Whew, life is crazy busy. Right before I left for a trip this past weekend, the plumbing system of our home backed up. I wrestled with it for 5 days and made zero progress before I had to go. Tonight, I’m back and those *&^%ing pipes are still clogged. Since the home is 50 years old, I’m having a heckuva time getting any of the clean out traps open (0/2 so far). In times like this, I question the value of owning a house which brings me to this week’s question about mortgages. First though, let’s talk about last week’s question, Soylent!
Soylent is a food substitute meant to replace meals completely. I decided to order a week long supply of it and wanted to know what ya’ll thought (resounding “HELL NO!!”).
Michelle from Michelle’s Finance Journal comment pretty much summed up the general opinion:
I love food and I can’t even imagine Soylent replacing food for me. I enjoy the different taste, texture, look, and smell of food.
A couple folks including Mrs. PoP from Planting our Pennies made the connection to the crazy name:
Seriously – this is a really unfortunate choice of name for the product.
I did get a supporter in Nick from A Young Pro:
I could totally do Soylent.
I’ll be honest, I’m a bit terrified of the Soylent. However, I just got a temporary reprieve. My shipment has been pushed back to December, so the experiment is on hold. (Mrs. 1500 note: I will NOT be joining Mr. 1500 on this crazy scheme journey.
This week’s question is this: Would you get a mortgage even if you had the cash to purchase your home straight up? Another way to ask this question would be, Is any debt good debt?
I realize that for a lot of folks, the response to this question depends on the interest rate. Feel free to include that in your response.
We faced this same question ourselves back in June. I’ll tell you what we did and why we did it next week.
You already took the words right out of my mouth – it would depend on the interest rate! If we had had the price of a house in cash when we bought our home, we still probably would have gotten a mortgage because the interest rate we were offered was 3.6%. We would have taken that cash on hand and invested it in a few places, where it was highly likely we would have ended up with a return of much more than 4%.
However, if I was older, I think my answer would change regardless of interest rate – the closer to my goal age for retirement, the more I would appreciate the sense of security owning a home without having to pay anyone back for it monthly would bring. I would assume at that point, if I keep going the way I am now, I wouldn’t feel like I had to bolster my savings and investments first (because I’m assuming they’d be at comfortable levels).
Kali @CommonSenseMillennial recently posted…#FinCon13 and Financial Goals, Big and Small
My partner and I will be buying a condo in a year or two. I would need a mortgage for my half, but my partner could pay their half outright. But unless we had tons of EXTRA cash lying around I don’t think its a good idea to wipe ourselves out and be cash-poor just for the sake of not having a mortgage. We’ll put 40-50% down and maintain liquidity (ie flexibility) for the next 15 years. In a few years if we decide to pay it off, and we have more cushionperhaps we will do so but I do not see a mortgage as an evil to be avoided at all costs.
Sounds like you are doing it right!
“In a few years if we decide to pay it off…”
Exactly, you can always get rid of it down the road.
Great question Mr. 1500! As you’ve said above, the interest rate plays a large role in this. In our current state, with interest rates in the low to mid fours plus the added benefit of being a legal tax shelter, I would absolutely mortgage up!
If your net after tax cost is 3% on your money, and you invest the cash you would have spent on the house, you’re in a classic interest rate arbitrage situation. You become your own bank. Put that money to work in peer-to-peer lending, dividend growth stocks, index funds, whatever your heart desires and take advantage of the extended growth you can achieve as a result of the leverage provided to you.
writing2reality recently posted…Passive Income – May 2013 Update
Peer lending is one of the investments that convinced me to get a mortgage. Why throw all of that money into a mortgage that would only cost me 3% when I can make 10%+ peer lending?
Exactly. ☺
Wendy recently posted…Save Money: Gas Mileage Tips That Work
I think it really depends. Even though I would love to just invest all of that money, not having a mortgage would be very nice as well.
Michelle recently posted…How Much Was Your Wedding?
Yes, if one thing is true, it is that debt sucks!!
I feel like my answer to this really depends on life position – if you’re closer to retirement or reducing income in that way, I think it would make me feel more secure to be mortgage free but I don’t necessarily feel the same way now when it will be a decade or slightly more before I retire. I will retire my debt first but am not prioritizing it now – now I’m working on building up my savings and thinking about alternative income streams like investment property. The capital to come up with that would be the same mortgage prepayment money so I’d rather allocate it to a different place right now.
“I feel like my answer to this really depends on life position…”
Good thought! My parents are in their 60s. They have a huge home and a huge mortgage to go with it. I never want to be in that position.
For me the decision was made for me because I didn’t have enough cash to buy outright so I had to get a mortgage. I do know one difference between buying in Canada versus the US is that our interest on a mortgage is not tax deductible so we tend to want to pay off the mortgage as fast as possible as there is no tax advantage. I’m not sure if in the US when taking out a mortgage you have what they call high risk mortgage insurance but in Canada if you buy and have less than a 25% downpayment you have to purchase insurance which is not cheap. So when I did buy I scraped every penny I could together to get the 25% downpayment. Now you may wonder if I had to do all that why didn’t I continue to rent. The reason I didn’t was my mortgage payment worked out to be the same as my rent each month and the place I bought also had two rentals in it so the income from the two rentals actually paid my mortgage payment. So now just a little over 10 years later my house has over doubled in value (hopefully the market doesn’t bust) and I owe very little, could actually pay it off now but my investment returns are more than the interest rate on the remaining balance.
“The reason I didn’t was my mortgage payment worked out to be the same as my rent each month and the place I bought also had two rentals in it so the income from the two rentals actually paid my mortgage payment.”
Wow, this is an awesome move and I’m jealous!
I see both sides to this coin. Personally i have paid mine off at the moment. But if i really needed the cash flow or more investments i would consider taking out a loan on my property because the margin between interest rates and historical investment returns is so large right now.
Good point about taking out a loan after the fact. A line of credit usually has much lower fees than a mortgage and is much less of a pain in the butt to get.
Despite understanding the math and the arbitrage opportunity, we’d still just purchase the home outright and use the opportunity costs as motivation to invest as much as possible while mortgage/debt free. We are within a decade of FI, so we are more concerned with avoiding really bad things in the short term (e.g. – severe market dip coupled with a job loss while still paying a mortgage) than with maximizing the upside.
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It depends on where the rest of our finances are at. If we’d be raiding all of our savings to purchase the house then I’d just take on the mortgage, although a larger percentage down might make sense. If we were financially independent then I wouldn’t have a problem with using the cash to purchase the house. Given the low interest rates that you can currently get I think taking on a mortgage would be the right thing do if you’re planning on purchasing a house and wouldn’t be financially independent excluding the house purchase.
JC @ Passive-Income-Pursuit recently posted…PepsiCo (PEP) Dividend Stock Analysis
At this point in life, I’d take the mortgage if interest rates were “low” – like now. I’ve been house rich and cash poor, and would not like to repeat that experience. However, as I get older and theoretically closer to retirement, I would rather pay outright for a house, just to not have the mortgage payment. There is one situation where I’d probably go mortgage-less though: it gives you *huge* leverage as a buyer to not have the purchase contingent on lender approval). If there’s a house I just had to have, I’d probably make the offer to pay outright to get it.
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Sorry to hear about the plumbing troubles!
I think for me it would depend not only on the APR, but also on the fixed loan origination costs and the loan amount. The relationship between origination costs and the loan amount would move the balance point of what I could consider to be the interest rate I would need to make the mortgage feel “worth it” if we had more than enough other cash sitting around to make the purchase out right.
Mrs PoP @ Planting Our Pennies recently posted…Fear: Fight, Flight, or Opossum?
I think for me, I would pay the cash. I understand the thought that you could make a better return than the interest rate you would be paying… but the thought of having that monthly housing expense at $0 (well, close to $0, with property taxes, insurance, and the like) and the peace of mind that comes with that would be worth any potential opportunity cost!
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First I want to say that it was great meeting you both at FinCon this past weekend. If I had the money I personally would pay cash for a house. Yes, you get the tax deduction from the mortgage interest, however, I would rather give that money to a charity of my choice then to the government. I also understand the argument that you can get a better return if you invested it in the stock market. Me…I would rather have peace of mind and be completely debt free. That is my two cents.
Deacon @ Well Kept Wallet recently posted…Highlights from FinCon 2013
Hi Deacon, very nice meeting you as well!
Interesting point about the mortgage deduction. In my case, I don’t think I’ll even be able to itemize, so the deduction is out the window. However, I’m still going with the loan so I have a enough cash on hand to make my next move.
I do think it depends on the interest rate. If it was low enough, I would likely take the mortgage. I don’t think I’ll have enough saved up to pay for a house outright in the next 10 years, but who knows! My parents recently purchased their home using the cash they got from the sale of their old home. I think that was a great decision for them, and really a no-brainer. I don’t think they gave it a second thought. They still had enough left over to pay off a large portion of their debt, and they don’t have to worry about another monthly payment. I think the comfort of owning meant a lot to them. Good luck with the pipes!
E.M. recently posted…Financial Observations About Colleagues
The pipes are going to drive me off the sanity cliff soon!
We’re going to purchase a house with 20% down payment. With interest rates where they are right now, I would rather invest the rest of the money in cash.
Savvy Financial Latina recently posted…How to Be Successful
Yep, me too.
Simple, just calculate the net present value of the house with the mortgage and without, assuming a reasonable cost of capital, taking into account tax breaks on mortgage debt, and inflation. May make sense
I’ll chime in like the others who have said it all depends on the math!
Anne @ Unique Gifter recently posted…The Cost of Hunting in British Columbia
I would consider paying for the home out right if I had the cash regardless of the interest rate on the mortgage. Especially, if this would be my forever home. The older I get the less debt I want to carry.
Practical Cents recently posted…DIY Projects and More
I see your point too a bit. I really hate any debt. I’m pretty sure that a mortgage is the only debt I’d ever have at this point in my life.
Unless the interest rate was crazy, I would probably do a 50/50 split. This lets me pay off the majority of the house but I could keep money around to invest. This would also let me have a good emergency fund in case my house decides to start dying on me.
Micro recently posted…The Snooze Button: the silent time waster of our lifetime
Sounds like a good plan. You can always make extra payments on the home as well.
This depends on a lot of things. Back in 2005 I had tax clients that had approx. $600,000 in a retirement account. Four kids in college, and the wife wanted to build her dream home, and wanted it to be big enough for all the kids to come home to with spouses and grandkids in tow. Approx. dream home cost: $450,000. The couple wanted to take the money out of the IRA and build the home for cash. It made more sense to split the retirement account into a couple of different investment vehicles and take out a loan to build the house. The interest on the retirement vehicles paid the mortgage payment, plus some. Dream house was built, and the retirement principal was still intact. Win-win.
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Wow, good work on guiding them in the right direction. Cashing out most of your retirement to build a home sounds like a horrible idea!
Actually, the clients had about $3 million in retirement funds, over and above the $600,000 account. The $600,000 account was a small IRA from a previous job the wife had, that had been left sit when she quit that job. To them it was “disposable” income because they did have the other retirement money, which was why they didn’t have many qualms about cashing in the account to build the house. BUT – to me, it’s all about trying to do what you want to do while retaining the base, or the principal, if at all possible – which is why they did not build the house for cash and instead took out a construction loan which was then converted to a mortgage. I call it “having your cake and eating it, too” – ☺☺
Wendy recently posted…Save Money: Gas Mileage Tips That Work
Ahh, I like this math much better! A cool $3,000,000 for retirement is a lot better than $600,000!
“BUT – to me, it’s all about trying to do what you want to do while retaining the base, or the principal, if at all possible…”
This is pretty much how I think as well. My goal is to have enough income generating investments (rental homes, peer lending) going that I never have to touch my investments.
Mr. 1500 recently posted…Customer Service is Dead!!!
If interests rates hit 5% then I’d certainly consider just purchasing the house with cash. There’s be something decidedly badass about writing a check (or handing over a briefcase of cash) for a house without involving the mortgage agent at all.
Cash Rebel recently posted…How to be great at anything
5% is pretty much my number too…
Despite the fact that it can be very lucrative financially to get the mortgage and invest the cash, we are HUGE “NO MORTGAGE” people, simply due to the fact that we want the peace of knowing we “owe no man”. That peace trumps having extra money for us.
Laurie @thefrugalfarmer recently posted…Hidden Tips for Saving Money on Groceries
Purchasing a house was by far our worst decision. Of all decisions. The debt severely limits our choices and opportunities. I am with Laurie. Owing anyone anything at anytime is a terrible weight. Cannot wait until the mortgage and the bastard house are both gone. But in the mean time, the Jollyhoos will not be cheated out of their fun!!!
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Hi 1500s! I am sorry about your pipes and hope that all is flowing freely soon. If that were to happen to us, we would have no clue and pay out the wazoo for help!
I would pay for the house, a very small house (tiny house!), in full. Our mortgage is the one thing that really grates on my nerves!
I could not do Soylent. I am thinking of nixing meat altogether, but bacon is so good.
Tammy R recently posted…I Love the NFL
“I am thinking of nixing meat altogether, but bacon is so good.”
Ha, me too! I like meat, so it’s going to be a struggle. A worthy one though. In the meantime, I spend the cash to buy meat from places that treat their animals well.
Man oh man, the pipes suck. I just got back from the rental place where I rented $150 worth of plumbing apparatus in hopes of solving the issue this weekend. Stay tuned.
Mr. 1500 recently posted…Customer Service is Dead!!!
For me though, it’s not really stressful because I have the money to back it up. With that said, I HATE debt passionately!
Mr. 1500 recently posted…Customer Service is Dead!!!
When we move to our forever house in the next year or so we will have enough money to pay cash for a house between savings and the equity of our residence and two rentals. But that would leave us with no cash so we plan on doing a hybrid. We are going to pay enough down that our mortgage is around $300 a month under a heloc. That small amount will not bother us in a mortgage in the event of a job loss and it will leave us adequate savings. Also, we would have it paid in a decade so that’s a plus.
That sounds like a pretty smart plan. I hate the idea of sinking tons of cash into a mortgage when borrowing money is SOOOOO cheap.
Two rentals, I am envious!