Author Topic: Should I buy a house with cash from my savings? Or convince me to get a mortgage  (Read 697 times)

jennifers

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So I sold my previous house a month ago for $255,000. After paying off my mortgage, I now have about $200,000 in my savings account. I don't really want to invest the money at this time. I'm buying a house for $185,000 next month. I haven't applied for a mortgage yet. My plan was to pay cash and then get a mortgage after since mortgage rates are so low. But now I'm thinking of just skipping the mortgage all together.

Thoughts? I'm pretty risk averse and the least risky thing seems to be to get a mortgage for like $100,000, so I have a huge emergency fund in case I lose or quit my job.

Other info:
I don't have any other debt, but I do have a $1000/month lease on an apartment that I'm going to have to pay until I find a subletter.
My 401k and Roth IRA are fully funded. I can probably replenish my savings at $3000 a month once I sublet the apartment ($2000 a month before that).

Anyone have a compelling argument for getting mortgage or not? Am I forgetting something?

I would probably get a 15 year mortgage for $100,000 with an interest rate around 2.5%. I'd be paying about $200 a month maximum in interest. There are also closing costs for the mortgage of a few thousand dollars.


SwordGuy

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You'll get a better rate with the original purchase than with a cash-out refi, all things being equal.

Why don't you want to invest right now?

Job security?    Years to FI?   Savings rate with/without a mortgage?

jennifers

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Why don't you want to invest right now? I read too much about climate change and am just constantly terrified. I already have a bunch of money invested in the stock market in my 401k and IRA. Seems best not to have all my eggs in one basket.

Job security? - Honestly not sure. I work in computer software at the same place for 10 years. I feel like anything could happen such as outsourcing or company reorganization. We've had 3 CEOs in the past 3 years...

Years to FI? - That's not really what I'm going for. I enjoy working. My goal is to have enough money to donate whenever I want and to be able to take a few years off work comfortably if I ever need/ want to. If nothing goes wrong, I would certainly be FI by the time I'm 50 (13 years).

Current savings rate is about 65%. Savings rate will be about the same with a mortgage (rent is about the same as a mortgage and property taxes would be).


ericrugiero

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The argument for buying with a mortgage in your situation is that the stock market has historically gained much more than the low mortgage rate you could get right now.  2.5-3% is amazingly low and it's likely you would make more investing that money. 

The counter argument is that a paid off home is a safer move.  It's a good feeling emotionally to own your own place and know that it's yours.  Nobody can foreclose on it (if you pay your taxes).  You lock in a lower cost of living which can be used to your advantage if/when you FIRE. 

If you aren't going to invest the money, I would recommend just paying cash for the house.  You aren't going to find a savings account paying out what the mortgage rates are now.   

rmorris50

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Hmmm, itís also risky not having cash / liquidity, especially in times like this. Iím a fan of fat cash emergency funds. I was one to always max every retirement account and prepay the mortgage and last fall BAM, lost my job just like that. While I had enough cash to last a year, I all the sudden realized I felt insecure not having even more than that in cash. Lose you job and good luck getting that cash out refinance.

I like your idea of going 50/50. Put 50% down, and take the other half and invest in a low cost index fund and/or pad the cash fund, depending on your goals and comfort level. I am also sure down the road as your financial situation continues to strengthen you could cut a check and pay off the balance should you ever want to!

Best of luck!!


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SwordGuy

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These are unsettled times.   Is $200K your only savings?    $185,000 would basically eliminate almost all your savings if it is.   Are you in a good job market for your field or are they hard to find in your area?    If you're really good at what you do and there are lots of opportunities where you are, or is it likely you would have to move?

If you want to minimize the downside risk of (a) losing your income and (b) having to move to get a job and (c) having to sell in a down market while (d) having little savings and (e) having discovered 8 years from now that you're heartily sick of your profession and want out, then getting a mortgage is a good plan.

If you want to maximize your upside chances of having more money when you plan to be FI in 13 years, get a mortgage.

If you have no real concerns about the downside scenario above and want your life simplified, pay cash.

Hope that helps!


Fishindude

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I'd pay cash for the house, or hold on to some of it and get a very small mortgage.

Dicey

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SwordGuy is right, the cheapest mortgage is the one you get when you buy the property. Doing it later costs more. It will be considered a "Cash-out Re-Fi" and theyre more expensive, which makes no sense. There can also be adverse tax consequences.

FWIW, we paid cash for our home seven years ago and still regret it, especially now that rates are so low.

There is an old-ish book by a financial guy called Ric Edelman. It's called "Ordinary People, Extraordinary Wealth". It was life-changing for me. All you need to read is the first chapter. You can probably get it free from your library. Really, get it today. It won't take long to read and it's the best explanation of the value and benefits of mortgages I've ever encountered. It's very easy to understand, even if you don't know a lot about investing. For that, jlcollinsnh is your guy, but that's another topic.

BTW, there's a whole thread on this topic here: https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

Finally, congratulations on your success so far. This is truly an MPP (Mustachian People Problem). It's all about optimizing your hard earned dollars to get to FIRE as expediently as possible. Mortgages are powerful tools. Fear is not.

sammybiker

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@jennifers   as @SwordGuy  and @Dicey  said, don't pay cash for the primary residence.  If things go to shit in the next couple of years, it will be harder to get a mortgage and home values will drop.  Take advantage of your good position now and damn near free money/low interest and get a mortgage.

As you're hesitant to put money into the market right now, any interest in taking some of that cash and applying it to a few down payments on rental property?

jennifers

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Thanks everyone! This makes me feel so much better. I contacted my loan officer today and decided to get a 15 year mortgage and put 30% down. The loan officer is going to try to get my mortgage done in time for closing - if she can't I can probably push back the closing a few days.

I'm checking out the first few pages of "Ordinary People, Extraordinary Wealth" on Amazon right now.

Dicey

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@jennifers - Here's a quote I posted on a different thread yesterday. @MrThatsDifferent then provided this helpful link, so I'm copying it here. It looks like an updated synopsis of the first chapter of OP,EW. IMO, anyone interested in this topic should read point #10 first. Read it until you thoroughly understand it. Then move on to the other nine points. If you have further questions, feel free to hop on over to the Don't Pay Off Your Mortgage Thread. Lots of smart, friendly people, always willing to help.

You know, that whole thing about not dragging a mortgage into retirement is so clueless. It's not directed at people who are mustachian, it's directed at the people who can't survive an unexpected $400 expense. If you have a big, fat-ass ball of investments and another of glide cash, having a mortgage in retirement ain't no big thing.

For OP, I published this elsewhere on the forum today, but I'm too lazy to dig it up. Grab a [free, library] copy of Ric Edleman's "Ordinary People, Extraordinary Wealth". It's old, but still relevant. Read the first chapter, it's the one that will help you with this question. Better still, read it with your wife. It's amazing. Short, concise and uses layman's terms. Total game changer for me on the path to FIRE. The rest of the book is fluff, IMO, but that first chapter nails it.

http://www.innovativeadvisors.net/files/10reasonsforMortgage.pdf

SndcxxJ

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SwordGuy is right, the cheapest mortgage is the one you get when you buy the property. Doing it later costs more. It will be considered a "Cash-out Re-Fi" and theyre more expensive, which makes no sense. There can also be adverse tax consequences.

FWIW, we paid cash for our home seven years ago and still regret it, especially now that rates are so low.

There is an old-ish book by a financial guy called Ric Edelman. It's called "Ordinary People, Extraordinary Wealth". It was life-changing for me. All you need to read is the first chapter. You can probably get it free from your library. Really, get it today. It won't take long to read and it's the best explanation of the value and benefits of mortgages I've ever encountered. It's very easy to understand, even if you don't know a lot about investing. For that, jlcollinsnh is your guy, but that's another topic.

BTW, there's a whole thread on this topic here: https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

Finally, congratulations on your success so far. This is truly an MPP (Mustachian People Problem). It's all about optimizing your hard earned dollars to get to FIRE as expediently as possible. Mortgages are powerful tools. Fear is not.
This is a great book recommendation Dicey, thanks!  The first few dozen pages are available by googling the title.  I like what I read so I just ordered it.