Paying for property with cash?

lkplatowApril 29, 2006

I am asking this for a friend -- if you wanted to buy a piece of property for $200K and you had the cash, would you pay for it outright, take a mortgage for all of it (minus say 20% down), or take a smaller mortgage and pay say half or more out of your cash? They already have a pretty good mix of stocks and bonds and are fully funding their IRAs and 401Ks so this is not their only money. It is pretty much all of their cash though - they won't have much by way of emergency savings if they use it all to buy the house. The money is coming out of equity in their current home - they are moving from a very expensive area to a much cheaper one.

I'm asking here because they've gotten very different opinions. Their stockbroker tells them to invest the money in stocks and get a mortgage because it is better not to have all your money tied up in real estate. I say duh, of course that's what the stockbroker says because he wants your commission. I was running the mortgage amortization calculator and showed them that on a 30 year mortgage, they'll end up paying about 200K just in *interest* - on top of the 200K selling price. I think they should just pay cash. What do you think?

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I wouldn't do it. But I like knowing that I have some cash reserves to fall back on should the -hit hit the fan. I would be more than prepared to put down more than 20%, though. I think I'd be more of the mind to settle on a mortgage payment that was a snap to make, keep some of the remaining cash "available" in the highest yield vehicle I could find, and put the remainder of it into a higher earning investment vehicle. Perhaps then they could siphon off earnings and have them directly paid to the mortgage holder, using wages to make up the difference. A quick "sit down" with their accountant could answer questions with respect to tax advantages. We are presently reviewing the same issue with respect to building a garage on our property. Conversations with our accountant and the guy who helps us with our investments have given us more to "chew on".

We put very nearly everything into our home when we built. We were OK with it then, but I now see it as a riskier approach. We were pretty "house poor" for some years, in spite of having 75% equity. But it worked for us because we were willing to do things for ourselves (like all the painting,landscaping, finish work) and make sacrifices that made many of our friends blanche, lol. We thought nothing of working full time (adding lucrative seasonal shifts in addition). We spent nearly all our free time working on our home. We paid for materials "out of pocket" and there wasn't much left for "laughs" after we'd saved, paid the bills. We held the belief, and still do! that investing in ourselves was the smartest thing we could do. It worked out well for us. We built in early 1991, when the economy was slow and building materials were pretty cheap.

I'm older now, and see things differently than I used to... I'm not so sure I would be so willing to go that route again, not because it wasn't successful, but because it was HARD work. ;)

    Bookmark   April 29, 2006 at 9:33AM
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I had a similar situation buying a house last year. With sale of previous property and savings on-hand, I had just barely enough to pay cash, but I couldn't do that without using all the available reserves which would put me in an uncomfortable position. That would have left only my IRAs that can't be touched without penalty, which I didn't want to risk getting into an emergency/disaster situation. So I paid 63% down, leaving what was (for me) a "comfortable" mortgage balance. In 15 months I've paid the mortgage down by $15K, and have more than enough cash to cover the balance. I'm more comfortable having the cash reserves, however, and my mortgage rate is a pretty good 4.875%

I've got a psychological thing where if I'm going to pay cash for a major purchase, I aim to have *double* (or close to it) the amount saved. For a house, that's very hard to do, almost an impossible and impractical goal.

    Bookmark   April 29, 2006 at 3:47PM
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I think they need to look more at their complete financial planning future.

Not to have cash savings means when you need that different vehicle, you'll be taking out a loan. At higher rates than mortgage rates. Furnace breaks down, will that have to put that on a credit card? New roof?

How old are they, what is the ability to pay a mortgage for the next 10-15 years? Kids heading off to college? Are all of their other funds invested in retirement accounts and can they liquidate those funds if needed without a huge penalty?

Do they plan on itemizing on their taxes and will they be able to do that without the mortgage? What will they lose if they don't itemize?

If they put 1/3-1/2 down, get a 10-15 year mortgage (which gives better rates), and put the rest in available investing such as a Roth or even a money market fund they will have more flex with their money. Money markets are paying 4% at Schwab. I wouldn't invest where I had to pay commissions. Short term CDs are paying 4.8%. Less than current mortgage rates, but quick turnovers and ways to build the money will less risk.

Depending upon where they are buying and if it's at the top of the market, they could lose money on the home. People like to think that homes keep going up in value. Those of us who have lost money in other decades know that isn't alway so. We don't view our home as an investment, just an expense. That way we don't "need" the funds from the home and we focus on building money other ways.

Our goal is to have our home totally paid off within a few years so we prepay on the mortgage each month. We ran all of the numbers and figure that prepaying $300 a month gives us the best savings off the life of the mortgage and still allows us the most use of our cash funds.

Not just one answer. The fact that you say they wouldn't have any cash savings would make me automatically say no.


    Bookmark   April 29, 2006 at 4:55PM
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Gloria is much more focused and eloquent than I. But the basics that she espouses are right in line with the way I think.

How boring am I?


    Bookmark   April 29, 2006 at 5:17PM
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Alwasy have some cash around. At least enough for 6 months' living expenses.

I'd say get a mortgage, altho there's no reason they shoudln't put down 40% or more.

And, make sure there are no prepayment penalties.

    Bookmark   May 1, 2006 at 1:33PM
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I wonder how many folks actually have 6 months living expenses near to hand? We have had this for a decade, but I get the feeling it's pretty unusual. I can't imagine being without that much reserve, but I'm really conservative about my finances.

    Bookmark   May 2, 2006 at 11:50AM
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6 months living expense, heck i have maybe 6 days living expense most of the time. every time we get a little built up, either my wife or my daughter gets a huge medical bill. since my daughter is only 21 months old today, i can't force her to get job for at least another 2 years. ;)

honestly if it were me i would buy the property with the cash. then turn around and replenish my savings with the money i would have been paying for a mortgage. with NO mortgage note, there is LESS living expense.

    Bookmark   May 2, 2006 at 2:21PM
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I would put at least most of the cash into the house. My guess is that with no mortgage payment, they could accumulate cash fairly quickly - though that assumes continued employment and continued good health, neither of which is guaranteed.

Another alternative is to pay all cash, and take out a line of credit on the house, available for possible emergencies. I'd like to hear what others think of this idea. If I understand correctly, there is no upfront cost to initiate the line of credit. The danger is that most of these are variable rates. I don't expect rates to go real high in the future, but what do I know?

    Bookmark   May 2, 2006 at 3:32PM
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We keep a line of credit open on our house--just in case. Sometimes you can't get it when you need it, so, since we plan on doing some additional remodeling it's worth the $75 to keep it open at the lower rate.

David, if people would really save the money by having lower living expenses, that could be a wise move. But if you have something constantly draining that money such as health costs--you could be right back in the same spot all over again. Then what?

For us, we would lose too many deductions if we didn't itemize. We took out a 15 year loan, but will done in 10 years. We run the numbers every year and make changes as needed.

Even being 50, I look back are realize I could have done many things differently in my twenties and it would have paid off now. Live and learn.

Our biggest concern now is health insurance. I wish I hadn't moved so many times. As a teacher, my current state demands 25 years teaching in this state or the health insurance is totally out of pocket until age 60. Since our youngest is only six, we still have a long way to go before buying something on our home is reasonable.


    Bookmark   May 2, 2006 at 11:01PM
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I think this is one of those situations where really any answer is fine, it just depends on what they're more comfortable with. I haven't checked mortgage interest rates lately, but I think they're still fairly reasonable; personally, I would do what the stock broker suggests; take out the mortgage, keep some cash on hand for emergencies, and invest the rest, assuming whatever the resulting mortgage payment was would be comfortable for me to handle. If not, I would pay enough down to reduce to a comfortable mortgage payment. There is (some) risk involved here, but --in general, in the long term-- you will make a greater rate of return on a decent stock mix than you will pay on (current, relatively low rates) mortgage interest. So, while they will paying 200K in interest over 30 years, IF their rate of return on investments is greater than the interest rate on the mortgage, they will be making more than that by putting the money in stocks, and will come out ahead. In the long run. Probably. Like I said, there are risks, so that's not a guarantee. But it's more likely than not that after 30 years, the stock broker's suggestion will put them ahead of yours.

Probably not hugely ahead, though, and there's definitely something nice and secure about having a paid for house. (Or so I assume...) So, this is where personal comfort level comes in. Maybe they'd be happier knowing the house is all theirs. But, that's entirely dependant on what *their* comfort level is. Not yours. Not the stockbroker's. You might rather have a paid for house, they might be perfectly comfortable investing. Nothing wrong with your choice, or the stockbroker's suggestion, but this is really a personal judgement call for your friends.

A third option, if they prefer the house paid off but are concerned only about giving up the cash emergency cushion, they could pay cash for the house, then take out a HELOC to use in case of emergency or major house repairs or something. They wouldn't have to touch it if they didn't need it, but if they did, the end result wouldn't be any different than if they'd taken out a small mortage to start with. And HELOCS are cheap and easy to set up.

    Bookmark   May 3, 2006 at 11:24AM
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I'm in the "pay for the house with cash" crowd on this one. If the economy tanks, you still have a house. Imagine you put only 20% down, invest the rest, and the 1990s stock market happens all over again. I know everybody says that given time, it always recovers, but what if it does not recover on a timetable that makes sense in your life? How would you feel if you COULD have owned your house outright, but you put the money toward investments instead, the market tanked, and things happened that made it difficult to make your house payments? Stupid. I'd feel very stupid.

Pay cash, get a HELOC for emergencies, sack away the money that would have gone toward a house payment into savings. When you have the 6 months of living expenses in savings, then invest the "house payment" money into stocks or other investments.

Or keep 6 months of living expenses in savings and pay the rest toward the house. Get the HELOC for emergencies, and split the extra income each month between paying extra on the mortgage and putting it toward stocks or other investments. After all, a small mortgage may not even get you out of the standard deduction category on your federal taxes, so why pay the interest longer than you have to?

    Bookmark   May 3, 2006 at 3:09PM
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I was thinking in terms of 50-60% down on the home. 10-20% in a conservative, conventional savings investment (that is NOT to be touched unless they have to), 20-ish % in a more conservative investment vehicle (money market/index fund?). They would be in a wonderful position to negotiate a comfortable mortgage, with terms very favorable to them. So much depends on their risk tolerance and discipline with respect to saving/investing.

Following that, I would definitely "round up" the monthly payment, applying the "extra" to principle. I would also make a 13th. payment every single year and get the mortgage paid off ASAP.

It is wonderful to have a home that you own "lock, stock, and barrel". It was also pretty nice to attain the one year's worth of living expenses goal; achieving that requires very strict attention to budget and saving. It gets easier as you see the "nest egg" grow... it becomes less intimidating and more of a game. As I said, we did the "hand to mouth" thing early on and it was fine then. But at nearly 50 I would be unwilling to roll the dice like that now.

Health insurance... ugh! my prime worry. But even WITH it, you can lose your home. Make no mistake about that.

No kids, no expensive "habits".

    Bookmark   May 4, 2006 at 5:12PM
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We were in the same place a few years ago. Our financial advisor told us that we should either own all of a house or as little as possible. We went with buying the house outright and putting the "mortgage payment" into savings. I am not smart enough to "beat the street" and make more money than I would lose paying mortgage interest, so it was the best decision for me. I only put 20% down on the house I bought for a rental but that's a different tax situation altogether. I was only willing to buy though if I could make the payment myself if I absolutely had to. So far, that hasn't been a problem

    Bookmark   May 5, 2006 at 1:42PM
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Good discussion. Especially the comments on risk tolerance and comfort level. That really is the bottom line here.

I would advocate for paying about 50% of the house price in cash and mortgaging the rest. I'd lean toward a 15 year note but consider a 30 depending on the age of this person, their job security/retirement goals and the difference in the two loans' rates. Either way they should prepay in an amount that would pay it off in, say 10 years. Something happens to their cash flow, that low 30 year (or 15 year)payment schedule option will be welcome. Think of it as insurance. Things go well, they can pay off the mortgage in a lump sum even earlier. Their own and the country's economic situation will evolve and point the way.

With the cash left, put six months' living expenses in laddered CD's. The stockbroker obviously won't promote this, but rates are very good now. Renew as they come up if all is well, break into them if there is trouble. The money is available to cover expenses in a crisis, but not available for impulse purchases. The rest of the cash can be invested more aggressively - couple no load stock index funds, and municipal bond funds and/or Treasuries (tax free earnings matter more here than in their IRA's and 401K's) whatever makes a nice balance in their total picture and fits their risk tolerance.

I say hold half the cash for a while because they could be in a pickle if their situation changed abruptly. A paid for house feels good, yes, but not at the risk of a "no income and no reserves" scenario. Sure they could tap into equity then, but on what terms? Better to keep some cards (cash) to play if needed. And put to work earning money in the interim.

BTW, we are prepaying a 4.75 fixed loan and will own our house outright in 2009. The tax deduction for home interest is becoming less of a tax advantage as the balance drops, and our nonretirement investments are doing really well. Despite our great rate, there is a real pull to pay the thing off in a lump sum. But I would not do that without really being sure we would never have to borrow, because we sure won't snag a rate like that again.

    Bookmark   May 6, 2006 at 7:22PM
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If I understand right, you pay a $75 annual fee to keep a line of credit open at a fixed rate? For some reason I thought all HELOCs were variable rate. Are there fixed rate options out there?

    Bookmark   May 7, 2006 at 7:48PM
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There is no "one fit" answer here..Scenario 1..Pay cash for home, only to watch home depreciate 30% in a housing could be gone forever, but at least not having the monthly mortgage payment will help refill the savings coffer, albeit very slowly. also how long will it take to save that amount of cash again?
If you financed 40% of home price, you'd still be affected by a housing slump, but you still have a BIG stash of cash left.
My personal feeling is NOT to pay 100% cash, unless you have significant $$$ left after doing so...

    Bookmark   May 7, 2006 at 7:59PM
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Ah, but the house mortgage does not decrease with the value of the home. Imagine having to pay the high mortgage on a house that has depreciated that much. No matter what you pay for a home, having it paid off is safer. One could find one's self owing more than the house could sell for, and be stuck in that home despite any later desires to leave. If it is paid off, anything made on the sale goes right into the new house (which will be similarly devalued). Money that was saved by not having to pay a mortgage from Year 1 will go into investments/cash savings. Chances are, if home prices depreciate that quickly, the stocks will tank right along with them. A dive that big in housing prices would have to impact the whole economy, wouldn't it?

Can you tell I am not a big risk-taker?!

    Bookmark   May 7, 2006 at 9:48PM
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You're right liz. Don't know what I was thinking. It's variable. Ours is .25 above prime. Our current mortgage company has a loan offer of .50 below prime so were looking to change to that. DH thinks he may be able to get 1.0 below prime, but we'll see. Either way, it's not a bad deal.


    Bookmark   May 8, 2006 at 2:42AM
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Nancy, I don't think they could end up owing more than the home's value prepaying on a mortgage that was for half the selling price. That would be a heck of a busted bubble !

    Bookmark   May 8, 2006 at 11:16PM
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    Bookmark   May 9, 2006 at 7:44PM
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I'm with the "safety net" crowd. If the house is $200K, I'd put 50% down and keep 100K back, putting half in mutual funds and half in an FDIC insured account. But I'd get a 15 year mortgage (assuming they plan to stay in the house) so that the total interest over the life of the loan is smaller than a traditional 30-year mortgage.

    Bookmark   May 10, 2006 at 9:09AM
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Better yet mary__md7, is to get a 30 year loan, and prepay monthly to make it a 15.This way you have the option if money gets tight, or an unanticipated expense arrives, you are NOT locked into higher 15 year payment

    Bookmark   May 10, 2006 at 9:12AM
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If someone can't afford the 15 year payment, obviously it's better to go with longer. You get a lower interest rate with the shorter loan and often the payments are very similar--yet automatically knocking 15 years off. We got 4.6% on a 15 year two years ago, while our buyer was paying 5.8% for a 30 year mortgage. Since we were able to put half down, it was a huge savings compared to what he was doing.

Since we're talking cash or put some of it away the 30 year doesn't make sense to me.


    Bookmark   May 10, 2006 at 4:26PM
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Not true Gloria.. a 15 year fixed at 5.86%(going rate recently) is a payemnt of $836 for 100k borrowed..the 30 year fixed at 6.19%(from same bank as 15 year rate) will cost $611 for 100k borrowed...$225 difference on 100k per month..To some people, 225 bucks is a lot of $$, to others, no big deal

    Bookmark   May 10, 2006 at 4:49PM
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All good points and all true.

Really does come back to issue of risk tolerance and a safety net. These buyers may see no need to allow for a possible situation when money gets tight and the 30 year payment is welcome. Maybe they trust they could tap equity or raid other assets - like that other 100,000 they hold back to put to work. That .33% difference in interest rates (30 year vs 15year) may or may not be worth it to them. It means $330 extra in interest a year on the 100k borrowed.

Would you pay $330 a year (before tax deduction)for the option of lower payments in a pinch? Is it money well spent?

And is there an advantage to being locked into a 15 year schedule? (= no temptation)

    Bookmark   May 10, 2006 at 10:54PM
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Your right in that some families $225 may make or break them. We aren't talking about just anyone in this case. This post is regarding someone who already has the cash. If they put it to work they will have the cushion for those tight months.

I wouldn't pay those interest rates for a 30 year when I can do better. If someone is going to pre-pay on a mortgage, they will most likely be consistant to do so. There's no need to pay the higher interest and be on the hook for an additional 15 years of payment.

Think of all the money they will spend over the life the loan to get that monthly savings. With so many people living so close the financial edge these days, I think it reinforces that cash savings is needed to get through those hard times.


    Bookmark   May 11, 2006 at 2:28AM
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Thanks Gloria,

If there were that good a deal out there, I sure wanted to know about it!


    Bookmark   May 11, 2006 at 5:51PM
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gloria, i am not certain you understand the workings of mortgages..As you state, this doesn't really pertain to the original post about paying cash or not..BUT, a 30 year loan is MUCH cheaper $$$ wise monthly then a 15. Secondly, you can "turn" your 30 into a 15 by adding a certain $$ amount monthly(that sum depends on original
balance of mortgage), then you have paid only for 15 years..

You state "Would you pay $330 a year (before tax deduction)for the option of lower payments in a pinch? Is it money well spent? "
But that is a MONTHLY difference not annual on 100k +-
before dispensing advice, either you need to clarify to what you are talking about, or understand what you are talking about

    Bookmark   May 11, 2006 at 6:05PM
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qdognj has just touched on the very thing my parents rammed into my pea brain for as long as I can remember, lol. It was; borrowing money for a mortgage was a foregone conclusion, unless you were really lucky.

They ALWAYS told me to go for the fixed rate, 30 year note, taking care to ensure that there was no penalty for premature payment in full, OR payment to principal over the term of the loan!

I counselled above that I would "round up" the monthly payment, stating the excess should be applied to principal. I further stated that a "13th. payment" ought to be made yearly for the duration of the mortgage. I stand by that. Given those terms, AND ADHEREING TO THE TERMS STATED, you have just purchased a mortgage at lower rate... one that your personal disclipline will pay off in very nearly the same term as the 15 yr. version.

Mind you, I'm a total Ludite when it comes to computer stuff... I can't hit a few keys and produce the amortization schedule. But my parents were smart with money (dumb with estate planning!) and what they imparted to me has served me well.

Is there something important I'm "not getting"?

    Bookmark   May 11, 2006 at 6:34PM
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My parents paid cash for their homes. We chose not to do that. It's all a choice. Even living on the edge is often a choice, at least where I live. We know families who make the same yearly amount, yet don't do the necessary things to make sure they don't live paycheck to paycheck. They don't want to hear that I cook 6-7 days a week and we don't go to the movies at $50 a whack. They prefer to think we have some secret or we're "just lucky."

We can argue til the cows come home, but people who may have trouble making an additional $225 a month probably won't consistantly pre-pay a 30 year morgage, thus taking on way too much debt if they don't need to.

Getting back to the OP--that family will have $100,000 sitting somewhere. If they have a crappy month, they can pull out $225. 30 year loans are at a higher interest rate. That simple. I'd rather pay less interest. Heck, you can even get a 40 year mortgage at 7% now.

Chelone, I think no matter what method is used, a family which pays their bills, watches spending and lives below what the banks say they can afford can do well. I feel for the younger couples living where a starter home is $800,000. I'd have to move because I wouldn't want that financial stress.

It's not that you're "not getting" anything here, just that the shorter the loan time the less the overall cost. If you reduce a 30 year to, say 22 years, by making the additional payment, a 15 year loan would have saved you an additional 7 years of payments-minus the difference between the loan payments which won't add up to the 7 years.

You don't even need an amoritzation scheduale. Just add up the payments on a 15 vs 30 year loan, even by reducing the principal by one month a year, you save less than doing a shorter loan time. At our mortgage co. a 15 year is at a lower interest rate than an interest only.

You get the biggest savings by prepaying the amounts you can during the first few years. This reduces the amount of principal for the life of the loan. Only making one additional payment on a regular basis will not give you the same savings as if you had doubled that payment for the first few years.

Using our mortgage co. payment calculator and the $100,000 in regards to the original OP, the life of a 30 year loan is $293,400. The cost of the life of a 15 year loan is $190,980. That's over a $100,000 in savings for only a little over $200 a month difference (-$36,000 for the $200). So, a total of savings of $64,000 for the life of the loan. At two hundred a month additional prepay on a 30 year, you wouldn't have it down to 15 years. You would absolutely need to put that additional amount down every month to gain anything close in savings.

A lot of money a month is a relative term. And not an issue for the family of the OP since they have the additional cash. I believe I do understand mortgages and the only one to gain by a higher interest rate is the mortgage company, so qdognj, I'll assume you work for one based on your statements. Under your calculations, what exactly would they have to prepay each month to get those savings? If someone can prepay a 30 year at the same rate for savings as a 15 year, they will probably be just fine through a crappy month. They will be smart enough to have savings.

liz--I sent you an email through gardenweb with the mortgage co. for the HELOC.


    Bookmark   May 11, 2006 at 8:10PM
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I'm not convinced. But, I don't have the facility to hit a few keys and see it "spelled right out". You have failed to accomodate the "rounding up" of the monthly payment. And how that simple step might affect the principal over time, BEFORE factoring in a 13th. payment.

I don't believe that a 15 year note will be any more beneficial than a longer term note with an "easier" monthly payment IF people are committed to knocking down the principal monthly (rounding up) and again YEARLY (13th. payment). Nowhere have I seen you address the liklihood that a 15 year note will likely carry a variable interest rate.

I'd rather go for the "more expensive" 30 yr. vehicle, knowing I may "round up" AND/OR pay to principal at any amount or time I may choose. To ME that is security and comfort.

It worked nicely for us.

    Bookmark   May 11, 2006 at 8:34PM
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I do not work for a mortgage company,lol..But any financial person would tell you to take the longer term loan, that said, some people like the idea of being debt free..My opinion of that is DON"T be afraid of debt, just learn how to properly MANAGE debt.Don't overextend yourself with debt..Credit card debt is the worst kind of debt.Mortgage debt is the best...I echo the comments chelone, a 30 year loan is more often then not the best choice for a mortgage..

    Bookmark   May 11, 2006 at 8:47PM
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No, any financial person won't tell you to take on a 30 year. You have to look at a bigger financial picture and your financial goals. I'm married to my CFP and the shorter the debt, the better the savings for us. More people than not get themselves in a world of hurt with debt.

But I still see the question of how much a month needs to be thrown at the principal in order to get the same savings hasn't been answered.

I think we should all take the $100,000, apply it how we think best and meet back in 10 years to see who's ahead. I'm taking my dd to Reno tomorrow for a dance competition, so I think we can guess where I might "invest" a bit.


    Bookmark   May 11, 2006 at 9:09PM
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good luck in Vegas..The Palm at Caesars is an excellent steak restaurant, and the crap table at Bellagio has been very kind to me :)

Now back to issue at hand, if interest rates continue to climb, you are better off with a 30 year loan at the going rate of 6+%, as interest rates on your savings are 4+% right now, and in less then 5 years, could easily be 6%..What needs to be figured is the "after tax" real rate of that 6+% 30 year could easily be 4.5% depending on your tax bracket..
As i have said before, there is no one definite answer to this question, it is a finacial decision that needs to be evaluated.If you can't sleep knowing you owe 400k on a 1 million dollar house, then pay it off.
Gloria, throw 5 bucks on 23 red at the roullette table, 36 to 1 odds

    Bookmark   May 11, 2006 at 9:44PM
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OK, this one got my curiosity up! I usually don't ask DH to run numbers for me on board questions, but I really wanted to know. He's a fee only CFP as part of his consulting practice, so my question was a pretty routine for many of his clients. He used the interest rates offered by our local credit union (who we didn't use for our mortgage.)

Based on $100,000. I can't get his chart to print up correctly here. It doesn't like my spacing so I just put in below.

My question was, how much would someone have to prepay a month on a 30 year to equal the savings of the 15 year. An additional $270.99 would be needed each and every month, which is $50.59 higher than the monthly payment on the 15 year loan. Out of pocket, it would cost you an addition $9,102 to get the same savings as a 15 year loan.

My daughter is only 8, so unless they have some type of daycare for a few hours I'm going to be lucky to throw my "investment" at a few slot machines. I haven't been to Nevada for 30 years, so DH reminded me I could hit a few in stores or probably the airport. Someday, I'm going to get all of these kids grown and gone and I'm going to go on a vacation all by my lonesome.



Int Rate Pmt Total Pmts Total Interest
30 year 360 6.410% $626.16 $225,417.90 $125,417.90
15 year 180 6.050% $846.56 $152,380.89 $52,380.89
Principal $ 100,000


Int Rate Pmt Total Pmts Total Interest
30 year 169.85 6.410% $897.15 $152,380.89 $52,380.89
15 year 180 6.050% $846.56 $152,380.89 $52,380.89
Principal $ 100,000

Extra mnthly payment on 30 year loan

Extra mnthly payment Over a 15 year loan

    Bookmark   May 11, 2006 at 11:12PM
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I am with those who would take out the mortgage and keep the savings.
If they already have stocks & bonds they should have a broker they could discuss this with.

When I look at a recent statement on my retirement account it claims that since January 1, 2000 my rate of return on that account has been 10.9% per annum. My mortgage rate has been variable but substantially less than that.
All of that is in Canadian dollars (which have gone up relative to US$.)
That is also pre tax.
I dont think that my investment strategy has been particularly risky.

I have also been in the position of having had a house with a paid off mortgage (pre divorce.)
In my experience I do better with the discipline of what is in essence a forced savings plan.
When I had no mortgage to keep me focused I tended to fritter away the money which would have otherwise gone towards a mortgage.

It does very much depend on the personalities of the people involved.
What is their tolerance towards risk? And how disciplined are they in their savings?
In other words there is no one right answer.

    Bookmark   May 12, 2006 at 12:18AM
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It looks like no one has mentioned the fees associated with obtaining a mortgage. Where I live, they would be about $6k for a 200k house (although eloan was a lot less when I got one from them 2 years ago). This could be significant in relation to a small mortgage.

Also, you can pay cash now and still have the option of getting a mortgage in the future. Mortgages don't have to be at time-of-purchase; you can get one on a house you already own outright. (Though of course interest rates may be higher -- but wait long enough and they will be low again!)

As others have said, personal preferences are a factor. I like the comfortable, unencumbered feeling of a paid-for house, and am not much interested in stocks -- so if it were me I'd pay cash, get a heloc for emergencies, and have the option of getting a mortgage for cash out in the future.

    Bookmark   May 12, 2006 at 12:30AM
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I may have overlooked it, but I don't recall any of the posters asking how long the OP's friend plans to stay in the house. I think that makes a huge difference. I think I am in my last house. Having it paid off seems very sensible to me particularly since I am getting close to retirement. If my financial world really came apart, it would take the county years of red tape to get me out of here. A mortgage holder could do it in a matter of months.

On the other hand, my previous house increased in value by 500% before I sold it. Did I make 500% on my money? No, I did better then that because I only had about 12k in equity - which by a rough calculation means I made 1800%. It's not quite that simple, but you get the idea. If I had a drastic change of fortune, and my house went back to the mortgage holder, I would only lose the small amount of money I had put into it - and yes, it's a bit more complicated then that too, but still generally true

My daughter told me that she included extra money with her monthly payment whenever she could. I advised her not to do that because she was only going to be in the home for a short time and she wouldn't make a nickel on her money. Her payments weren't going to change during the time she was in the house and she wouldn't make even simple interest on the extra money she was throwing in. It was a forced savings that would come back to her in a diminished amount due to inflation. It wouldn't even help her with her taxes, because the extra payment was going to principle and she could only deduct interest.

    Bookmark   May 12, 2006 at 1:16PM
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Thanks Glo.!

Interesting information, much to "chew on".

    Bookmark   May 13, 2006 at 11:01AM
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In theory, if you had a 30-year mortgage and a 15-year mortgage ***at the exact same interest rate***, you could just pay the extra on the 30-year and come out the same. You could pay the same amount of money each year on the 30-year that you would have been required to pay on the 15-year and will come out exactly the same in the end.

In the real world, 15-year mortgages have lower interest rates, so if you pay the exact same amount toward the higher-interest 30-year mortgage, more of it is going toward interest, less of it is going toward principal, so you will have to come up with some extra money to pay the prinicipal back down to what you would have gotten with the 15-year mortgage.

It's not that there's inherently any difference between a 15-year mortgage and a 30-year mortgage that you make extra payments on. The reason a 15-year saves over your plan is ONLY because you can find better interest rates on them. But you can find better rates, so anyone who is absolutely sure they can and want to make the higher payments to get the house paid off in 15 years is better off with the lower interest rate 15 year mortgage.

But, with the 15-year option, you are then obligated to make the higher payments, while with your plan, if you lose a job or hit some other financial snag, you can always revert to the lower required payments on the 30-year mortgage until you get your financial feet back under you. It is more expensive, but for most people, it's also more safe.

    Bookmark   May 14, 2006 at 11:58AM
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If they can't pay 100% in cash, they should put as big of a downpayment as practical. If adversity strikes, their fixed expenses will be so much lower than if they had a big mortgage. Yes, they could invest that extra cash in the stock market, but the market is so volatile unless you look at very long time frames, e.g. 20 years.

    Bookmark   September 5, 2008 at 10:48PM
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this conversation is mostly dead, but i wanted to sound my two bits. my credentials, i am a financial planner.

first i hope you did not sink you money into the stock market. i have been in cash for almost a year now and i am no market genius (those who are still in have been shorting the market and making millions all year). it is shocking how many "planners" and brokers urged their clients to "invest for the long term" and hold in the market. if your planner or broker has been saying this this last year, you should fire them. the stock market is not a long term investment. in needs to be watched daily and adjusted daily. money is never lost in the market. it only changes hands. if you lose somebody else won. the winners are those who know what is going on and adjusting their strategy daily. if this is not something you can do, hire somebody who can, get out, or suffer the cost of ignorance as those who know (major investors and fund managers) take your money.

Second, i hope you did not bury your cash in a coffee can in the back yard�"in other words, pay cash and hold no mortgage. paying cash is a very expensive way to own a house. the reason being you are burying you money. you will realize appreciation but that is pointless from the standpoint of cash flow and you have to sell to get it. this money could have easily generated more than the cost of holding the mortgage. there are also tax savings on the mortgage debt if you pay it off. this is know as a lost opportunity cost. it is as real of a figure to be calculated just as an fees or interest paid.
example: if i pay no interest i loose nothing. right? wrong. i loose out on what i could have done. if i could have made 8% and it cost me 6% for the mortgage i made 2% plus tax savings. FYI i am a lazy investor with most my money managed by others and i make (yeild not average) 24% with no loss of principle risks. with effort you can do better. for me to have this money in my house would be a compounding loss of 18% plus the loss of my mortgage right off. cost of money is important, but is just part of the equation, not the answer to it. the spread or the margin in the number that matters, not the cost.

paying off a mortgage can cost you your retirement. the most important part of any financial plan is time. if you spend the first half of you career paying down a mortgage rather than investing, you are shorting yourself.

paying down your mortgage faster is almost as bad. mortgage interest is front loaded. you only get the promised rate if you go the term. pay it of faster and the percent paid is higher.

what i would recommend people do in such a situation is pay it cash and forgo all the fees associated with financed closings. then immediately after, open a HELOC for the maximum amount possible and start looking for ways to reinvest and grow that capital all the while controlling the real estate. there is no cost to have the HELOC and usually no fee to open it. you can go in and out as much as you want and use it like a private bank. leave non working mey in the realestate, but have access to it to use for opportunities. you only pay interest on what is out and are only required an interest only payment. my house equity actually pays for the house debt and then some because it is working.

right now would be a great time to have access to those funds. real estate and stock investment are all on fire sale. if you don't understand the market find someone who does. if you don't understand real estate, read some books and attend some seminars. if you are lazy, look into hard money lending or payday lending for 18-36% interest. buy some rental properties and cash flow them (rents are on the rise) and reap even more tax advantages. there are so many great places to earn money on your money rather than "burying" it. I would recommend the same with permanent life insurance and even investing some funds in it. just do something, actually do lots of different things.

risky? i think keeping the money out of the banks control is the best way to minimize risk. give it up to the financial institutions and they will happily follow the the model i am recommending only they won't be sharing the profit with you.

to most, this sounds like terrible advice. well most people in this country are not wealthy and have no idea how to become such. learn to act like a rich person, not by spending like one per se, but by understanding that money is not math, it is a commodity and needs to be treated as such. you cannot park it nor can you settle for small returns. personal financial models are worthless. you need to learn business finance principles and apply them to you personal finances. this is then main difference between the wealthy and the non. it is not the amount of money the have (net worth) it is about how much they have to spend (cashflow). many rich people are terribly poor on the books but have plenty to spend. why is that? they understand money and the laws that govern it.

your first dollar should be spent on education. build a network of advisers and mentors and for goodness sake don't listen to the talking heads and radio "gurus". if they are so good at making money, why are they working for a radio station and who is paying the bills (banks and investment houses who want your money buying ads).

all that said. this opinion is based on the person applying these principles being trustworthy with money. if you can't discipline yourself, pay off the house and invest in a 401k. if you are disciplined, stay away from both.

books i would recommend, eye openers all of them:

rich dad poor dad (kiosaki)
who took my money (kiosaki)
LEAP (castiglione)
killing sacred cows (gunderson)

sorry for the rant and the poor spelling. some of the philosophies presented, even by those with letters after their name were disturbing to me. such advice has cost millions of people billions of dollars this year.

any wanting a larger book list or wanting to discuss any of this "crazy" advice further, feel free to contact me off forum or invite me into another discussion. i love this topic and love to offer my opinions. the fee i charge for personal planning advice is zero. one of my personal beliefs is that you don't pay for financial advice. i do what i do because somebody once taught me and i am paying it forward. so you can dismiss any hidden agendas. my opinions are what i personally believe and practice but by no means the only way to the goal.

great discussion all-even those i disagree with. thanks for the thread and the interest in helping each other.

    Bookmark   September 22, 2008 at 6:43PM
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As a personal financial advisor, I recommended to clients that they might want to choose to have at least 3 mos. income available in case of emergency, that I'd prefer 6 mos. worth, and a full year being even better.

But - what to do with that money?

A bank account doesn't pay much, some prefer a money market account, some use laddered bonds.

I sometimes suggested to clients that I didn't follow my own advice ... that I sometimes have some funds available (as was true for the past year or so), but often not.

On another thread I spoke of having a fully secured line of credit, and some inferred that I'd implied a home equity LOC, which troubled some of them, not wanting to put their home at risk, but mine had been secured by mutual fund and stock certificates.

I can have mutual fund certificates issued without fee, but if I ask for stock certificates, there's usually a $35. - 50.00 fee per certificate.

My LOC cost nothing to initiate, there's no fee for inactivity and none to close. The interest rate is variable, which doesn't trouble me.

It has sat there unused for some time.

Since I expect to be able use my credit card for an emergency that crops up, and since I pay off the amount owing in full each month, there is no interest cost.

A few days before the credit card due date, I can draw on the LOC if I lack cash assets to cover current needs and pay the credit card amount owing in full. As I develop savings, I pay off this account as soon as practicable, as the interest is not deductible.

My suggestions to this family would depend on several variables - how soon do they plan to retire, do they expect extra health-care costs, and/or expect to need to help their offspring (or themselves) pay for advanced education soon, etc.

For myself, I would likely use the cash to pay off the house cost in full, then set up a Home Equity Line of Credit for a substantial portion of it, agreeing to pay interest only monthly and drawing about a quarter of the amount of the line to buy shares in some quality, solid companies, between two and five, in various parts of the economy, within the next short period.

If cash were rather tight, I would ask for a certificate to be issued for one of the stocks, then take it to a secondary lender to use it as collateral to set up a fully-secured Line of Credit, if there were no initiation fees, no inactivity fees or others related to non-use, and paying interest only month by month, with larger payments at my choice without penalty. This Line of Credit to be available in case of emergency.

Then I'd draw on the HELOC to invest the rest of the asset in equal regular amounts into various local and international companies' shares.

As for my advice to the client, I might suggest that they pay off the most of the cost of the house now, leaving some asset, maybe 20%, on hand in a money market account with their discount stockbroker, in case of emergency. I would likely suggest setting up a plan to invest a certain amount on a regular basis and study the market, seeking for a good investment vehicle.

For a client, especially one unfamiliar with investing, I might suggest buying a quality equity-based mutual fund, purchasing other fundswith varying focuses, over time.

For myself, if I chose to follow this plan, if I didn't have equity-based investments earlier, I'd buy some of a quality, solid stock. Next time, a different, quality stock in a strong company. I would continue in this fashion to get about 4 - 5 stocks, then buy more of each, in turn, perhaps somewhat more of the best one.

Then I'd ask for a certificate to be issued for the one with the highest value, take it to my secondary lender and set up a Line of Credit for most of that amount, leaving it unused at that time and drawing on the line for emergency(ies) as needed, if I did not have enough remaining in the money market account left over from the time that I'd held some back when purchasing the house.

For the client, either invest more in the original fund, or choose another with a different focus, then later in a different field, choosing about four or five fields.

As time went along, if cash became too short for the clients comfort in case of emergency, to ask the mutual fund manager for certificates to be issued, to use as collateral for a fully-secured line of credit, supported by the mutual fund certificate(s).

I'd likely suggest to the client that they set up a Home Equity Line of Credit with their primary lender, same parameters as suggested above, using the proceeds on a regular basis to invest.

I would like them to study the markets and choose to buy stocks in individual companies directly, as their expertise grew, for holders of mutual funds often pay the managers more than they pay income tax on the income produced.

I would want to keep the loans for investing and for emergency use completely separate, for the investment loan interest is deductible, and the one to be used for emergencies is not.

Good wishes for shrewder use of both your income and assets.

ole joyful

    Bookmark   September 23, 2008 at 5:50AM
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