Should I pay cash for a house?
May 24, 2010 1:49 PM Subscribe
Under 30 with a 16-month-old. Getting $750k from insurance settlement. Have $65k in a money market from previous settlement, $10k in my Roth IRA, and $13k in my 16-month-old's 529. Should I pay cash for a house?
My husband and I made less than $30k last year (he's a private contractor and has suffered with the economy and I am a stay-at-home-mom). My husband is enrolling in school full time this fall to finish his degree. Though we both have good credit, it will be two years before we're both working and can qualify for an income-based mortgage. We're currently renting and want/need more space. If we pay cash for a house ($300-$350k), we'll invest the rest ($300-$350k).
Right now my first concern is freedom from a house payment. Eventually we'd like to invest monthly what our mortgage payment would have been (around $1400), but as I said, I think that's about two years away.
I understand when you pay cash for a house you sacrifice the return you could get by investing in something else, and I understand you sacrifice the tax shelter. I dont want to commit financial suicide, but given my situation as described above, I feel like I have some freedom to choose. I would only be investing 50% of my available cash, would have the remaining 50% for investments and would still have $65k liquid in my current money market.
My husband and I made less than $30k last year (he's a private contractor and has suffered with the economy and I am a stay-at-home-mom). My husband is enrolling in school full time this fall to finish his degree. Though we both have good credit, it will be two years before we're both working and can qualify for an income-based mortgage. We're currently renting and want/need more space. If we pay cash for a house ($300-$350k), we'll invest the rest ($300-$350k).
Right now my first concern is freedom from a house payment. Eventually we'd like to invest monthly what our mortgage payment would have been (around $1400), but as I said, I think that's about two years away.
I understand when you pay cash for a house you sacrifice the return you could get by investing in something else, and I understand you sacrifice the tax shelter. I dont want to commit financial suicide, but given my situation as described above, I feel like I have some freedom to choose. I would only be investing 50% of my available cash, would have the remaining 50% for investments and would still have $65k liquid in my current money market.
It sounds to me like you could use the advice of a financial advisor; the NAPFA is a good place to start looking for one. The reason I suggest talking to an advisor is s/he will be able to take a close look at your financial situation (which we can't do on this anonymous thread) and help you take a long view of your plans to help you make that decision.
However, if you decide to skip that and go ahead with purchasing a home with cash, take your time. Work with a realtor you trust, and be picky. In much of the country, the real estate market is such that there are deals to be had due to foreclosures, short sales, etc., so you might be able to find a $350k-equivalent home for much less.
posted by me3dia at 1:57 PM on May 24, 2010
However, if you decide to skip that and go ahead with purchasing a home with cash, take your time. Work with a realtor you trust, and be picky. In much of the country, the real estate market is such that there are deals to be had due to foreclosures, short sales, etc., so you might be able to find a $350k-equivalent home for much less.
posted by me3dia at 1:57 PM on May 24, 2010
If you made less than $30,000 last year and your husband is going to school full time the last thing you want to do is to take on the expense of a house, no matter how much your settlement is.
Rent, and then when you and your husband are working, consider buying. But only buy if your incomes can support the house and its ancillary expenses. Treat the insurance settlement as a nest egg. A house is not a means to wealth. It is a money pit.
posted by dfriedman at 1:57 PM on May 24, 2010
Rent, and then when you and your husband are working, consider buying. But only buy if your incomes can support the house and its ancillary expenses. Treat the insurance settlement as a nest egg. A house is not a means to wealth. It is a money pit.
posted by dfriedman at 1:57 PM on May 24, 2010
Yes, pay cash for the house. You are trading off the investment value in exchange for reducing (or eliminating) the risk of not being able to make mortgage payments at some point in the future.
posted by charlesv at 2:02 PM on May 24, 2010
posted by charlesv at 2:02 PM on May 24, 2010
I disagree with dfriedman. If you're not carrying mortgage costs, then your monthly expenses in the house are likely to be less than rent in a comparable residence. Keep in mind that you will still need to pay property and school taxes, so you should have an escrow account with those monies.
I paid for my house when I had it built. Since then, we've gone through layoffs, business openings, closings, recession, market crash...and in all of it, I've been secure in the knowledge that I have a roof over my head. (As long as I don't piss off the HOA...don't even get me started on the evils of HOAs in Texas.)
If you can afford to own, and your area is not in a bubble, I would seriously consider it. Feel free to Memail me if you have questions about hiring a broker and that sort of stuff.
posted by dejah420 at 2:03 PM on May 24, 2010
I paid for my house when I had it built. Since then, we've gone through layoffs, business openings, closings, recession, market crash...and in all of it, I've been secure in the knowledge that I have a roof over my head. (As long as I don't piss off the HOA...don't even get me started on the evils of HOAs in Texas.)
If you can afford to own, and your area is not in a bubble, I would seriously consider it. Feel free to Memail me if you have questions about hiring a broker and that sort of stuff.
posted by dejah420 at 2:03 PM on May 24, 2010
This question is far more complicated and involves both subject/objective considerations, so each person's ultimate answer may not be the same. So I'm not going to venture into the ultimate question except to remind you that the "tax shelter" you refer to (presumably the mortgage interest) are not, IMHO, reasons to keep paying mortgage interest because your deduction does not equal the cost of your payments. In other words, your payments to the bank will always be more than the tax benefit you might possibly receive for the tax deduction. Tax benefits are no reason to get a mortgage, especially if you don't presently itemize deductions. Make your decision on other grounds. This is one of those questions where the long-term implications and cost of making the "wrong" decision far outweigh the short-term cost of paying an accountant or other financial professional to run the actual numbers and present some "what if" scenarios to you.
Remember, too, that the cost of a home is not just the mortgage payment. You've got taxes, utilities, maintenance, and repairs on an ongoing basis for the life of your ownership of the place.
posted by webhund at 2:10 PM on May 24, 2010
Remember, too, that the cost of a home is not just the mortgage payment. You've got taxes, utilities, maintenance, and repairs on an ongoing basis for the life of your ownership of the place.
posted by webhund at 2:10 PM on May 24, 2010
You need a financial advisor. With all that dough lying around, you could achieve that nirvana state where you're able to offset rent costs, partial or entire, with money made from investments.
posted by Cool Papa Bell at 2:11 PM on May 24, 2010 [2 favorites]
posted by Cool Papa Bell at 2:11 PM on May 24, 2010 [2 favorites]
With $750k showing up at your door, you're dealing with enough money that it's worth talking with a financial planner, especially when you're considering making what is likely the biggest purchase of your lives. I love AskMeFi to death, but I think questions like this should be answered by professionals who know what questions to ask and what to do with the information you give them, and not The Internet.
posted by craven_morhead at 2:13 PM on May 24, 2010
posted by craven_morhead at 2:13 PM on May 24, 2010
If you're not carrying mortgage costs, then your monthly expenses in the house are likely to be less than rent in a comparable residence. Keep in mind that you will still need to pay property and school taxes, so you should have an escrow account with those monies.
It depends on the renting vs owning costs in your particular location, but I agree that owning is probably going to cost less than renting if you pay cash.
I understand when you pay cash for a house you sacrifice the return you could get by investing in something else, and I understand you sacrifice the tax shelter.
You're also somewhat exposing yourself to more real estate market risk by having that much of your net worth tied up in your house. Overall though I think buying a modest home with cash makes sense for you based on the details you gave. Rent or mortgage payments would otherwise probably be your biggest monthly expense, so no matter what happens with the rest of your finances you'll still have a lot more flexibility.
With $750k showing up at your door, you're dealing with enough money that it's worth talking with a financial planner, especially when you're considering making what is likely the biggest purchase of your lives
Yes I would say speaking to a professional financial planner would be a good idea. I would suggest going fee-only at an hourly rate for advice rather than someone who works on a commission or actively manages your investments. Also, realize that you don't have to make a decision right away. If you keep paying rent for a while, it's not going to make much of a difference compared to the sum of money you are talking about. Don't let anyone pressure you into making a decision until you are ready.
posted by burnmp3s at 2:25 PM on May 24, 2010
It depends on the renting vs owning costs in your particular location, but I agree that owning is probably going to cost less than renting if you pay cash.
I understand when you pay cash for a house you sacrifice the return you could get by investing in something else, and I understand you sacrifice the tax shelter.
You're also somewhat exposing yourself to more real estate market risk by having that much of your net worth tied up in your house. Overall though I think buying a modest home with cash makes sense for you based on the details you gave. Rent or mortgage payments would otherwise probably be your biggest monthly expense, so no matter what happens with the rest of your finances you'll still have a lot more flexibility.
With $750k showing up at your door, you're dealing with enough money that it's worth talking with a financial planner, especially when you're considering making what is likely the biggest purchase of your lives
Yes I would say speaking to a professional financial planner would be a good idea. I would suggest going fee-only at an hourly rate for advice rather than someone who works on a commission or actively manages your investments. Also, realize that you don't have to make a decision right away. If you keep paying rent for a while, it's not going to make much of a difference compared to the sum of money you are talking about. Don't let anyone pressure you into making a decision until you are ready.
posted by burnmp3s at 2:25 PM on May 24, 2010
Speaking of financial planners...in my experience, the vast majority of them are shysters with zero actual financial acumen. Your mileage may, of course, vary. I wouldn't search for financial planner...any idiot can call themselves a "planner". The only time I've ever lost money is when I used a financial planner. Everyone I know from the dot.com era says the same thing.
You want a CPA or an estate attorney. Given that it's less than a million, and given that there are going to be tax events, I would go with the CPA now. Estate attorney as needed to set up college funds/etc.
posted by dejah420 at 2:47 PM on May 24, 2010
You want a CPA or an estate attorney. Given that it's less than a million, and given that there are going to be tax events, I would go with the CPA now. Estate attorney as needed to set up college funds/etc.
posted by dejah420 at 2:47 PM on May 24, 2010
Do you really need a $350,000 house? That's a lot of house in many places, especially for a family making 30k a year. Remember you will still have the carrying costs of insurance and taxes. Are you buying a practical house or the dream house that will turn into a financial anchor around your necks if your income doesn't rebound?
posted by rikschell at 2:50 PM on May 24, 2010 [2 favorites]
posted by rikschell at 2:50 PM on May 24, 2010 [2 favorites]
Rikschell, I don't know where Anonymous lives, but my 50-year-old 1800-square-foot ranch house in a downmarket Seattle suburb 45 minutes out of town is currently worth $315K. That's. . . not really a lot of house. If the OP is looking in or near an urban area, $350K might not be much of an overshoot at all.
posted by KathrynT at 3:07 PM on May 24, 2010 [2 favorites]
posted by KathrynT at 3:07 PM on May 24, 2010 [2 favorites]
lot of variables here. And as other people say getting sound advice for a qualified person is worth more than what you will get in AskMe. With that large caveat a few things:
1. Are you looking for a home or a short to medium term house?
2. What price point (i.e how much of your capital will you spend)?
I, personally, and this is non-expert advice, would jump at the chance to buy my home outright if I had the cash reserves to do so. Of course in the long term you save a shit load of money by not paying interest (one of the things a lot of people will say is pay off debt first, interest just kills you in the long run). From a month to month expense mortgage/rent make up a large % of what people pay out, it could be a large benefit to not have to pay it. It immediately gives you a large amount of equity to use if you really need to.
posted by edgeways at 3:25 PM on May 24, 2010
1. Are you looking for a home or a short to medium term house?
2. What price point (i.e how much of your capital will you spend)?
I, personally, and this is non-expert advice, would jump at the chance to buy my home outright if I had the cash reserves to do so. Of course in the long term you save a shit load of money by not paying interest (one of the things a lot of people will say is pay off debt first, interest just kills you in the long run). From a month to month expense mortgage/rent make up a large % of what people pay out, it could be a large benefit to not have to pay it. It immediately gives you a large amount of equity to use if you really need to.
posted by edgeways at 3:25 PM on May 24, 2010
Ramit Sethi of "I Will Teach You To Be Rich" fame would say hell no. I am no expert, but I would have to agree with him based on the arguments he makes.
Remember that while you'd be freeing yourself of mortgage payments, you'd still be exposing yourself to insurance costs, maintenance, and property taxes. Those suck too.
Real estate, over the long run, is nowhere near as good an investment as simply buying some index funds. You are better off renting and investing the principle.
posted by holterbarbour at 4:21 PM on May 24, 2010
Remember that while you'd be freeing yourself of mortgage payments, you'd still be exposing yourself to insurance costs, maintenance, and property taxes. Those suck too.
Real estate, over the long run, is nowhere near as good an investment as simply buying some index funds. You are better off renting and investing the principle.
posted by holterbarbour at 4:21 PM on May 24, 2010
With all that dough lying around, you could achieve that nirvana state where you're able to offset rent costs, partial or entire, with money made from investments.
I would suggest this if I knew where it was that you lived, anonymous. One of the first non-science-related things I ever remember my dad teaching me was that you never touch the principal if you can help it; always live off the interest &/or dividends. With interest rates at such a low and crappy level, though, idk if this would be feasible with just 750k unless your potential rent payments were in the low hundreds per month.
posted by elizardbits at 4:51 PM on May 24, 2010
I would suggest this if I knew where it was that you lived, anonymous. One of the first non-science-related things I ever remember my dad teaching me was that you never touch the principal if you can help it; always live off the interest &/or dividends. With interest rates at such a low and crappy level, though, idk if this would be feasible with just 750k unless your potential rent payments were in the low hundreds per month.
posted by elizardbits at 4:51 PM on May 24, 2010
I like the price of the home you have chosen - that should get you into a good neighborhood. We bought our home outright and I love sleeping at night knowing it is paid for. But we paid $120,000 for a fixer upper and the one regret I have is the neighborhood was worse than I realized and we ended up having to buy the place across the street in a foreclosure auction just to be in control of our neighbors. If I had it to do over again I would just buy in the $300,000 bracket in the first place.
And seconding financial planners are shysters, generalizing, unless you can get one to show you his credit rating and if it is excellent maybe consider him. But you are better off finding a crusty old CPA that drives a '93 Honda, has perfect credit and lets you see the printout, he does your taxes for less than 3 hundred with a guarantee that you can call him with questions. And then while you are in his office get some free advice from him or her.
You probably should be having a professional do your taxes and I don't mean the franchise kind.
posted by cda at 5:09 PM on May 24, 2010 [1 favorite]
And seconding financial planners are shysters, generalizing, unless you can get one to show you his credit rating and if it is excellent maybe consider him. But you are better off finding a crusty old CPA that drives a '93 Honda, has perfect credit and lets you see the printout, he does your taxes for less than 3 hundred with a guarantee that you can call him with questions. And then while you are in his office get some free advice from him or her.
You probably should be having a professional do your taxes and I don't mean the franchise kind.
posted by cda at 5:09 PM on May 24, 2010 [1 favorite]
Yes, my accountant has never had a client come back and tell him he wishes he did not pay off his home after he was advised to.
posted by bkeene12 at 7:57 PM on May 24, 2010
posted by bkeene12 at 7:57 PM on May 24, 2010
Has anyone else noticed Anonymous has quite a bit of cash in the bank and has established retirement and a college fund for his/her offspring?
Given that, I'd be willing to say you're miles ahead of most people and should feel fairly comfortable investing HALF your incoming settlement in real estate, especially in a nationally down market. Even if you've invested half your capital in real estate you're almost guaranteed some kind of a return when/if you sell. Not having a mortgage payment (even when you factor in property and school taxes and other homeowner expenses) liberates you to pursue all kinds of opportunities you might not pursue were you to feel burdened by a mortgage. GO FOR IT! Invest the rest, live mortgage free!
posted by djuna at 11:04 PM on May 25, 2010
Given that, I'd be willing to say you're miles ahead of most people and should feel fairly comfortable investing HALF your incoming settlement in real estate, especially in a nationally down market. Even if you've invested half your capital in real estate you're almost guaranteed some kind of a return when/if you sell. Not having a mortgage payment (even when you factor in property and school taxes and other homeowner expenses) liberates you to pursue all kinds of opportunities you might not pursue were you to feel burdened by a mortgage. GO FOR IT! Invest the rest, live mortgage free!
posted by djuna at 11:04 PM on May 25, 2010
This thread is closed to new comments.
posted by KathrynT at 1:53 PM on May 24, 2010