If you could pay cash for your first home, would you / should you?

[Anonymous]

If you were in a position where you are renting with the goal of eventually becoming a homeowner and you had the option of saving for 3-4 years while continuing to rent and then paying 100% cash for a first home in the ~250k range, would you? The alternative is to move forward with a mortgage immediately with a 30% down payment on a home of the same value.

Benefits of 100% Cash

(1) No mortgage, home is owned free and clear. I'm sure there are psychological benefits to this.

(2) Saving on interest that you would have paid over the course of the mortgage.

(3) If your life situation changes in the years before the home is bought then you are in a more advantageous position to deal with it (no home to sell, cash available)

Benefts of Mortgage

(1) Get into a home much sooner.

(2) No more paying rent, which does nothing for equity.

(3) Cash is available for other investments which may have a higher return than the mortgage interest costs you.

Do you consider this simply a numbers question where you compare investment potential of the cash against interest losses? Are there emotional factors that would come into play for you? What is your personal opinion about this?

Eric

[tooleman694]

Paying cash would rock, the interest you would save would be great.

If you could handle renting and the home prices were not rising quickly, it would be the way to go for sure.

But if prices are rising faster then you can save, I would buy now.

[Blackhawks_girl30]

It would be amazing to pay cash and have no mortgage!  But I agree with Tooleman, prices are rising.  In 3-4 years we don't know what the market will be and you may not be able to buy the same home for $250k that you can now.

[MovingForward_2012]

If it were me, I would probably take a little risk and go up higher on the purchase price to get the home I can only see in my dreams. I would put 30-40% down and keep the extra cash flow to invest in things with higher returns. I would also probably do a 15 year mortgage and pay extra on principal and in 10 years I could own my own castle free and clear.

I think sticking with $250K is very reasonable. But think about growth over the years. Will you have enough sq ft for a family, etc. buying a home in that price range. If you are buying long term, think long term to prevent having to sell such a great investment for a bigger house. With interest rates historically low and rising, it is best to look out into the future 10-20 years and imagine how things might be then when looking at particular houses and then expand or contract accordingly.

[p-]

Right now houses are still selling for less than build cost, at least in my area.  That can't possibly continue for too much longer.  The smart money is on prices going up.

Add to that the fact that your rent probably isn't much lower than a mortgage payment anyway, and a mortgage should look more tempting.  If you put 30% down, check with your credit union about a 15 or 20 year loan.  You'll get a crazy low rate.  If your cashflow lets you save 250k in 3 or 4 years, put a big portion of that money towards principal payments and you'll pay it off in 5 years anyway.

Good luck!

[MovingForward_2012]

+1, my thoughts exactly! :-)

[OilFieldEngineer]

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@Anonymous wrote:

If you were in a position where you are renting with the goal of eventually becoming a homeowner and you had the option of saving for 3-4 years while continuing to rent and then paying 100% cash for a first home in the ~250k range, would you? The alternative is to move forward with a mortgage immediately with a 30% down payment on a home of the same value.

Benefits of 100% Cash

(1) No mortgage, home is owned free and clear. I'm sure there are psychological benefits to this.

(2) Saving on interest that you would have paid over the course of the mortgage.

(3) If your life situation changes in the years before the home is bought then you are in a more advantageous position to deal with it (no home to sell, cash available)

Benefts of Mortgage

(1) Get into a home much sooner.

(2) No more paying rent, which does nothing for equity.

(3) Cash is available for other investments which may have a higher return than the mortgage interest costs you.

Do you consider this simply a numbers question where you compare investment potential of the cash against interest losses? Are there emotional factors that would come into play for you? What is your personal opinion about this?

Eric

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I was faced with the same situation. For the last almost 10 years I have worked overseas for different employers before going to my present employer 3 years ago. This has given me a substantial investment account as for almost 7 years I didn't even have an apartment in the USA and when I was overseas I lived in corporate paid housing. This allowed me to pay off debts incurred right after I turned 18 and still invest. Now fast forward to the last 3 years I have had an apartment with me girlfriend (fiance now) and want to buy a home. I have put through absolute hell by the lender (listed in other posts) to a point that yesterday I called my broker and inquired about just taking the funds out of my investment accounts and paying cash for this 280k house. What ensued at that point was a lecture telling me the tax ramifications of cashing out that much money from my investments and the short answer was for what it would take to get the money back out of investments in taxes as well as the amount of money it makes year over year it is not worth it at all. He stated I could pay as high as 6-8% on the home loan and still be better off than cashing out. 

What I learned from that conversation is money in the bank is worth far more than the trivial amount of intrest incurred on a home loan. But as he even stated the PMI yes presents an issue but with still being able to deduct that on your taxes it is not a huge concern so together with my broker I made the decision to stay with my 5% down and just pay my the bare minimum to get the loan through.

I know this is a hypothetical right now for you but I figured I would share the undertaking that I had to give you more perspective. Also if you are keeping that large of a sum 30% of down on a house of that magnitude in a non investment type account I would review this practice with a professional and evaluate when you need to access funds or how much liquidity you really do need.

[DallasLoanGuy]

depends on the kinds of return you might expect in the stock market.

mortgage interest deduction + money working in the market is pretty strong option.

there is risk though.

i, personally, subscribe to the "put down as little as possible" mindset. my investments make more than 4%

[DallasLoanGuy]

to add:

i am not a cpa/financial planner

this would be a good question for your cpa/financial planner

[OilFieldEngineer]

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@DallasLoanGuy wrote:

depends on the kinds of return you might expect in the stock market.

mortgage interest deduction + money working in the market is pretty strong option.

there is risk though.

i, personally, subscribe to the "put down as little as possible" mindset. my investments make more than 4%

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Myself my investments are pretty well diversified. I don't take any divendends or returns off of them and I re-invest just about all. I do keep a fairly substantial portion in a money market account just in case I need to access which makes less than 4% but collectively yes my investment make more than 4%.