Why shouldn\’t you pay cash for a house if you have the money?
I’ve always heard people say that even if you have all the money in the world, you should never pay cash for a house. When you ask why, everyone gives the same answer: because the interest on your mortgage is tax-deductible. But the way I see it, you’re still coming out ahead by not paying interest in the first place. If you can explain why I’m wrong, please do.
September 23rd, 2008 at 11:04 pm
The theory goes like this:
If you can invest the money and get a better return than the interest you’re paying on the mortgage, you’re coming out ahead financially.
But if you feel better with your home paid for, that’s also a correct decision.
September 27th, 2008 at 7:14 pm
If I could buy my house out right I would. Yes you can claim the interest as a tax deduction but I would trade that for not having to pay every month for 30 years anyday.
September 28th, 2008 at 12:43 am
I see your point, but you save a lot of money on your taxes, so for most people it is worth it to pay the mortgage each month because if you have enough cash to pay in full your intrest is VERY low and your tax benefit probably out weighs your interst payments.
September 29th, 2008 at 12:02 am
They are buying into the American lie by telling you that. If you buy a $100,000 home on a 30 year note, you will pay about $300,000 over the term. Don’t listen to them. It’s your money. And if you have a lifestyle of “cash” and not credit, you may not have what you want at the moment, but you will have more “stuff” over your lifetime.
You are on the right track. Go for it!
September 30th, 2008 at 12:15 pm
You come out much further ahead by not paying interest and not having debt.
September 30th, 2008 at 11:21 pm
Yes, you do get the mortgage deduction, if you have another deductions to itemize. But you don’t want to pay cash for other reasons. You want to save the money for emergencies. You may say I could just get the credit then, but it’s easier to get credit when you don’t need it then when you do. It also builds up your credit score which affects much more than interest rates anymore.
I’d say make a 20% downpayment, so you don’t have to worry about PMI, then make double payments.
October 1st, 2008 at 2:37 pm
You are correct. Always buy with cash if you have the $$.
Tax deductions only give you back a small percentage of the interest payments that you paid. Example:
You paid $20,000 in mortgage interest in one year and you are in the 33% marginal tax bracket, you will get back $3,333.33 in taxes. So your out of pocket is $6,666.66.
With no mortgage you paid 0 in mortgage interest and got 0 back in taxes.
So you are $6,666.66 ahead without the mortgage.
October 3rd, 2008 at 1:44 am
If you could get a low interest mortgage on your home and invest your money at a better rate. It would be wise to get the mortgage. Also the interest you pay may help you qualify for itemized deductions on your tax return. Depending on your tax bracket the savings could be 15 to 38 percent. One other item is that you could save that money for a rainy day fund. If you had an accident or illness and became disabled you may need a nest egg to live on for awhile. Not to many banks are going to lend money to someone with no income.
October 3rd, 2008 at 6:33 am
Let me give you an example
Lets say the house is worth $100,000, and you pay cash for it, then your 100 grand have a return on investment equal to the mortgage interest rate you would get if you financed it. So if you could have gotten a 6.75% interest rate then that is the return on your money $6750 a year since you are not paying any interest.
Now lets say you paid upfront 10% for the house, thats $10,000 and financed the $90,000 at 6.75%, you would be paying $6,075 in interest annually, but you would still have $90,000 in the bank. Lets say you take the $90,000 and invest it in a S&P 500 index fund which historically has earned a 12% return so your money would grow $10,800 a year.
Leaving taxes out of it for sake of this example and considering a S&P 500 index fund is a highly secure investment, your $90,000 are giving you a better return then just putting it all into the house.
The question you have to ask yourself is this, can I get a better return for my money than the interest rate of the mortgage or the 6.75% in this case? If not, go buy the house in cash.
October 5th, 2008 at 9:28 pm
I don’t necessarily buy their argument.
Suppose you pay $10,000.00 one year in interest (just for example purposes).
Even if you are in the 35% tax bracket, you only save $3,500.00 in taxes for spending $10,000.00. You are now $6,500.00 in the hole.
If you had invested the money, you would have had to earn at least $6,500.00 in interest to break even. Maybe you do, or maybe you lose money.
Also, with each passing year of your mortgage, the amount of interest applied to each payment goes down, and the amount of principal goes up. So each year, you have a smaller interest expense to deduct.
October 8th, 2008 at 6:40 am
It depends on what you would do with the money, if you didn’t buy a house. Would you invest it or leave it in the bank?
If you took a mortgage, in the initial years, the vast bulk of your monthly payments goes towards interest, which is tax exempt. So, the remaining of the interest is the “effective interest rate”. So, if you invest your money and get a return significantly higher (so that any market fluctuation would still make it worth while), then it is a good idea to take a loan. Besides mortgage loans do not typically carry a pre-payment penalty and so, anytime you feel like it, you can pay off the balance. When the “effective interest rate” starts matching or closing in on your investment returns, you can always pay the balance off!!
October 10th, 2008 at 11:05 pm
Because you could leverage the banks money and buy 10 homes instead of one.