Pay off mortgage?

[Joe689]

I know this discussion has been beaten to death but would like to get this forum's opinion.  Think there are some smart fixed income folks here.

 

Buying a new house:

 

Purchase price $501,000

 

I have about $530,000 to my name.    No debt.  Own my cars out right.

 

Through regular income, I am already maxing out my Roth.  I max out a 529 plan for children.  Have a bunch of Whole Life.  Got the disability insurance.  I will also have a NY pension in 25 more years.

 

Do I get a mortgage? Or do I pay cash for house?  If I get a mortgage, what type?  And then where do I put the cash?  I am only willing to accept investments with little (<1% risk) or no risk.  I could also use some steady cash flow from this investment to help with mortgage payments.    Can I outperform a mortgage? Was thinking Municipal bonds, but even the highest quality barely pay 4% from what I can tell.  Is it worth it?

 

 

 

 

[clutch]

Based on your post, I'm guessing it's hard to find good opportunities right now. In that case, I'd buy the home outright, and get HELOC right away. That way, if significant investment opportunities come, like the next market downturn, I can use that HELOC to pounce on those opportunities. I personally like the freedom / flexibility of this approach.

 

(Alternatively, you could get a mortgage and sit on cash; this seems work on theory but in reality I find it hard to resist not investing / spending the available cash.)

 

In a way, my approach is a mind trick. You prevent yourself from having to chase after sub-bar investments and / or spending the cash. Because you'd use HELOC (debt) to invest when you do, psychologically you'd only look for opportunities with greater hurdle rates / margin of safety.

 

[boilermaker75]

Based on your post, I'm guessing it's hard to find good opportunities right now. In that case, I'd buy the home outright, and get HELOC right away. That way, if significant investment opportunities come, like the next market downturn, I can use that HELOC to pounce on those opportunities. I personally like the freedom / flexibility of this approach.

 

(Alternatively, you could get a mortgage and sit on cash; this seems work on theory but in reality I find it hard to resist not investing / spending the available cash.)

 

In a way, my approach is a mind trick. You prevent yourself from having to chase after sub-bar investments and / or spending the cash. Because you'd use HELOC (debt) to invest when you do, psychologically you'd only look for opportunities with greater hurdle rates / margin of safety.

 

If you do not use the HELOC to improve your house, I believe only $100k is tax deductible and if you are subject to the AMT nothing is tax deductible if not used to improve the house.

[villainx]

You don't have to outperform the mortgage rate, you have to outperform the mortgage rate with the applicable mortgage interest deductions, right?  I wasn't sure from your background if you are saying that the deductions would not apply.  However, I guess there are cost with getting a mortgage too?

[clutch]

Based on your post, I'm guessing it's hard to find good opportunities right now. In that case, I'd buy the home outright, and get HELOC right away. That way, if significant investment opportunities come, like the next market downturn, I can use that HELOC to pounce on those opportunities. I personally like the freedom / flexibility of this approach.

 

(Alternatively, you could get a mortgage and sit on cash; this seems work on theory but in reality I find it hard to resist not investing / spending the available cash.)

 

In a way, my approach is a mind trick. You prevent yourself from having to chase after sub-bar investments and / or spending the cash. Because you'd use HELOC (debt) to invest when you do, psychologically you'd only look for opportunities with greater hurdle rates / margin of safety.

 

If you do not use the HELOC to improve your house, I believe only $100k is tax deductible and if you are subject to the AMT nothing is tax deductible if not used to improve the house.

 

I live in Canada and am not familiar with tax laws in US, so I should have stated that as a disclaimer.

[stahleyp]

You want something that's low risk and you're willing to put roughly 95% in to one investment (and a house in Canada, no less)? How's that not incredibly risky?

[winjitsu]

You want something that's low risk and you're willing to put roughly 95% in to one investment (and a house in Canada, no less)? How's that not incredibly risky?

 

+1 for mortgage, especially while rates are still lowish.

 

Mortgages are non-recourse, so you can put the house back to the lender if it falls below property value (aka walk away from the loan). Meanwhile, leverage works in your advantage should your property appreciate.

 

It also seems like your investing style is very risk adverse, so you should be diversifying as much as possible.

 

 

[clutch]

You want something that's low risk and you're willing to put roughly 95% in to one investment (and a house in Canada, no less)? How's that not incredibly risky?

 

I'm assuming the house is for OP's home.

[stahleyp]

You want something that's low risk and you're willing to put roughly 95% in to one investment (and a house in Canada, no less)? How's that not incredibly risky?

 

I'm assuming the house is for OP's home.

 

Yeah, I was assuming that, too. That's still a very aggressive stance though. Let's say the Canadian housing market stumbles (there is a higher than non-existent chance of that) and the buyer losses a job. You can still live in the house, but that doesn't include property taxes, maintenance etc. He said he's only willing to accept risks of 1% or less (I'm assuming no more than a 1% loss).

 

By the way, I'm wrong on that house in Canada I believe. In the US, at least, most states are not non-recourse loans.

[clutch]

BTW, the OP seems to be in NY, not in Canada. I just stated that I live in Canada.

 

I can't think of any other long-term investment that is as safe as a house on no debt. Think of it in terms of the value it will hold (as you live in the house), not necessarily the price. I'm not considering just the financials, but also the psychological well being, which BTW will also help you make better financial decisions. Plus you will still have the flexibility to use your house as a vehicle to invest if great opportunities come along.

[flesh]

I can't imagine how someone ended up on a value investing forum with a goal of no more than 1% movements. I guess that leaves short term treasuries and cd's. Long road to getting just moderately wealthy.

[boilermaker75]

Based on your post, I'm guessing it's hard to find good opportunities right now. In that case, I'd buy the home outright, and get HELOC right away. That way, if significant investment opportunities come, like the next market downturn, I can use that HELOC to pounce on those opportunities. I personally like the freedom / flexibility of this approach.

 

(Alternatively, you could get a mortgage and sit on cash; this seems work on theory but in reality I find it hard to resist not investing / spending the available cash.)

 

In a way, my approach is a mind trick. You prevent yourself from having to chase after sub-bar investments and / or spending the cash. Because you'd use HELOC (debt) to invest when you do, psychologically you'd only look for opportunities with greater hurdle rates / margin of safety.

 

If you do not use the HELOC to improve your house, I believe only $100k is tax deductible and if you are subject to the AMT nothing is tax deductible if not used to improve the house.

 

I live in Canada and am not familiar with tax laws in US, so I should have stated that as a disclaimer.

 

Sorry I was assuming US tax law.

[Joe689]

Thanks everyone for comments.  The house is in Buffalo NY.  Buffalo is one of the most stable housing markets.  During the crunch, we barely budged.  So it is not a speculative real estate purchase.

 

Mortgage interest deduction is at play here.  There are some good calculators out there to determine your effective interest rate after considering mortgage interest deduction.  I would need to beat about 3%. 

 

As for taking more risk.  I do have a 50K piggy bank that I trade/invest with... in value companies.   

 

This 500K is more or less my whole net worth (minus retirement, whole life insurance).  Therefore I need to take very little risk with it considering I have a family.  My family will live in this investments (or call it savings account). 

 

I could do a AA rated municipal bond 30y at 3.7%.  And those earnings are tax free I believe.  Thoughts?

 

 

 

[thepupil]

I think the biggest issue is a mismatch between your willingness (very low) and ability (higher) to take risks. 10% equities for someone early in their working career (judging by your pension eligibility) is extremely risk averse and unconventional. In the end you must do that which you are comfortable, but it seems an extreme stance (and in many ways is higher risk given the almost inevitable loss of purchasing power of the dollar over long periods of time)

 

How did you make all that money without risking anything?

 

 

 

 

 

[Joe689]

How did you make all that money without risking anything?

 

Working.  Saving.

 

I understand that at my age I should be taking more risk, but I do not like debt.  So maybe I am up against a psychological problem.  Is it obvious that I should not be paying off the mortgage?

 

In the past years, I did take more risk and received some handsome gains.  But now, with a new family, new house, and market hitting all highs, I am getting apprehensive.    I still will be keeping 100K in my Roth.  50K in brokerage account.  50K in Cash Value Whole Life with 1M death benefit. 20k 529 plan.  Just thinking I want to reduce my leverage.  I think I am answering my own question on what I am comfortable with. 

[hyten1]

buffalo ny, how is the RE market there?my initial reaction is, it can't be good due to lack of population/economic growth.

 

I am no expert in buffalo RE, is it even keeping up with inflation?

 

Thanks everyone for comments.  The house is in Buffalo NY.  Buffalo is one of the most stable housing markets.  During the crunch, we barely budged.  So it is not a speculative real estate purchase.

 

Mortgage interest deduction is at play here.  There are some good calculators out there to determine your effective interest rate after considering mortgage interest deduction.  I would need to beat about 3%. 

 

As for taking more risk.  I do have a 50K piggy bank that I trade/invest with... in value companies.   

 

This 500K is more or less my whole net worth (minus retirement, whole life insurance).  Therefore I need to take very little risk with it considering I have a family.  My family will live in this investments (or call it savings account). 

 

I could do a AA rated municipal bond 30y at 3.7%.  And those earnings are tax free I believe.  Thoughts?

[Joe689]

Lately, yes, it has been good.  Area has seen ~15% increase in residential RE value.  Our governor has been infusing billions of dollars into our area, and the brain drain has turned into a brain gain, and house inventory is low because of this.  Increasing value.  Buffalo is on the up and up.  haha maybe

[clutch]

Do what's best for your psychological well being. If someone tells you that you are going to make more money this way... ask yourself what that extra money will bring you in the end. It might just be little more extra freedom during retirement, which really is for your psychological well being anyways. But you don't want to pursue that if it causes distress to your current psychology.

 

We don't need to live everything as if we were a rational Homo Economicu. Listening to your intuitions and emotions can be the best for you sometimes.

[thepupil]

I personally think that having a mortgage and then keeping the cash that you don't put into the home in I-bonds, EE-bonds, CD's, high grade muni's etc. would be less risky than putting it all in the house and having no mortgage.

 

even if you can't make the cost of the mortgage from those and it costs you 0.5-1% on the $400K mortgage balance, having liquidity is important. you clearly are good at saving money so you can always do this route and then use cash flow to pay off through recasts in large chunks whenever you want (that way you'd work toward having no debt, but would maintain liquidity)

 

in the end it's your dough and your life and you should do what works for you. but having so much in 1 illiquid asset that historically returns 0% after inflation and in many geographies has not even done that would freak me out, personally. and that's coming from a guy who has  30% positions in a couple of stocks!

 

the tension I'm grappling with is I sympathize with "you need to do what you're comfortable with" but also think that "what you're comfortable with" is riskier than you think it is.

 

EDIT: Or you could go halfway and put like 50% down or do a 15 year versus a 30 yr to save on total interest costs

 

EDIT 2: Just as a thought experiment, if I had  all my money in EQC (a REIT with no net debt that owns these buildings http://www.eqcre.com/about/), I'd be considered to be taking an extremely risky position with my fam's money. If I had it all in the REIT index, some would say that's risky, if I had it in 5000 US stocks and no other assets some would say that's risky.

 

So why is it considered low risk to own 1 building in buffalo, NY?

 

Wikipedia tells me your home is quite expensive for the area. it sounds like an area where the housing market has a lot of upside...and downside.

 

The loss of traditional jobs in manufacturing, rapid suburbanization and high costs of labor have led to economic decline, making Buffalo one of the poorest among U.S. cities with populations of more than 250,000 people. An estimated 28.7–29.9% of Buffalo residents live below the poverty line, behind either only Detroit,[21] or only Detroit and Cleveland.[22] Buffalo's median household income of $27,850 is third-lowest among large cities, behind only Miami and Cleveland; however the median household income for the metropolitan area is $57,000.[23]

 

This, in part, has led to the Buffalo-Niagara Falls metropolitan area having the most affordable housing market in the U.S. today. The quarterly NAHB/Wells Fargo Housing Opportunity Index (HOI) noted that nearly 90% of the new and existing homes sold in the metropolitan area during the second quarter were affordable to families making the area's median income of $57,000. The area median price of homes was $75,000.[citation needed]

 

Buffalo faces issues with vacant and abandoned houses, as the city ranks second to St. Louis on the list of American cities with the most vacant properties per capita. Since 2000, the city has torn down 2,000 vacant homes but as many as 10,000 still remain. Mayor Byron W. Brown recently unveiled a $100 million, five-year plan to demolish 5,000 more houses.[24] The city's move away from heavy industry and toward a service and bioinformatics economy[citation needed] has brought improved air and water quality, which benefit not only residents and tourists but the bioregion as a whole. In July 2005, Reader's Digest ranked Buffalo as the third cleanest large city in the nation.[25]

 

Buffalo's economy has begun to see significant improvements since the early 2010s.[26] Money from state governor Andrew Cuomo, plans for different construction programs, and hundreds of new jobs have brought strong economic change to the area.[27]

 

 

 

 

[Gregmal]

Do what's best for your psychological well being. If someone tells you that you are going to make more money this way... ask yourself what that extra money will bring you in the end. It might just be little more extra freedom during retirement, which really is for your psychological well being anyways. But you don't want to pursue that if it causes distress to your current psychology.

 

We don't need to live everything as if we were a rational Homo Economicu. Listening to your intuitions and emotions can be the best for you sometimes.

 

This x100.

 

I have a good friend who in his mid 20's settled in Pittsburgh. Bought his place in cash, and then kind of started shaping the rest of his life there. The freedom he had from having very little overhead was incredible. Like under $1,200 a month with 25% being discretionary spend. Once you remove the colossal cloud that is a need for money from what drives you, your quality of life is so much higher.

 

The wisest financial thing to do would be to leverage it and keep your capital. But the problem with that is it forces you to keep running in the hamster wheel. If I have $1m USD and own my primary residence and 2 income properties in cash, I don't really need to do anything I don't want to, outside of cover the basic necessities which would be minimal if anything once factoring in rental income. If with the same $1m USD I own my home, a vacation home, and 5 condos all about 20% LTV, every month for the next few decades I need to keep grinding along to cover those costs. If you like playing that game(some do) thats fine. But money isn't everything and having enough of it to provide for yourself and your family an adequate lifestyle brings one freedom. That equation essentially comes down to (money in - money going out > 0). Theres different ways to get the but the easiest is reducing monthly expenses and for most the mortgage is the largest. On the other hand, is your objective in life is the pursuit of money, well, lever up.

[Simple Investor]

I live in Rochester, NY.  For 500k in Buffalo you can get a mansion.  Why not find a house for 350k? 

 

I think taxes on 500k will be 15-20k per year. 

 

and whole life insurance?  I still don't see how the numbers work out in my favor on that insurance. 

 

It seems confusing to spend 95% of your net worth on a very expensive Buffalo house. 

 

Go Bills.

 

 

[villainx]

There has to be a middle ground where you can accept slightly more risk.  Being comfortable is important, but developing a better plan that allows you to be comfortable has to be possible. 

 

Of course, these thread will end badly ... you'll do something rash or get swindled and then those of us that urged you to take on more risk will feel awful, but in a limited internet way. 

 

Anyway, this thread is also a prime reason for why this is a great site, very thoughtful responses!

[Jurgis]

Of course, these thread will end badly ... you'll do something rash or get swindled and then those of us that urged you to take on more risk will feel awful, but in a limited internet way. 

 

Yeah, man, go to Vegas, put it all on zero. YOLO!  8)

 

 

I really liked the "those of us that urged you to take on more risk will feel awful, but in a limited internet way"

[Joe689]

I live in Rochester, NY.  For 500k in Buffalo you can get a mansion.  Why not find a house for 350k? 

 

I think taxes on 500k will be 15-20k per year. 

 

and whole life insurance?  I still don't see how the numbers work out in my favor on that insurance. 

 

It seems confusing to spend 95% of your net worth on a very expensive Buffalo house. 

 

Go Bills.

 

Go Bills!  Taxes are 13K.  Yes, high.  Need the school district for the kids.  Ranked 1 in the area. Little under 4000 sq ft.  Need room for kids.

 

I have been very successful with saving money over the years.    This will be the 3rd house I've owned.  Each one I sold for more than I bought it for.  However, I agree that homes are not an investment.  But in my eyes they are a savings account.  Real estate taxes are a cost of life so they don't bother me.  And I plan on reaping the benefits that the government offer (parks, schools, safety, etc).    Not sure how you can avoid taxes without renting.  As for whole life, in my eyes, another savings account.  My cash value already exceeds my premiums paid because it is 10 years old.    With kids, you need life insurance.  So you either buy term or whole life.  I would rather buy whole life and have cash value.  Now that the account is 10 years old, it is a savings account on steroids.  There is nothing wrong with savings accounts.  Real money is made working.  I max out my retirement vehicles, keep another 10-20% of worth in brokerage, and store the rest in 'savings accounts'.   

 

Anyways, I think I am going to do the half and half approach.  Be half right, half wrong.  Will put half down, and put the other half in an index fund or something. 

 

I will keep my trading piggy bank too and continue to buy value.  Keeping this forum happy. 

 

[villainx]

This will be the 3rd house I've owned.  Each one I sold for more than I bought it for.  However, I agree that homes are not an investment.  But in my eyes they are a savings account.

 

Nothing wrong with anything except keep in mind that depending on timing of your purchases, it could be largely due to luck, or a period of rising property value.  This might be especially true if you entered the real estate market soon after the big crash, right?  And your main experience was during the low interest rate and recovering property value period. 

 

Just something I felt worth mentioning.