Jump to content
Washington Football Team Logo
Extremeskins

Question on buying a house


Ancalagon the Black

Recommended Posts

I know there are some financial whizzes out there, so I thought I'd ask.

If you want to buy a home in a declining market, does it make sense to pay cash (that is, not take out a loan and just pay the full price)?

I know that usually this is not done, as the costs of a mortgage are often outweighed by capital appreciation. But if prices are falling, is paying up front a safer hedge?

This is how I see it:

Cash--no interest, fewer transaction fees, no approval process BUT ties up an enormous chunk of capital in a possibly depreciating asset.

Mortgage--smaller up-front investment, interest deduction on taxes BUT could end up with negative equity if prices go down.

Is there anyone who can help me out on this?

Link to comment
Share on other sites

Of course this always depends on what kind of house you're getting, but if you can afford to either buy one with cash or put down a large deposit, I don't see how that can hurt you when comparing it to taking out a large loan.

I know there are some financial whizzes out there, so I thought I'd ask.

If you want to buy a home in a declining market, does it make sense to pay cash (that is, not take out a loan and just pay the full price)?

I know that usually this is not done, as the costs of a mortgage are often outweighed by capital appreciation. But if prices are falling, is paying up front a safer hedge?

This is how I see it:

Cash--no interest, fewer transaction fees, no approval process BUT ties up an enormous chunk of capital in a possibly depreciating asset.

Mortgage--smaller up-front investment, interest deduction on taxes BUT could end up with negative equity if prices go down.

Is there anyone who can help me out on this?

Link to comment
Share on other sites

i just bought a house 2 months ago in Fort Worth area. Since I am employeed by a large corportation I got a decent transfer package where gave me a great deal for a mortgage. I am almost 99.99% sure that I would be moved again by my company in about 12 months.

Only way it made sense for me buying a house was the fact that when my company move me again they will buy my house (appraised value) if it does not sell in 60 days but if I do sell the house, my company will pay me a seller's bonus of 6% of the sale price.

So what I did was downpay 5% and bought a nice new house. I am basically betting that I would not quit or get fired from my company until my next transfer. Since I really like my job i think its a safe bet.

Link to comment
Share on other sites

my advice is to put a half of the purchase price down and invest the other half and take advantage of the low interest rates available. That way you have two investments. One is monetary in financial market and and asset in terms of an appreciating home over the course of a life time. You will get the tax deductions as well. Approval process wont be any deal if you put half down, and your transaction fee's will be low if you make sure you get a good deal

Mortgage advice. Get a good faith from your local bank - get good faith estimate from large bank - get a good faith estimate from a broker whom you are reffered to not random.

while homes are declining this is not a long term problem so by using a large downpayment and giving yourself instant equity you are hedging your risk

that my 2 cents

Link to comment
Share on other sites

First of all, you should ask yourself if you're smart enough to know for sure whether you're actually in a declining market, and that it will continue to decline.

Secondly, once you determine in your best judgement that it is a declining market, it seems to me you'd want to wait it out, wouldn't you? Wouldn't one be better off renting and waiting out the market?

If you did buy, I'd think you'd want to pay cash if you're fortunate enough to have that option. Otherwise, you've got a loan with principle that soon exceeds the value of the house.

Link to comment
Share on other sites

What you have to determine is would you make more money by investing it in something else at the same time. Paying for anything that expensive in cash would only be a smart decision if you have a ton of money and can not worry about it for something else.

Link to comment
Share on other sites

In a truly declining market, I think you would want to have a mortgage. If your payments become much more than the home is worth, you could just default and let the bank take the loss. (Of course, that might destroy your credit rating).

This is kind of an odd question to pose because few people are in the situation where they have decided to buy a home and actually have a choice whether to pay cash or to get a mortgage ... where is the cash coming from?

If you have a few hundred thousand dollars at your disposal, the question you're presented with is whether you want to spend your cash on a house or if you want to spend it somewhere else. I think in that situation, you would almost never invest in real estate unless the housing market is growing at a very high rate.

With that much cash, you could buy gold, or oil, or shares of hedge funds, or Euros ... you would have a lot of options that would probably return a lot more than a house right now. And after investing in something, you could probably still get a loan on a house with a good interest rate. You could even get the home mortgage and then use your cash to hedge against falling home prices by shorting stocks in the real estate industry.

Actually, when looking at it that way, I think you should always get a mortgage when buying a house. There is no other loan in the world (except an interest-free loan from your parents) that is given on friendlier terms than a home mortgage. You get a low interest rate, a tax deduction, and since the loan is secured by your property, the bank will give you a bigger loan than you could have gotten any other way. Why spend your own money when you can buy a house with someone else's money?

Link to comment
Share on other sites

Thanks for the great advice, folks.

Mark, the reason to buy would be because I'd be unsure if I'm in a declining market or not, so it would kinda be a hedge. I get what you're saying, though.

DjTj, I understand what you mean about the friendliness of the mortgage, but by that reasoning should one never pay off a mortgage, opting instead to refinance and cash out whenever possible?

Link to comment
Share on other sites

DjTj, I understand what you mean about the friendliness of the mortgage, but by that reasoning should one never pay off a mortgage, opting instead to refinance and cash out whenever possible?
I guess I would have to say yes - as long as you're making other income, it should be valuable to keep moving your cash into other investments while keeping the mortgage. It's definitely the profit-maximizing strategy, but as with any other investment, you are trading risk for profit.

...to really maximize your profits, you could take out as many loans as possible and put the cash into higher-yield investments, but everyone has some limit on the risks they're willing to take. It may very well be that owning a house with no debt fits best with your own risk profile.

Link to comment
Share on other sites

Not knowing your exact situation, it seems your tax savings would be material. And the difference in loss of equity if the housing market goes down and the loss of capital (if you pay cash) and the market goes down probably wouldn't outweight that.

I think it also largely depends on the duration of your investment, and what other investments you have that you'd be hedging against.

Link to comment
Share on other sites

I guess I would have to say yes - as long as you're making other income, it should be valuable to keep moving your cash into other investments while keeping the mortgage. It's definitely the profit-maximizing strategy, but as with any other investment, you are trading risk for profit.

...to really maximize your profits, you could take out as many loans as possible and put the cash into higher-yield investments, but everyone has some limit on the risks they're willing to take. It may very well be that owning a house with no debt fits best with your own risk profile.

In theory, it seems. If there really were that many higher yield investments with similar to less risk than you as a debtor, why wouldn't the banks just invest directly in those investments instead of loaning to you at a lesser yield for them?

I just loved finance class when you get to assume that you can borrow at the risk free rate to properly take advantage of opportunities in the market...

But yes, the spirit of the post is correct, you want to build a portfolio which maximzes your utility based on your risk aversion, and in your case, the house will be a larger part than most, but it certainly doesn't have to be the only asset you hold.

Link to comment
Share on other sites

The reason why people say not to take the mortgage is because they don't trust themselves, often with good reason. If you're just going to blow the money on fast cars and loose women, or perhaps to nurse a healthy drug addiction, you should probably buy the house with the cash.

If you're going to really put the money into another investment, then it's all risk vs. reward. Why do banks give good interest for homes? Because the risk of real default is almost zero, giving home mortgages is basically no risk. If you have as much cash as you claim, you probably have a healthy appetite for risk.

You are almost always better off in the long run putting the money somewhere else that has a higher rate of return, but you could lose money.

Do you want to maximize your expectation or do you want to sleep easy at night? These are questions you have to ask yourself. If you could lose all that cash tomorrow and be okay -- note okay, not happy -- then you should consider a riskier investment.

So in the end it doesn't matter whether the market is declining or not. That should make you decide whether or not to buy the house. The fact that it is declining has no effect on the mortgage except for the interest rates, which are still almost always lower than the returns on other more high risk investments.

Link to comment
Share on other sites

ATB,

I don't think I've ever heard this question asked before because paying cash for a house for almost everyone in America is a non-issue.

If you do have the money and pay cash you won't have the mortgage interest deduction to take on your income taxes but you will have a psychological advantage knowing no one can take your house from you and put you on the street. If you can do it, I say do it.

In reality, I've never seen anyone pull off the taking equity out of their house and investing it in the stock market thing and having it work out.

Link to comment
Share on other sites

i just bought a house 2 months ago in Fort Worth area. Since I am employeed by a large corportation I got a decent transfer package where gave me a great deal for a mortgage. I am almost 99.99% sure that I would be moved again by my company in about 12 months.

Only way it made sense for me buying a house was the fact that when my company move me again they will buy my house (appraised value) if it does not sell in 60 days but if I do sell the house, my company will pay me a seller's bonus of 6% of the sale price.

So what I did was downpay 5% and bought a nice new house. I am basically betting that I would not quit or get fired from my company until my next transfer. Since I really like my job i think its a safe bet.

I don't believe he asked you about your life and experience.

But it's an interesting statement that you felt like you wanted to share that information.

Link to comment
Share on other sites

Ancal- Long time no read, glad to see you :)

I am pretty much in the same opinion as Dj here, and I would go with a mortgage, and use your cash for investing in other avenues. If you plan on staying at your house through the downtime in the market, there is no reason to wait, but if you are planning on moving in a few years, i would wait it out.

If you are looking at maximizing your ROI, and minimizing risk, buying a house in cash at this time is not a good decision. In fact, I would hardly ever recommend buying a house with cash, except in rare circumstances. I do not think your case is one of them though.

Link to comment
Share on other sites

What DjTj said. Don't pay cash for the house, invest that money somewhere else. You can get better returns if diversified. Especially if the market is declining, you've only got your down payment tied up to that depreciating asset... whereas you can invest your other money elsewhere.

Link to comment
Share on other sites

I'm John Lennox from Lennox financial and let me tell you something: Take the loan (from my company) and invest your leftover money. It's the biggest no-brainer in the history of Earth. When the Japanese invaded Pearl Harbor, that was a blunder. But it pales in comparison to how retarded you would be if you didn't pick up the phone and call me right now.

:dunce:

Link to comment
Share on other sites

Here is the question - If you take out a mortage at say 6.5%, will money you invest make more then 6.5%? In addition - Don't forget that mortage intrest in tax deductable. So really - Is your money going to make 4%?

In addtion, keep in mind, Market in Fort Worth has not gone up in 7 years! Texas also has all sort of funkey Homestead laws - Make sure you research and factor ALL that in before deciding.

Link to comment
Share on other sites

Agree with most here.

Get as big of a morgage as you can afford (dont read that wrong).

A- You get the tax benefit.

B- You can invest the difference and earn more than what the rate is on your mortgage.

Yep. Anyone with a good income should have a mortgage. Let Uncle Sam help you pay it. Invest the money in diversified equities instead.

Soon you will be this guy.

6f6ba4fd9b.jpg

Link to comment
Share on other sites

Hey DH, everyone has a little MSF in them ;)

Did he actually leave the board because the skins were struggling in that one game?

The key to investments is diversify, meaning never put a huge amount in one type have mulitple types so you never get killed if one goes bad, look at the people who had their life savings in Enron.

Stocks, mutual funds, real estate, foreign currency and companies etc......

Link to comment
Share on other sites

Thanks for the ongoing good advice. There's a lot of good financial thinking in here. However, I do see some flaws in the Edelman article, techboy, that I think are symptomatic of some misconceptions in the economy today.

In fact, I think a lot of our reasoning is based on the fact that we've seen a long-lasting economic boom that is by its nature temporary. People are forgetting that in the short to mid term, it's not a given that property appreciates (or that other investments do).

I'll go through each reason Edelman gives in his article and try to point out the flaws I perceive:

Reason #1: Your mortgage doesn’t affect your home’s value.

This is not a reason to get a mortgage.

Reason #2: You're going to build equity anyway.

This is true only in a rising market.

Reason #3: A mortgage is cheap money.

This is true, but Edelman goes on to say that "There’s no way you can avoid debt in today’s society." This is the type of thinking that has created the overspent society we have today. I don't see any reason to go into debt if I don't have to. I can certainly avoid it if I want to.

Reason #4: Mortgage interest is tax-deductible.

Yes, this is true--but it's the same as Reason #3.

Reason #5: Mortgage interest is tax-favorable.

Again, this is essentially the same as #3.

Reason #6: Mortgage payments get easier over time.

This is the same with any debt that features fixed repayments.

Reason #7: Mortgages allow you to sell without selling.

This is exactly what has screwed a lot of people over in 2006 and 2007. People are used to treating their houses as ATMs that fund their extravagant spending. If prices suddenly go flat or decline, people find themselves upside down all of a sudden.

Reason #8: Large mortgages let you invest more money more quickly.

Reason #9: Long-term mortgages let you create more wealth.

Reason #10: Mortgages give you greater liquidity and flexibility.

These are all exactly the same thing, and they bank on the fact that you'll be able to get a better ROI than the interest you're paying on a mortgage. This will often be true, but in bad economic times it may not be.

Link to comment
Share on other sites

Archived

This topic is now archived and is closed to further replies.

  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...