I'm coming into some serious cash, should I pay cash for my house?

Question

need advise please!

Answer 1

You received a lot of good advice, but there are a few people saying you shouldn't pay it off and get the tax deduction, or finance your house and invest in the market and where you can get a return of 9% - 10%.

I agree with the people that say you should pay cash. Here's why. I'm not sure where you live and what an average house costs, but here in the DC area, the median home price is about $650,000. Okay, let's say you put 10% down and take out a mortgage for $585,000 at say 5.5% interest for 30 years. Now you know you'll pay the bank back $585,000 in principal, but do you know how much you'll pay back in interest alone? Take a guess. You will pay back $610,763.61 in interest ALONE. That's a total of $1,195,673.61 that you'll pay back to the bank. And if your credit is marginal, you're rates will go up.

Why would anyone in their right mind pay a million dollars for something only worth $650k?

Second, the argument of "you get a tax break". That's conditioned thinking. So, you get a mortgage to get a tax break. So, if you're in the 30% tax bracket, for every $1 you spend on the mortgage, you'll get back 30 cents from Uncle Sam. Why not pay off the mortgage, give Uncle Sam the 30 cents and you keep the other 70 cents? I personally would rather have the 70 cents then get 30 cents. What about you.

Last, the people that say to invest the money in the stock market where the average return is 9-10%. Here are some questions for you. How much do you know about stock investing? On the NYSE, there are 1600 issues, are you ready to go through that kind of research (worldwide there are around 40,000 issues). Also, what most people fail to take into consideration that an average return of 9-10% is based on over 100 years of data. There are cycles when the market is booming and there are cycles where the market is falling. Do you think that during the 1929 crash and the depression that followed, the market returned 10%?

The stock market runs on a 17-18 year cycle. The last cycle (which was a bull market) ran from 1982-2000. We are now in the midst of a secular bear cycle, and since the cycle is about 18 years long and it's now 2006, we still have another 11-12 years to go before this cycle completes. Can you wait that long before the market turns into a bull to start earning returns? And if you invest now, do you know how to invest during a bear cycle?

Also, take into consideration this point. Interest rates are rising, and although Bernanke hinted towards a rate pause, he may be able to do it once, but he'll definitely have to resume again. Why? In 2000 when the tech bubble popped, to prevent an economic contraction, the Fed lowered interest rates to 1%. Shortly there after, the dollar went into freefall against the world's major currencies. Because the US is running such huge budget & trade deficits and with such low interest rates, currency investors saw the dollar as too high a risk. When the fed started raising interest rates again, the dollar stabilized. But, investors no longer are attracted by the rates, they see the huge debt the U.S. is in as a major risk factor. Couple that with the fact that virtually all the major central banks have started raising their rates, currency investors are putting their money in currencies more stable that are now paying more interest. In order for the U.S. to prevent a dollar collapse, the fed will have to continue to raise rates to keep the dollar "attractive".

Problem, as you raise rates, the less money you qualify for on a mortgage. If you take an individual and qualify them for a mortgage, they will qualify for less at 6% then they will at 5% because as rates rise, in order to keep the payment at a level the individual an afford on a monthly basis, as the interest component of the payment goes up, the principal portion of the payment must go down.

Now answer this, do you know what interest rates are going to be like in 1 year? 5 years? 10 years? I believe we will see continued rate hikes. Maybe not at the Aug. 8th FOMC meeting, but will will in successive meetings.

So, as rates go up, the amount of money that people can qualify for goes down. Which means, they'll need to bid less and less for the house. If in 2000, they qualified for $500,000, but now rates have gone up and they only qualify for $425,000 (their income and credit could remain the same), they can no longer bid $500,000, they'll have to bid $425,000.

What that means is that property values will begin to fall. Basically, a house is worth what someone is willing to pay for it. If you mortgage your house now and rates go up and you need to sell, with higher rates, you may not be able to get a price for your house that will cover the payoff of the existing mortgage.

The best thing you can do for yourself is to have Zero debts. If you can pay cash and not carry a mortgage, then do it. If times get tough (and they will be, believe me, they're going to get really bad), then you have no chance of losing your house because it's free and clear (unless you don't pay the property taxes). If you have a layoff or something, you don't need to worry about making your mortgages payments and facing a foreclosure.

Just look around you an pay attention to what's happening in the housing market. The news from around the country is not good. Do you want to carry a mortgage in that kind of weakening environment?

Answer 2

Without knowing more about your financial picture it is pure speculation and utterly irresponsible to have an informed opinion of what you should do. In general I would say that if all your other debt is paid off and if your retirement is taken care of, and if you don't have much taxable income then that would make you a candidate to pay for the house in full. It is a nice feeling not having a mortgage but that obviously isn't the only financial goal that we have in life. How are real estate values doing in your area? How long do you plan to stay in your house? Will you be able to afford taxes and insurance on the property. Is this sudden windfall of cash that you are receiving taxable? Are you really getting what you think you are getting? I would strongly advise you to spend a few dollars for some real financial advise as opposed to a bunch of know nothing people like us telling you what we think we know. I would recommend that you speak with a fee only financial advisor or perhaps a tax attorney. It is likely that this might be the most important financial decision of your life. It is advisable to make sure that you are making the best decision for you and your family. Good luck

Answer 3

If you already have bought your house and have a mortgage running, I would suggest you put your money into a long term annuity and ask for monthly payouts. Take half of the monthly payouts and direct that to your mortgage and reinvest the remaining halve. Or you can split it 60-40 0r how ever you like. Then at the end of both your mortgage and your annuity you have both your money and the little extra cash reinvestments while you have enjoyed serious cash rebates on repaying your mortgage faster.

Don’t immediately pay off all your mortgage at a go as this might reflect badly on your credit score but the more you pay off your mortgage over a lengthier period of time the more credit score you would have. If say you are paying $200 for your mortgage and you add an extra $50 from your annuity payout then you will cut out at least 5 years from your total mortgage and you would have built a good credit score and at the end you will have both your house and the initial capital you are expecting now.

Good luck and just take some time asking the guys at your local investment bank about this.

Answer 4

The issue here is what kind of return can you earn with the serious cash. If you can earn 10% on it, then you can afford a 6% mortgage, and then use some for principal payment, not much in the early years of a mortgage loan. A paid up mortgage has a big tax advantage in that you are not taxed on the value of the equivalent rent. If you rented a similar house for $1000 per month you would have to pay taxes on it before paying he landlord. If you are in the 20% tax bracket you need to earn $1200 to pay the rent. This is such a huge break that almost all tax reform bills have a clause to make homeowners pay the piper on a paid up mortgage. So far they have all died, but they are watching as the treasury would get huge inflows from such a tax.

Answer 5

It depends on the mortgage interest rate you can get, and how well you think you can do on your investments. If you can get a 6% mortgage but get 9%-10% in the stock market over the long term (which is the historical average), you're better off taking a mortgage and investing the money in stocks. It's even better than that because you get a tax break from mortgage interest, so that lowers your "tax-effective" interest rate. But you should probably pay down at least 20% on your house, so that you don't have to pay title insurance for the mortgage lender.

However, you need to consider your risk tolerance. Your investments will likely swing up and down in the short term, and sometimes you'll be losing money. Your house value will be more stable.

Another thing to consider is that down the road, you can sell stocks/bonds/mutual funds to get some cash, but it's harder to do that with your house. You'd need to take out a home equity loan or sell the house.

In any case, you should keep 3 to 6 months' expenses in cash for emergencies.

Hope this helps, good luck.

Answer 6

There are a few things to consider:

a) Having your house debt free is a wonderful feeling. And naturally, there is a big emotional element to owning one's home.

b) However if we were to take a step back and look at it objectively and without emotion, then there are other elements to consider.

c) How old are you ? How comfortable are you when it comes to dealing with money ? Are you knowledgeable on other asset classes ? Do you have the necessary financial discipline ?

d) For example, if you always find yourself in debt and can't control your spending habit, then by all means pay cash for your house. Having a house all paid off thus enforce some sort of fiscal responsibility. You cannot take out your house and say put this trip on my house as easy as using your credit card.

e) Another element to consider is do you believe having your own house makes the best investment ? For example, if you believe house prices will remain flat in the next 10 years, you maybe better off put some money into the house and use part of the piggybank to invest in stocks or bonds ? Naturally, in making these investment decisions, you should also consider your tax situation.

f) What if you have other debts ? For example, if you owe money on your credit cards, then pay off your credit cards first because interest rates on credit cards are outrageous.

g) Given the sum involved, maybe it is worthwhile to talk to your accountant or financial planner ?

Hope it helps.

Answer 7

Probably not, if you are under 45. Your mortgage probably costs you about 7% a year before taxes (if not, you should refinance) and less than that after taxes. Your serious cash, if you invest it prudently (i.e., in good stock funds with as much tax deferral as you can get), is likely to earn you over 10% a year in the long haul. The keyword, however, is "in the long haul", hence, the remark about you being under 45, meaning it's still a long time until retirement.

Answer 8

Yes, pay cash for it if you don't use up the whole amount. Find a pretty neighborhood and choose the worst looking house in it and fix it up. Then you'll make a bundle when you sell it. This way, your homes will make money for you, bringing you income instead of you putting a constant drain on your resources.

I'd also advise putting away several years worth of property tax bills in CDs and also invest some.

Good luck with your decision.

Answer 9

depending on your true resources and your goals - a house mortgage may be "good" debt - unlike credit cards, etc, which are "bad" debt.

If you pay cash for your house, you will not have the interest payment as a tax deduction. That may or may not be sufficient to decfide this question for you - but it must be a consideration.

Answer 10

Living your life OUT of DEBT is one of the most wonderful situations you can have. You will suddenly find you have enough money in your pocket you won't have to worry about the tax man. Sit down and compute your taxes for last year without the mortgage deduction. You will find there's not much difference. Then consider how much money you will have not paying a mortgage.