money in my wallet than give it to the bank.

 Let's do the math for $100,000 for 30 years at 3.5%.  It's $61,656.09.  So you definitely saved that much! 

Payment Summary
Number of Payments
Monthly Payment
Total Principal Paid
Total Interest Paid
Total Paid
360
$449.04
$100,000.00
$61,656.09
$161,656.09

Definitely! But to be clear, the number I calculated includes all of that (over the 50-month sample period). We came out $19k short versus mortgage + investing AFTER considering the things you mentioned.
You both realize that closing costs include the price of transferring and insuring title, etc., and not of acquiring a loan? Paying cash does not eliminate most closing costs, which can be substantial. Also, be sure to run your numbers through an inflation calculator. The effect of inflation over time is quite eye opening, even if rates are low.

iva

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #26 on: May 22, 2020, 11:33:25 AM »
Most people at age 25 have zero (or negative) net worth (there was just a thread on this recently).

You are far ahead of the game and can start throwing more savings into investments without a mortgage to tend to. And there is peace of mind in owning your own place.

If the math concerns you, however, feel free to take on a mortgage at historically low rates!

Hi Omy. I was wondering if you still remember the name of this thread or what board it was in? sounds interesting, but haven't been able to find it through searching.

Dicey

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Re: How Much Did I Lose By Paying Cash For House At Age 25?
« Reply #27 on: May 22, 2020, 11:45:11 AM »
Most people at age 25 have zero (or negative) net worth (there was just a thread on this recently).

You are far ahead of the game and can start throwing more savings into investments without a mortgage to tend to. And there is peace of mind in owning your own place.

If the math concerns you, however, feel free to take on a mortgage at historically low rates!

Hi @Omy. I was wondering if you still remember the name of this thread or what board it was in? sounds interesting, but haven't been able to find it through searching.
Added bat signal for you, 'cuz I couldn't place which one they were referring to either. Inquiring minds and all...