Business History Books » Business Consultant » Loan or all cash?
Loan or all cash?
Question:
> In order to save $3000 in taxes, I have to spend almost $8000, that >seems to me like a $5000 loss.
[snip] The $5K/yr "loss" is a small price for the potentially much larger gains. > It still seems to me (I’m not an accountant either, nor do I know any) > that I’d be much better off paying cash for the house and investing the > 880.52/month in something that appreciates faster than the house does.
Back of the envelope calculations show that $120K invested at 12% for 30 years (compounded monthly) will yield a net (ignoring taxes) of $4.19M. Investing 880.52/month for 30 yrs. under the same terms nets $2.88M. All other things being equal (and we all know they’re not*) paying the $120K on the house vs. investing it as a lump sum costs you $1.2 million. *Variables of course include appreciation on the house, your changing tax bracket over the life of the loan and flunctuations in investment returns. In the purest sense you are much better off investing the money up front. Verne —
Response:
[snip!] >*Variables of course include appreciation on the house, your changing >tax bracket over the life of the loan and flunctuations in investment >returns. In the purest sense you are much better off investing the money up >front.
You should qualify this by saying that you are much better off investing the money if you believe that historical trends will continue. I personally would buy the house (assuming it’s a primary residence) because you will be better able to weather all storms. Is $1 million over 20-30 years really worth the risk involved? To some maybe, but not to me — at least not if the cash invested in the house represented a sizeable amount of my savings. If I have $20 million in the bank, then sure take out the loan. Dimitri
Response:
>>>>>Back of the envelope calculations show that $120K invested at 12% for 30 >>>>years (compounded monthly) will yield a net (ignoring taxes) of $4.19M. >>>>Verne
I will invest with you, if you will guarantee me 12% for 30 years compounding monthly. Send me the guarantee and guarantee bond and I’ll send my check. Support bacteria- the only culture some people have. <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
Response:
Sean, Your friend is smart. It is just an application of the same principle as buying bonds at a discount or premium depending on their coupon rate. However, that kind of strategy would require an in-depth knowledge of the local RE market over at least a few years, so that you could actually calculate the "discount" to see if it was really worth it. You could also be stuck in a high mortgage rate for some time, so there is risk to calculate as well. Probably not something the average home owner would go through, especially if it was the home they are going to live in. In any case, I’ve always considered the home you live in to be rather a poor investment vehicle. After all, you have to live *somewhere*, it’s not like you can take the money and spend it on something else when you sell (recent tax law changes allowing one to downsize notwithstanding). — Casey – Hide quoted text — Show quoted text -> Historically, over time, stocks perform substantially better than real estate as an > investment. Real estate actually is one of the worse investments – again, historically > and over time (sorta’ redundant). > CK > Someone I know from work has argued with me that people’s common perception > "buy a house when rates are low, so you’ll have low payments" is poor > investment logic. > His argument is that the best time to buy a house is when interest rates are > *high*. Houses are moving slowly, builders are offering seconds to get rid of > them. Even if you just pay the interest alone, building no equity, eventually > rates will drop– and you’ll cash in big with the leverage on the sale. When > interest rates are low, *everyone* is out looking at houses… You end up > paying top dollar in a seller’s market, and won’t make as much profit when > *you* finally sell. > People tend to forget how much leverage there is on a house. It sounds crazy > and risky to buy $250,000 of commodities with 10% margin– but people will > regularly do this with real property. When I bought mine, I put 25% down… and > was considering putting 30%. Big debts just give me the willies!
–
Response:
I ignored a lot of factors… The message was not intended to include all possible factors, but to give a few ideas to chew on and think about. Since we are talking a 30 year investment, much of that investment could be in an IRA / Roth to defer some of those taxes. You are right, there are a lot of things left out. But there are so many combinations you can do to invest for maximum gain and others to reduce tax liability of gains. A simple newsgroup message could in no way cover all the possibilities. Once again, I am in no way an accountant, financial advisor, or anyone qualified to give professional advice. I am just stating my findings and views. As far as owning your home straight out… I still cannot see a reason to purchase a house as any investment. The original question was, would I do better purchasing (investing) my house in full or putting down 20% and invest the remaining $120,000? I cannot see how investing in your house over today’s stock market can come close. If you can show me a way, I would love to see it… I am in the process of building a house… I will be glad to put more $$ down at closing if someone shows me I would benefit more by doing so. >Whoa Chad! You completely ignored the risk factor here. You don’t get that > extra >investment income for nothing. Plus, owning your home straight out certainly > puts >you in a better situation from the viewpoint of no debt (assuming no other > debt). >Not giving an opinion either way on the loan vs. own argument, but I think you > are >being too one-sided and optimistic. You also seem to be ignoring the tax due on >those stock investments. >– Casey
Chad Stansel Independent Consultant http://www.stansel.com
Response:
- Hide quoted text — Show quoted text ->>>>>> >>>>>Ok, but your $120,000 in stock market (with the power of compounding) is going >>>>>> >>>>>to do a hell of a lot more for you than a lousy appreciation return on the >>>>>> >>>>>paid-for house. >>>>>> YOU HOPE. >>>>>Historically, over time, stocks perform substantially better than real estate as an >>>>>investment. Real estate actually is one of the worse investments – again, historically >>>>>and over time (sorta’ redundant). >>>>>CK > That wasn’t my point. Stocks do *usually* out perform real estate on > a pure financial basis. Real estate for most homeowners is only > partly an *investment*. My point is the stock market is volitile just > as the dice on the green felt table in Vegas are volitile. In other > words a gamble.
My point was that over time, a well diversified portfolio of equities WILL substantially outperform real estate as an investment. It isn’t a "gamble" as in Vegas gaming if the buys are well researched and held for long-term appreciation. Yes, in the short-run the equities market can be risky but so is housing. If I remember correctly, over a 30 year period, stocks give an average annualized return of around 9% and real estate something on the order of .7%. ( that’s point 7 percent). CK
Response:
- Hide quoted text — Show quoted text ->>>>> >>>>>Ok, but your $120,000 in stock market (with the power of compounding) is going >>>>> >>>>>to do a hell of a lot more for you than a lousy appreciation return on the >>>>> >>>>>paid-for house. >>>>> YOU HOPE. >>>>Historically, over time, stocks perform substantially better than real estate as an >>>>investment. Real estate actually is one of the worse investments – again, historically >>>>and over time (sorta’ redundant). >>>>CK
That wasn’t my point. Stocks do *usually* out perform real estate on a pure financial basis. Real estate for most homeowners is only partly an *investment*. My point is the stock market is volitile just as the dice on the green felt table in Vegas are volitile. In other words a gamble. Support bacteria- the only culture some people have. <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
Response:
>>>>>> I will invest with you, if you will guarantee me 12% for 30 years >>>>> compounding monthly. Send me the guarantee and guarantee bond and >>>>> I’ll send my check. >>>>> Support bacteria- the only culture some people have. >>>>> <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<< >>>>1 percent/month is not unreasonable given a 12% annual stock market return. >>>>Anybody who’s been in market index funds for the past several years has >>>>realized much better.
I will extend my offer to you again. Give me a written, insured 12% return for 30 years and I will write a check. The key in your non-response is "for the past several years". Care to go for thirty? Support bacteria- the only culture some people have. <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
Response:
> Historically, over time, stocks perform substantially better than real estate as an > investment. Real estate actually is one of the worse investments – again, historically > and over time (sorta’ redundant). > CK
Someone I know from work has argued with me that people’s common perception "buy a house when rates are low, so you’ll have low payments" is poor investment logic. His argument is that the best time to buy a house is when interest rates are *high*. Houses are moving slowly, builders are offering seconds to get rid of them. Even if you just pay the interest alone, building no equity, eventually rates will drop– and you’ll cash in big with the leverage on the sale. When interest rates are low, *everyone* is out looking at houses… You end up paying top dollar in a seller’s market, and won’t make as much profit when *you* finally sell. People tend to forget how much leverage there is on a house. It sounds crazy and risky to buy $250,000 of commodities with 10% margin– but people will regularly do this with real property. When I bought mine, I put 25% down… and was considering putting 30%. Big debts just give me the willies!
Response:
Whoa Chad! You completely ignored the risk factor here. You don’t get that extra investment income for nothing. Plus, owning your home straight out certainly puts you in a better situation from the viewpoint of no debt (assuming no other debt). Not giving an opinion either way on the loan vs. own argument, but I think you are being too one-sided and optimistic. You also seem to be ignoring the tax due on those stock investments. — Casey – Hide quoted text — Show quoted text – > Ok, but your $120,000 in stock market (with the power of compounding) is going > to do a hell of a lot more for you than a lousy appreciation return on the > paid-for house. Even if you are basically giving away 8%. Your compounding > rate at starting 880.52 each month will be nothing compared to a lump > investment amount of 120,000. Lets look at that. From my old business classes > in college, I think you can use the Future Value formula to determine the > difference over 30 years.. > Excel formula : FV(12%,30,0,120000,) > $3,595,190.65 > Excel formula: FV(1%,360,880.52,0,) > $3,077,385.82 > Even though in 30 years the dollar value will not be the same as today, I > think $500k will still be a significant difference. Even adding the 8% savings > to example 2 will still make example 1 better, not even taking into account > the tax savings. Either example you are going to have the same value on the > house. >and this is where I get confused… >In order to save $3000 in taxes, I have to spend almost $8000, that >seems to me like a $5000 loss. Additionally, without the mortgage >deduction, I’m well below the standard deduction so the government is in >effect, giving me money (sticking with HOH, they say "here deduct $6250 >even though if you itemized it’d only be $5000"). >It still seems to me (I’m not an accountant either, nor do I know any) >that I’d be much better off paying cash for the house and investing the >880.52/month in something that appreciates faster than the house does. > Chad Stansel > Independent Consultant > http://www.stansel.com
–
Response:
Its volatile… And you mean to tell me that homes are not? What if you spend $300k on a house and the city builds a jail down the road… The stock market, if you pick up a trend, you unload the stock that concerns you. You don’t have all your eggs in one basket like you do a house. There has been several cases where homes during inflationary periods lose original value and people are simply stuck in them. Right now; homes, I think, are priced WAY to high.. If inflation did ever set in, you are going to see what I am talking about… – Hide quoted text — Show quoted text ->That wasn’t my point. Stocks do *usually* out perform real estate on >a pure financial basis. Real estate for most homeowners is only >partly an *investment*. My point is the stock market is volitile just >as the dice on the green felt table in Vegas are volitile. In other >words a gamble. >Support bacteria- the only culture some people have. ><<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
Response:
>Its volatile… And you mean to tell me that homes are not? What if you spend >$300k on a house and the city builds a jail down the road… The stock market, >if you pick up a trend, you unload the stock that concerns you. You don’t have >all your eggs in one basket like you do a house. There has been several cases >where homes during inflationary periods lose original value and people are >simply stuck in them. Right now; homes, I think, are priced WAY to high.. If >inflation did ever set in, you are going to see what I am talking about…
The issue is that a home that falls in value is still useful as a dwelling. That means that rent won’t have to be paid and that no matter what you’ll have shelter. Remember, we are talking about purchasing a home cash versus taking out a loan for it and investing the rest of the cash. Dimitri
Response:
- Hide quoted text — Show quoted text ->>>>>Back of the envelope calculations show that $120K invested at 12% for 30 >>>>>years (compounded monthly) will yield a net (ignoring taxes) of $4.19M. >>>>>Verne > I will invest with you, if you will guarantee me 12% for 30 years > compounding monthly. Send me the guarantee and guarantee bond and > I’ll send my check. > Support bacteria- the only culture some people have. > <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
1 percent/month is not unreasonable given a 12% annual stock market return. Anybody who’s been in market index funds for the past several years has realized much better. Verne —
Response:
– Hide quoted text — Show quoted text -> > Not that I don’t believe you (since everyone else says it, it must be > > true 
but can you "show me the money"? > > To make sure everyone’s playing from the same set of rules, here are > > some assumptions for the scene… > > Annual income: $75,000 (all sources, wages, dividends, etc) > > House price $150,000 > > Interest rate: 8% > > Mortgage term: 360 months > > Investment return: 8% > > Assume the tax tables don’t change, purchaser get a 5% raise each year > > and purchaser has enough liquid assets to pay for the house. > Any consumer debt (credit cards, auto loan(s))? Standard or itemized > deductions? > OK, A few more assumptions that I should have stated to begin with… > Assume this is a healthy (no excessive medical bills) family of 4, > parents in their 40’s. They have an average monthly balance of $750 on > their credit cards which they manage to pay off every month. They don’t > have car payments. Without a mortgage deduction they don’t have enough > (by a fair amount) to make it worth their while to itemize deductions at > tax time.
I’ll make the assumption that in addition to mortgage interest, you can come up with $2k in additional deductions (charitable contributions, auto registration, real estate taxes, etc.). The only comparable aspect between financing $120k vs. paying cash is the tax deductable interest, as the interest and investment return rate are equal. According to my calculations, you’ll be $160k ahead after 30 years, which is accumulated by annually investing the avoided tax. This assumes a nominal tax rate of 33%, $3,300 standard deduction, and that the standard deduction increases will be offset by increases in deductions. This benefit does not consider state taxes avoided, which will make the savings greater. Mark Atanovich "Good judgement comes from experience. Experience comes from bad judgement."
Response:
>>>>>Ok, but your $120,000 in stock market (with the power of compounding) is going >>>>to do a hell of a lot more for you than a lousy appreciation return on the >>>>paid-for house.
YOU HOPE. Support bacteria- the only culture some people have. <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
Response:
> >>>>>Ok, but your $120,000 in stock market (with the power of compounding) is going >>>>>to do a hell of a lot more for you than a lousy appreciation return on the >>>>>paid-for house. > YOU HOPE.
Historically, over time, stocks perform substantially better than real estate as an investment. Real estate actually is one of the worse investments – again, historically and over time (sorta’ redundant). CK
Response:
Ok, but your $120,000 in stock market (with the power of compounding) is going to do a hell of a lot more for you than a lousy appreciation return on the paid-for house. Even if you are basically giving away 8%. Your compounding rate at starting 880.52 each month will be nothing compared to a lump investment amount of 120,000. Lets look at that. From my old business classes in college, I think you can use the Future Value formula to determine the difference over 30 years.. Excel formula : FV(12%,30,0,120000,) $3,595,190.65 Excel formula: FV(1%,360,880.52,0,) $3,077,385.82 Even though in 30 years the dollar value will not be the same as today, I think $500k will still be a significant difference. Even adding the 8% savings to example 2 will still make example 1 better, not even taking into account the tax savings. Either example you are going to have the same value on the house. >and this is where I get confused… >In order to save $3000 in taxes, I have to spend almost $8000, that >seems to me like a $5000 loss. Additionally, without the mortgage >deduction, I’m well below the standard deduction so the government is in >effect, giving me money (sticking with HOH, they say "here deduct $6250 >even though if you itemized it’d only be $5000"). >It still seems to me (I’m not an accountant either, nor do I know any) >that I’d be much better off paying cash for the house and investing the >880.52/month in something that appreciates faster than the house does.
Chad Stansel Independent Consultant http://www.stansel.com
Response:
- Hide quoted text — Show quoted text – > I think your situation is still a no brainer… Take out the loan, get the tax > advantage and invest your money. An accountant or financial advisor (which I > am not) should crunch the numbers for you but think about it. Your annual > income is 75,000. If you pay cash for the house, you will be using a lousy > standard deduction. The more interest you are paying on the house, you will > get to take that right of the top of your taxable income. So, put the $30,000 > down on the house. Take out a loan for the remaining $120,000. At 8% fixed: PI > would be $880.52/mo. You would get to take at least 75% of that or more (lets > be conservative) as interest to deduct over the first several years.. So > 7924.68 plus your property taxes, varies.. lets say $1500. Right off the bat, > your taxable income just dropped from 75,000 to 65,000 (Head of Household for > 65,000 tax is $13794, Head of Household for 75,000 tax is $16594) You save a > little less than $3000 in taxes (given the standard deduction will help the > 75k some)
and this is where I get confused… In order to save $3000 in taxes, I have to spend almost $8000, that seems to me like a $5000 loss. Additionally, without the mortgage deduction, I’m well below the standard deduction so the government is in effect, giving me money (sticking with HOH, they say "here deduct $6250 even though if you itemized it’d only be $5000"). It still seems to me (I’m not an accountant either, nor do I know any) that I’d be much better off paying cash for the house and investing the 880.52/month in something that appreciates faster than the house does. – Hide quoted text — Show quoted text -> That is almost another 3%… Your home will appreciate at the same > rate regardless of whether you own 100% or 20%. Lets say it appreciates only > 3% a year… That would take your loss rate from 8% to 2%. Your $120,000 that > you did not use to pay OFF your house is sitting in a nice growth mutual fund > earning 12+% a year… > It is a NO-BRAINER!!! > I may be off a few numbers but like I said, talk to your accountant or > financial advisor and let him answer your questions. I personally would never > use a house as an investment. > Good luck! >> > Not that I don’t believe you (since everyone else says it, it must be >> > true but can you "show me the money"? >> > To make sure everyone’s playing from the same set of rules, here are >> > some assumptions for the scene… >> > Annual income: $75,000 (all sources, wages, dividends, etc) >> > House price $150,000 >> > Interest rate: 8% >> > Mortgage term: 360 months >> > Investment return: 8% >> > Assume the tax tables don’t change, purchaser get a 5% raise each year >> > and purchaser has enough liquid assets to pay for the house. >> Any consumer debt (credit cards, auto loan(s))? Standard or itemized >> deductions? >OK, A few more assumptions that I should have stated to begin with… >Assume this is a healthy (no excessive medical bills) family of 4, >parents in their 40’s. They have an average monthly balance of $750 on >their credit cards which they manage to pay off every month. They don’t >have car payments. Without a mortgage deduction they don’t have enough >(by a fair amount) to make it worth their while to itemize deductions at >tax time.
Response:
> Not that I don’t believe you (since everyone else says it, it must be > true but can you "show me the money"? > To make sure everyone’s playing from the same set of rules, here are > some assumptions for the scene… > Annual income: $75,000 (all sources, wages, dividends, etc) > House price $150,000 > Interest rate: 8% > Mortgage term: 360 months > Investment return: 8% > Assume the tax tables don’t change, purchaser get a 5% raise each year > and purchaser has enough liquid assets to pay for the house.
Any consumer debt (credit cards, auto loan(s))? Standard or itemized deductions? Mark Atanovich "Good judgement comes from experience. Experience comes from bad judgement."
Response:
- Hide quoted text — Show quoted text -> Not that I don’t believe you (since everyone else says it, it must be > true but can you "show me the money"? > To make sure everyone’s playing from the same set of rules, here are > some assumptions for the scene… > Annual income: $75,000 (all sources, wages, dividends, etc) > House price $150,000 > Interest rate: 8% > Mortgage term: 360 months > Investment return: 8% > Assume the tax tables don’t change, purchaser get a 5% raise each year > and purchaser has enough liquid assets to pay for the house. > Any consumer debt (credit cards, auto loan(s))? Standard or itemized > deductions?
OK, A few more assumptions that I should have stated to begin with… Assume this is a healthy (no excessive medical bills) family of 4, parents in their 40’s. They have an average monthly balance of $750 on their credit cards which they manage to pay off every month. They don’t have car payments. Without a mortgage deduction they don’t have enough (by a fair amount) to make it worth their while to itemize deductions at tax time. Bruce
Response:
I think your situation is still a no brainer… Take out the loan, get the tax advantage and invest your money. An accountant or financial advisor (which I am not) should crunch the numbers for you but think about it. Your annual income is 75,000. If you pay cash for the house, you will be using a lousy standard deduction. The more interest you are paying on the house, you will get to take that right of the top of your taxable income. So, put the $30,000 down on the house. Take out a loan for the remaining $120,000. At 8% fixed: PI would be $880.52/mo. You would get to take at least 75% of that or more (lets be conservative) as interest to deduct over the first several years.. So 7924.68 plus your property taxes, varies.. lets say $1500. Right off the bat, your taxable income just dropped from 75,000 to 65,000 (Head of Household for 65,000 tax is $13794, Head of Household for 75,000 tax is $16594) You save a little less than $3000 in taxes (given the standard deduction will help the 75k some) That is almost another 3%… Your home will appreciate at the same rate regardless of whether you own 100% or 20%. Lets say it appreciates only 3% a year… That would take your loss rate from 8% to 2%. Your $120,000 that you did not use to pay OFF your house is sitting in a nice growth mutual fund earning 12+% a year… It is a NO-BRAINER!!! I may be off a few numbers but like I said, talk to your accountant or financial advisor and let him answer your questions. I personally would never use a house as an investment. Good luck! – Hide quoted text — Show quoted text -> > Not that I don’t believe you (since everyone else says it, it must be > > true but can you "show me the money"? > > To make sure everyone’s playing from the same set of rules, here are > > some assumptions for the scene… > > Annual income: $75,000 (all sources, wages, dividends, etc) > > House price $150,000 > > Interest rate: 8% > > Mortgage term: 360 months > > Investment return: 8% > > Assume the tax tables don’t change, purchaser get a 5% raise each year > > and purchaser has enough liquid assets to pay for the house. > Any consumer debt (credit cards, auto loan(s))? Standard or itemized > deductions? >OK, A few more assumptions that I should have stated to begin with… >Assume this is a healthy (no excessive medical bills) family of 4, >parents in their 40’s. They have an average monthly balance of $750 on >their credit cards which they manage to pay off every month. They don’t >have car payments. Without a mortgage deduction they don’t have enough >(by a fair amount) to make it worth their while to itemize deductions at >tax time. >Bruce
Chad Stansel Independent Consultant http://www.stansel.com
Response:
You would still be better off borrowing 80% for house and investing the $$. You are still getting the equity/appreciation in the house whether you own 100% or only 20%… If you build your portfolio wisely, you will do MUCH better than a conservative 8%… The only way I would put more money into a house would be to avoid a balloon rate and/or PMI… If it wasn’t for those, I would finance 100% and keep my hard earned $$ making more $$ and using my house as a write-off… >I’ve read that in certain areas, buyers are paying all cash for their >houses. Yet I’ve also read that it’s best to put just 20% down and take >out a loan out for the rest, because then you can invest the extra money >plus get your tax deduction. Which is better? What if you have to choose >between an 8% mortgage and an investment that, estimating conservatively, >would only pay 8%? Assuming people don’t choose to pay all cash just to >avoid the hassle of applying for a loan or to make themselves more >desirable to sellers in hot markets, why would they do it? >Karen Steinberg
Chad Stansel Independent Consultant http://www.stansel.com
Response:
Not that I don’t believe you (since everyone else says it, it must be true but can you "show me the money"? To make sure everyone’s playing from the same set of rules, here are some assumptions for the scene… Annual income: $75,000 (all sources, wages, dividends, etc) House price $150,000 Interest rate: 8% Mortgage term: 360 months Investment return: 8% Assume the tax tables don’t change, purchaser get a 5% raise each year and purchaser has enough liquid assets to pay for the house. Please state any other assumptions you make. Show me how much I’m better off by borrowing $120,000 than by plunking down $150,000 and not having any long term debt. – Hide quoted text — Show quoted text – > You would still be better off borrowing 80% for house and investing the $$. > You are still getting the equity/appreciation in the house whether you own > 100% or only 20%… If you build your portfolio wisely, you will do MUCH > better than a conservative 8%… The only way I would put more money into a > house would be to avoid a balloon rate and/or PMI… If it wasn’t for those, I > would finance 100% and keep my hard earned $$ making more $$ and using my > house as a write-off… >I’ve read that in certain areas, buyers are paying all cash for their >houses. Yet I’ve also read that it’s best to put just 20% down and take >out a loan out for the rest, because then you can invest the extra money >plus get your tax deduction. Which is better? What if you have to choose >between an 8% mortgage and an investment that, estimating conservatively, >would only pay 8%? Assuming people don’t choose to pay all cash just to >avoid the hassle of applying for a loan or to make themselves more >desirable to sellers in hot markets, why would they do it? >Karen Steinberg > Chad Stansel > Independent Consultant > http://www.stansel.com
– Bruce Bowler 207.633.9600 (voice) Research Associate 207.633.9641 (fax) West Boothbay Harbor ME 04575 http://www.bigelow.org/
Response:
I’ve read that in certain areas, buyers are paying all cash for their houses. Yet I’ve also read that it’s best to put just 20% down and take out a loan out for the rest, because then you can invest the extra money plus get your tax deduction. Which is better? What if you have to choose between an 8% mortgage and an investment that, estimating conservatively, would only pay 8%? Assuming people don’t choose to pay all cash just to avoid the hassle of applying for a loan or to make themselves more desirable to sellers in hot markets, why would they do it? Karen Steinberg
Response:
> I’ve read that in certain areas, buyers are paying all cash for their > houses. Yet I’ve also read that it’s best to put just 20% down and take > out a loan out for the rest, because then you can invest the extra money > plus get your tax deduction. Which is better? What if you have to choose > between an 8% mortgage and an investment that, estimating conservatively, > would only pay 8%? Assuming people don’t choose to pay all cash just to > avoid the hassle of applying for a loan or to make themselves more > desirable to sellers in hot markets, why would they do it?
This is a question that has no single correct answer. If you have no consumer debt, minimal tax deductions, and are already heavily invested in equities, than paying cash for a home may make sense. Conversely, if you have credit card debt, car loans, and are not investing at all in the stock market, it would be foolish. Mark Atanovich "Good judgement comes from experience. Experience comes from bad judgement."