Would you rather pay for your house in cash vs a mortgage?

posted 5 days ago in The Lounge
  • poll: Mortgage or Cash?
    Mortgage : (20 votes)
    22 %
    Cash : (71 votes)
    78 %
  • Post # 61
    Member
    9094 posts
    Buzzing Beekeeper

    sollyb :  Medium (I’m risk averse so would never do anything high risk). We have a mix of mutual funds and ETFs (all of which were chosen because they were particularly tax efficient), and we also have California state and municipal bonds, which are all tax-free. Our financial adviser manages our accounts for us.

    Post # 62
    Member
    828 posts
    Busy bee

    sollyb :  You only pay taxes when you sell investments or earn dividends (capital gains taxes). You don’t pay on the value while you’re holding them.

     

    The Capital gains tax rate is much lower than income tax rates- 15% if you make under $434k USD or 20% if you make over. 

    Post # 63
    Member
    1162 posts
    Bumble bee
    • Wedding: April 2019 - USA

    kes18 :  Yes, but even if they paid cash in full, they would still be making money off the house since it appreciates over time, it’s already an asset. Real estate IS an investment in itself. They could rent that property out and stand to make much more than the 7% or whatever they’d get from investing, depending on the investment of course. Why not just put some of the remaining nest egg in a mutual fund or something if you want to earn interest on your cash? A mortgage seems like a lot of trouble to go through if you can just pay cash for the house and invest elsewhere in another way that would probably make you more in the long term. 

    ETA: Also, just worst-case scenario, what happens if they’ve already paid thousands in interest on the mortgage, and those other investments tank for some reason, and they realize they could have just bought this house and done something else with those thousands of bucks they just gave to the bank? 

    Obviously there’s no right or wrong answer but that’s how I see it 

    Post # 64
    Member
    2500 posts
    Sugar bee
    • Wedding: June 2008 - County courthouse

    My husband and I have always paid cash for our houses. First we built our house only using our income and no loans. Then we bought another house and paid cash. A mortgaged house is never yours until it’s paid in full. Banks can take it away if you dont pay your mortgage. I consider my husband a smart man. He’s very resourceful when it comes to money

    Post # 65
    Member
    11600 posts
    Sugar Beekeeper

    Real estate is a notoriously unreliable investment. I would not pay in cash unless I was already independently wealthy. 

    Post # 66
    Member
    10389 posts
    Sugar Beekeeper
    • Wedding: City, State

    sollyb :  

    We did.

    In our case, there were considerations other than the possibility of earning higher interest on other investments.  We’re quite a lot older than most Bees.  Owning your home free and clear as you face old age starts to make more sense.  No investment is fail proof.  We don’t have time to play catch up if we lost any of our money.

    We’re in a very nice, high growth, but LOC community. Property taxes are relatively low; but we are in a very good school district, which is a big plus.  All indicators point to continuing growth; but, I have had enough real estate experience to know that can turn on a dime.

    So what?  All real estate is cyclic.  Value becomes important when you want to sell or borrow against the property.  While you’re living in the house, value is irrelevant.

    The house is also an insurance policy.  Since it’s 100% pure equity, it could be tapped later, in old age, if necessary.

    I would be remiss if I didn’t mention the psychology of owning free and clear.  It’s glorious. This is my second time.  The first was my very little cottage to which I escaped from my abuser.

    For me, no feeling has ever quite compared to standing out on the deck, or in the front yard, catching myself falling into the old habit of thinking omg, this is so nice.  Can I really afford this place?  Oh.  Wait.

    I’d like to say that if you pay cash, no one can ever take your home away from you, but that’s not quite true. You’re still stuck with taxes and insurance.  Other things can go wrong that could result in a lien being slapped on your house.  That doesn’t usually happen if you are responsible with debt, particularly taxes.

    If you do go with cash, be sure to ask your closing attorney about your state’s Homestead Exemption.  The limits vary from one state to another.  The Homestead Exemption protects your primary residence against future claims by debtors up to a specified dollar amount of equity. In some states, it’s automatic, in others, the Exemption has to be recorded.

    You can ask the closing agent to send it down for recording along with the deed.

    Just thought I would throw in a bit of a different perspective.

    Do let us know what you decide.  And there is a mandatory Pic Posting Rule for all Homebuyer Bees, you know.  There’s also one for Before and Afters. 😉

     

    Post # 67
    Member
    221 posts
    Helper bee

    I love this! I think you beautifully described some of the benefits to owning your home without the bank having equity! sassy411 :  

    Post # 68
    Member
    448 posts
    Helper bee
    • Wedding: June 2013

    Hell Cash!! But I would never afford it anyway..

    Post # 69
    Member
    523 posts
    Busy bee

    peachybee88 :  IA, beautifully said sassy411 :  

    also @ peachybee- if your company is matching your RRSP contribution, this is one of the exceptions where RRSPs make sense- even if you lose a percentage when you withdraw (the % will be based on your overall income with the T4RSP withdrawal added in), you’ll still receive more back than you put in since 50% was contributed by your employer, plus you’ll get the yearly contribution deduction now. 

    OP- if your financial advisor is telling you to take out a mortgage to ‘free up’ more money for investments, this isn’t a ‘slight bias’, IMO this is more akin to a conflict of interest. Others will have their own interests too- in many instances, the more services/ add-ons a bank employee sells you benefits them (many banks have incentives/ quotas etc for getting you to open mutual funds and other accounts or services & to up-sell you into additional features, including ‘bells and whistles’ you may not even need. 

    My advice to you would be to go for the house paid in cash- something many people can only dream of. Then together with your husband you can learn as much as you can from unbiased sources about various investment options. You say you’ll still have a nice nest egg even after paying cash for a house so you can divide this btw retirement savings and creating an investment portfolio. And since you have your incomes on top of this, freed from a mortgage, you will have above average buying power to continue building your portfolio- and if you build on it as you go along, you’ll not only be able to take advantage of new investment opportunities as they come along, you’ll be making better informed choices based on the ongoing knowledge you and your husband are acquiring. 

    Post # 70
    Member
    9764 posts
    Buzzing Beekeeper
    • Wedding: September 2013

    missmollybee :  You would never want to put cash you need in the short term in the stock market.  Anything you put in you should not need access to right away (excluding any major emergencies maybe- beyond your liquid emergency savings).  See post #54 by dgirl715.  Generally you would make more in the stock market than real estate unless you have a large real estate portfolio. 

    My husband is more interested in real estate investments but personally I am not as I have seen many people with a small number of rental properties lose lots of money when they have renters who completely trash the place and now they have tens of thousands in repairs.  So I am not really interested in that for those reasons.  Too much headache and hassle for me.  Real estate is not a great investment for most people IMO.  Most would be better off just putting money in a low cost index fund, as long as they don’t need the money immediately.  The best thing you can do is ride out the lows.  Withdrawing your money during a low in the market is TERRIBLE.

    And it really depends on the interest rate of the mortgage.  Also, mentally, some people really like the idea of not having any debt (even low interest) and if that’s also fine.  Personally, we just bought a 2 year old car and could have paid cash but it’s such a large chunk of cash and the interest rate was SO LOW that I decided to keep my cash and just take a $1500 hit of the interest over 5 years.  Many people wouldn’t make that choice but I’d rather have the assurance of having a larger $ reserve on hand (doesn’t make sense for everyone, but for our current state it does).

    Post # 71
    Member
    10389 posts
    Sugar Beekeeper
    • Wedding: City, State

    Anonymous1063 :  

    I can’t imagine what would motivate a financial advisor to advise a client to pay cash for their house.  It’s not what advisers are in business to do.

    It would be like my stylist telling me that it made sense to use box dye.  Maybe it would, maybe it wouldn’t.  But, that’s not the perspective from which she views things.

    Even an honest and ethical adviser is going to steer clients into what they know best—investments.  It’s how they make their livings; on commissions.

    Post # 73
    Member
    11600 posts
    Sugar Beekeeper

    It definitely makes a lot of sense closer to retirement to have a fully paid off home. But for a young couple just starting out, and many years ahead of them, I can’t see it unless it’s the only way that money won’t otherwise be spent or they are unlikely to follow through with an investment strategy.

    Post # 74
    Member
    9094 posts
    Buzzing Beekeeper

    kes18 :  Yep, we’re the exact same way. If for whatever reason we had to pay off our mortgage tomorrow, we could, but we’d rather not. But it seems like we’re in the minority here!

    Post # 75
    Member
    363 posts
    Helper bee

    Vanguard funds are great, and Schwab is a great tool to use to invest in Vanguard funds though they have all the funds so you can pick and choose.  If your 401(k) is with Vanguard, there’s no reason not to stick with them for additional investing.  Look for index funds that have low fees!  The funds aren’t created equal when it comes to fees, and some have high percentage fees that will eat into your growth.

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