Should I pay cash for a house?
March 7, 2018 1:39 PM   Subscribe

When my divorce is final, I expect to get a payout big enough to pay cash for the full price of a modest home in the city where I live. I want to do this, but enough people have told me that this is a terrible idea that I am getting nervous and would like help understanding the pros and cons. A few more details about my situation inside.

- I will not have to touch my modest 401(k) if I pay cash for a house. My retirement account is at the bottom of the acceptable range for people my age, according to online calculators. (So, I've saved enough, but not much more than that.)

- I have zero debt except a small credit card balance that I pay off in full each month.

- I am unhappy my job, but can't afford to live alone on any less than I make now. There are no jobs that pay this much or more available in my field that I would like more, but many jobs I could enjoy that pay less. I feel trapped.

- I want to live in this city for the rest of my life. Housing prices in Portland have climbed steadily for a decade and I want to get a home while there are still decent properties that I can afford.

- I feel like owning a house will give me the freedom to leave my job for something that pays less than I make now, which I desperately want to do.

- I am very uncertain about what to expect the economy to be like in the future and don't really want to try to game the system or beat the market or anything. I just want to buy a house outright and enjoy the financial freedom that comes with that.

Most of the people I have discussed this with think paying cash for a house a terrible idea, and that I should be working with a financial guru to invest my divorce settlement instead. But I do not care about acquiring wealth in the long run as much as I desire the freedom that would come from having extremely low living expenses right now.

Alternately, I could do a very large down payment, take out a small mortgage, and keep some cash as a safety net or to invest. If the mortgage were considerably less than my current rent, this feels like it might offer some of the advantages I would seek by paying cash for the entire thing.

posted by croutonsupafreak to Work & Money (37 answers total) 7 users marked this as a favorite
Response by poster: (If relevant: I am 40 years old, no children, and no plans to ever have any.)
posted by croutonsupafreak at 1:40 PM on March 7, 2018

Investing in real estate is a long term bet, one that usually pays off in cities on the rise.

I'm in central Los Angeles, tiny single family homes sell for about 1 million now (maybe more?) just so folks can rebuild. Portland is popular like LA. I see no reason not to invest in property... Yes you should speak to professionals to see if there are clever ways to structure this investment. In general, it's your money and you can do whatever you want with it. Choose a neighborhood on the rise. Enjoy your investment knowing one day the land will be worth a lot.
posted by jbenben at 1:58 PM on March 7, 2018 [4 favorites]

After you pay for the house, will you have cash to fund 6 months regular expenses plus a major repair (like the roof flying in or the heating system dying, figure $10k+)?. I think buying a house sounds like a good idea for you, but not necessarily in all cash.
posted by the agents of KAOS at 1:58 PM on March 7, 2018 [11 favorites]

Buy a house with 20% down and use the rest of the cash in investments, as advised by a fee based financial planner.
posted by JenMarie at 2:01 PM on March 7, 2018 [14 favorites]

You save a lot of mortgage interest when you buy a house with cash. It's a smart move, if you buy a good house and don't overpay.
posted by w0mbat at 2:01 PM on March 7, 2018 [26 favorites]

It sounds like owning a home would give you peace. You could talk to a mortgage broker about setting up so that you can have a small mortgage (to establish and continue to build credit on your own), especially with the option of increasing that mortgage without having to meet with anyone.

I would aim to keep 6-12 months of expenses and a repairs/disaster emergency fund on hand.

I would also look at purchasing a home that has a basement suite. You could rent it out occasionally, ongoing or in emergencies. You could rent it out all the time and re-invest the revenue in investments and retirement savings.

I would talk to a fee-based financial planner.
posted by Chaussette and the Pussy Cats at 2:03 PM on March 7, 2018 [7 favorites]

Your second plan - buy the house but don't put all of your cash into it - makes sense because the money that you don't put in the house will not only grow if well invested (probably faster than the after-tax interest on the mortgage on average) but also gives you a cushion in case of unexpected disasters and change in priorities.

For example, if you pay cash for the house and get laid off, you don't have to pay any mortgage but you have no money to cover any of your other expenses. If you invest most of it, and you get laid off, you can pull money out of the investment to pay your mortgage (so for sure you don't lose the house) but you also have money for something else.

This assume that you can trust yourself to protect your nest egg and not spend money that you might need to keep your house in event of problems.
posted by metahawk at 2:03 PM on March 7, 2018 [15 favorites]

It is usually better to pay a mortgage and invest your cash rather than paying off your house. You will make more money on investments than you would pay in mortgage interest.
posted by chrchr at 2:03 PM on March 7, 2018 [6 favorites]

It sounds like you have different a risk profile than other people. That is fine. If you buy the home in cash you can open a line of credit against the house in case of some major catastrophe like your furnace dying. It is a good idea to talk to a fee-only financial advisor about maximizing your savings/retirement fund now that your living expenses are going down. Congrats on your positive life choices!
posted by saucysault at 2:05 PM on March 7, 2018 [6 favorites]

You don't mention any savings outside of the 401k. You should have some kind of non-retirement savings in case something goes wrong in your life (as per KAOS). The idea of making a large down payment but keeping some cash in reserve sounds like a good one.
posted by Mid at 2:05 PM on March 7, 2018 [1 favorite]

Same situation, one year later – not a lot of retirement savings but a windfall last Jan gave us enough to buy an apartment near the one we'd been renting. We bought for cash, because real estate here is an excellent investment anyway, and if we want to retire elsewhere we can sell it. One lesson: we bought under our budget, but then the renovation "somehow" grew past it, so we're going to have to take a modest mortgage to cover that extra spending. So be realistic about the amount of work you'll want to have done.
posted by nicwolff at 2:05 PM on March 7, 2018 [5 favorites]

You are in much safer place with a small savings and small mortgage (or Home Equity Loan) for emergencies. I would take a loan equal to 12 – 18 months of living expenses (including servicing the loan) and stick in very safe savings vehicle like Treasury Bonds.

You'll lose little in interest, but would insure you against job loss, problems with the house, etc., but pay back the loan aggressively as long as you are able to maintain the emergency cushion.

Small mortgage might be relatively expensive, so you might want to pay in cash and then get no/ low fees fixed-rate Home Equity Loan. Alternatively, you could get Home Equity Line of Credit (HELOC), but banks can and will close those down when economy turns, your income takes a hit, etc.
posted by zeikka at 2:06 PM on March 7, 2018

I have known people that lost money investing even while using a financial planner. Investing can be risky, but a house you can live in. I was also advised to not pay off my mortgage, and use that money to invest instead, but I'm really happy that I paid it off, and don't have a mortgage. It's easy to save money if you're not paying rent/mortgage, so you can save and invest later.
posted by 5_13_23_42_69_666 at 2:11 PM on March 7, 2018 [9 favorites]

When I was house shopping, the best deals went to people who could pay cash. I don't know if that outweighs the other benefits of a mortgage, and they were all houses that needed some amount of work.
posted by sepviva at 2:12 PM on March 7, 2018 [4 favorites]

I bought a house with cash for the same reasons you are looking into. I sold it and made a decent (to me) profit on it but it was also pretty clear that I was "leaving money on the table" because if I had invested that same amount, I would have wound up with more money. That said, whatever. The big deal was ignoring all the people hassling me about it. Make sure you have some savings and, depending on your relative credit rating post-divorce, it might be worth having a small mortgage that you can pay down aggressively to establish credit and maintain some small savings in case you need it.
posted by jessamyn at 2:12 PM on March 7, 2018 [8 favorites]

Other people have covered the market returns vs mortgage interest argument pretty well. There are some advantages to paying cash for a house, though, especially in a hot market. Your offer will be much more attractive to sellers than non-cash offers. This can make the difference between getting the house you want or not, or can give you negotiating power on the price. The buying process will be quicker. You'll save some money on closing costs (I don't know what they are in Oregon, but they can be considerable in some states). And of course there is the psychological factor of not being beholden to a bank, which I think people underrate.

(I'm assuming you would have enough left over after purchase to have a bit of a cushion. If buying the house would leave you with little or nothing in the bank, then I think you're better with a mortgage. Houses are always more expensive to maintain than you think.)
posted by enn at 2:16 PM on March 7, 2018 [4 favorites]

I bought a house with cash in a similar situation. I didn't tell anyone really except my real estate agent, and she wasn't arguing. I think the critical difference is that I didn't spend the entire windfall on the house.

I really appreciate having the house, even though I guess I could have made more money in investments. I thought it would make me feel secure and settled, and it does, and I have no regrets.
posted by jeoc at 2:21 PM on March 7, 2018 [3 favorites]

Your peace of mind is worth something. There is always some risk to investment. Yes, your house could decline in value (which seems unlikely in Portland), but that doesn't matter unless you're trying to sell it.

Have you owned a house before? If not, be aware that unexpected expenses can be huge (for instance, you could need a new roof). But if you own your house outright, you can get a home equity loan to cover that.

As long as you have a decent emergency fund, it seems completely reasonable to buy the house. Sure, you might be able to make some more money if you invest instead, but it sounds like you have a low tolerance for risk. Do what makes you feel best, and don't worry about other people who think they know what you should do.
posted by FencingGal at 2:25 PM on March 7, 2018 [2 favorites]

Financial decisions are also emotional decisions. It looks like you understand that there is generally more money to be made in the stock market with the cash getting a mortgage would free up, but at the same time you want the security and financial freedom that would flow from having your house paid off. So my advice would be to first understand the math (and the assumptions behind the math), and then do what you want to do with that information, even if that's buying the house outright despite what your friends are telling you.
posted by craven_morhead at 2:34 PM on March 7, 2018 [3 favorites]

Assuming you have a decent credit score, putting 20% down and taking a 15 year mortgage will leave you in a much better situation regarding savings and leave you room to invest part of it in something making 3+%.

If it turns out you can't find any good investment opportunities for the remainder (above and beyond what you hang onto for an emergency house fund) you'll still have the option of either paying more to principal every month or paying off a large chunk all at once, reducing your already relatively small interest cost. With a 30 year you basically pay twice the contract price of the house, while a 15 year cuts that to an extra 25%, which is worth it for the flexibility, IMO.

Even if you pay it off six months after buying it, the couple thousand in extra cost would be worth it to me.
posted by wierdo at 2:35 PM on March 7, 2018 [2 favorites]

If you're talking about Portland, you may find it difficult to get the house you want without making an all-cash offer. It's a weird world out there.

People will always be rushing in uninvited to offer their finance rules of thumb. Often, those rules are simply dumb. But even when they're not dumb, they're rules of thumb rather than absolute law for a reason. An individual may well have a reason to value some benefit more highly than the average person does, or may be more exposed to some risk. It's true that on average market investments will return more than the interest on the mortgage. But it's not guaranteed, or even so unbelievably likely that you are a fool frittering away a fortune if you choose to go all-cash. (People also often fail to consider what might happen in a severe market down-turn, when suddenly you might lose your job, your investments will be in the tank, and the value of your house may drop significantly. This happened to a lot of people in 2007-08! When you are leveraging yourself, you are always increasing the risk you are exposed to as well as the potential gain.) You clearly value the security of owning the home outright. As long as you hold back sufficient funds to cover emergency repairs/some property taxes, that's just not insane.
posted by praemunire at 2:46 PM on March 7, 2018 [9 favorites]

Investment income and interest payments oppose. You can look at not taking a mortgage as a low-risk investment earning 4% or so. Historically, that's not that great, but it's one of the better minimal-risk investment strategies out there right now. If you are risk-averse paying more down and/or skipping the mortgage is better than taking mortgage debt and putting money in a mattress.
posted by doomsey at 2:55 PM on March 7, 2018

I currently own a home I purchased in cash (although per my recent ask, am considering moving and would have to get a mortgage) and the financial freedom is AMAZING. We currently invest monthly more than we would pay for rent, and significantly more than a mortgage on this house would be, but the psychological feeling of investing it instead of sending it to a mortgage company is amazing. As we consider moving, looking at the total interest we would pay even on a 15 year mortgage makes me feel a little sick.
posted by raspberrE at 3:01 PM on March 7, 2018 [4 favorites]

I think putting your money into your house is a completely sound and sane thing to do (assuming, as others have noted, you have the cash flow to maintain the house and other living expenses). Mortgage rates are a shade under 4%, so if you don't get a mortgage you essentially made a super-safe investment that's earning almost 4% (as compared to the scenario where you did get a mortgage). I don't know of any other investment that comes close to that level of risk/reward.

As for making more money investing it, which I am assuming means the market (either stocks/mutual funds), who knows what the market is going to do in the future, let alone the slice you choose to bet on. Sure it will *probably* outpace 4%, but there's a not insignificant chance that it may not.
posted by forforf at 3:31 PM on March 7, 2018 [4 favorites]

Best answer: One important disadvantage to an all-cash home purchase is that you won't have a bank scrutinizing the comps and the condition of the house. You should go in with a general contractor of your own choosing before you commit yourself. Don't use an inspector recommended by a real estate agent, an agent has a vested interest in getting the house sold.
posted by wryly at 3:50 PM on March 7, 2018 [8 favorites]

f you're talking about Portland, you may find it difficult to get the house you want without making an all-cash offer. It's a weird world out there.

Yeah, this comment shouldn't be glanced over. The market in Portland, while cooling slightly, is still kind of bananas, and people will regularly offer over the asking price, with cash. You can find some rad places to live that banks wont necessarily lend on When we were house hunting, there were two really cool, really weird houses that we couldn't get a loan for because of some work that was lacking permits (one of which was to code, but, no permits), the other was fine, but like, one staircase wasn't up to code? The banks basically said no, but if you were purchasing with cash you can avoid that...and then who gives a shit if the stair railing is a few inches too low?

Also, if the property you're planning on purchasing can easily be split, has a mother-in-law apartment, or you can chuck a prefab ADU on the property, you can likely make more in rental charges than you could investing. Lots of new construction in our hood are being built with detached studios on the property that are up-to-code and ready for a single permit to convert over to an ADU. You see them frequently above garages. If you're 100% paid up, that can be some sweet passive income that could stack up pretty quick given Portland's rental market.

Talking to a financial planner isn't a bad idea, but you've got quite a few options, and given that they involve property and geography, you'll want to talk to someone here in the city.
posted by furnace.heart at 4:13 PM on March 7, 2018 [3 favorites]

So due to a windfall last year, I am currently in the process of buying a home in San Francisco. Like you, the amount is roughly comparable to the purchase price.

I'm getting a mortgage and keeping the balance in low-cost index funds. Over a 30 year span, it's hard to find a point where it doesn't average more than 4%/year. And from a risk standpoint, I feel better with the diversification.

The great thing about being a cash buyer is not actually the cash. It's having the flexibility when the bank appraises the property below selling price. You can put a larger down payment since the bank will only lend 80% of their valuation.

But you should be aware of why their valuation is so low. The cool weird houses are insurance risks. You're not going to be covered if someone falls over the railing and you knew it wasn't up to code. And when you need to unload the place because you're drowning in lawsuits, you're going to have a hard time getting a good price with that disclosure.

They might be risks you're willing to take. But don't just dismiss them as red tape.
posted by politikitty at 4:31 PM on March 7, 2018 [3 favorites]

Personally I think Portland real estate is at least as good an investment as any other investment opportunity you're likely to find - including with a "guru" - and probably a lot more.

That said, it is very important to have a cash safety net *especially* when you are buying a house, because stuff always, always comes up. The fridge needs replacing, the roof leaks, termites, a foundation crack is discovered... so yes, you should make sure you have some cash held back for that sort of thing. But I personally wouldn't stress holding back money to invest somewhere else.
posted by fingersandtoes at 4:37 PM on March 7, 2018

But you will still be investing in real estate! While you'll need to pay off your mortgage when you sell, any increase in value is 100% yours. Minus closing costs.

So it's about only investing in real estate, or investing in multiple things.
posted by politikitty at 4:43 PM on March 7, 2018 [1 favorite]

So it's about only investing in real estate, or investing in multiple things.

Not quite: it's about only investing in real estate, or making a leveraged investment in real estate and regular investments in other things.

But you're not wrong that either way the majority of OP's net worth will probably end up in real estate. Concentration risk is a real thing, but it's basically inevitable if you're a homeowner and not really wealthy.
posted by praemunire at 5:35 PM on March 7, 2018

Interest rates are still quite low, which argues for a mortgage, but you get to live in a house. I paid off my mortgage. I love being debt-free. I have savings for repairs, 401k and Soc. Sec. for retirement. If I run out of 401K, I could sell the house. The one thing I would recommend is keeping the option open to have a roommate, meaning 2 bathrooms and at least 2 bedrooms.
posted by theora55 at 6:42 PM on March 7, 2018 [3 favorites]

If you are now paying rent in Portland and you think you will be eliminating that monthly payment by paying cash for your house, make sure you take real estate taxes into account. If you buy a house for cash and have no mortgage payment, you may still be paying $800-$900 or more monthly (your annual real estate tax divided by 12).
posted by Joleta at 7:55 PM on March 7, 2018 [2 favorites]

Best answer: I do not care about acquiring wealth in the long run as much as I desire the freedom that would come from having extremely low living expenses right now

Trust your feelings. Ignore the people who say you should invest. You say yourself you don't want to, so don't! Having said all that, I do agree that you should also consider what you have (or will have) available in liquid cash available after all is said and done. 6 months worth of living expenses in savings, plus maybe 10-20k in a 'house fund' for unexpected repairs would make me extremely comfortable. If you have to take out a small mortgage to be able to do that, this is not a bad idea at all. Even a 50k, 15 year mortgage is less than 400/month with current interest rates, which is far less than any outcome where you're not paying cash for a majority of the house price.

Make sure you account for property tax expense too.
posted by SquidLips at 8:04 PM on March 7, 2018 [5 favorites]

One important disadvantage to an all-cash home purchase is that you won't have a bank scrutinizing the comps and the condition of the house.

Hahaha, no, this is an advantage of paying in cash--the bank doesn't get to say! My god, after all Wells Fargo put me through when I was buying my house, you bet I would have paid all cash if I could. Screw them.

Seriously, appraisals are a horrible, disgusting racket. They're for the bank, not you.
posted by Violet Hour at 10:06 PM on March 7, 2018 [1 favorite]

Even though it is likely not the mathematically best course of action, we've been aggressively paying down our mortgage. You said it really well: "the freedom that would come from having extremely low living expenses". Without our mortgage we would still have housing expenses (taxes, repairs, insurance, etc), but our monthly budget would look very different, making it much easier to deal with a job loss, a career change, or one of us deciding to, say, go back to school. At least at current rents, we could rent out the spare bedroom for more than the house taxes and insurance, which feels like an additional safety factor as well.

So what I'm saying is that the people saying to leverage yourself and invest probably aren't wrong (though people do lose their shirts that way from time to time), but you should pick the path that feels right to you and directly meets your needs. If it means anything, this random person on the internet agrees and thinks that your choice has a lot of merit.

Part of this for me is simply how unpleasant it was the last time we went through the mortgage process, and how it limited us to only looking at traditional houses in good repair. There were some weird but intriguing properties that came up for sale that weren't options for us because you couldn't get a traditional mortgage for them. (There may have been ways to put together creative lending packages for them, but it would have been more work and at higher cost.) With cash in hand, you can look much more on your own terms.
posted by Dip Flash at 5:52 AM on March 8, 2018 [1 favorite]

Ok, so there is benefits to a mortgage - mainly the interest you pay is tax deductible. Plus it makes it easier to manage your property tax and insurance payments through escrow.

Agreeing with the whole 'put some off to the side.' Namely, 6 months expenses. Then figure out what you likely want to do free-time wise and put some aside for that.

Then come up with a split that makes sense to you for the rest 80% to house, 20% to invest or 50-50. Or whatever.

But - consider, the more you put to the house means the more free cash you have each month not going to mortgage. Which, ostensibly, you should be saving anyway and auto-depositing into an IRA. So, end of the day, depends on how you operate with money.

I think the small mortgage (fixed rate, 15 year), put a chunk away, and then keep putting more away, is the best way to go.
posted by rich at 7:53 AM on March 8, 2018 [1 favorite]

Buying a home for cash means no rent; no mortgage. Get ill for a few months or need surgery and recovery time? No rent. No mortgage. Good luck with that negotiation with most leases anywhere.
Investing can be a daily joy to monitor track adjust and develop. Or it can be a OMG my money I just left somewhere just did what?

/R/ I'm not seeing Portland going anywhere but up and up for at least five years; I am making the assumption the Trump presidency is going to mirror the Reagan presidency. Waiting five years for a 100%+ increase in value to drop 50%; YMMV. Can't say I've ever been to Portland; but I am pretty sure it isn't heading towards a hellish view and a long ways from being a recreational paradise. Cue the elderly in 20 more years if not sooner; and seniors always bring income to an area.

Do the math on the _per day_ interest on just a $100,000 loan @ 5% - which is not an unreal figure when you account for escrow; and/or all the misc fees fees etc when you do a mortgage. Or use a 4% figure. Are your investments going to beat that rate guaranteed? Do not discount the taxes and fees that investments bring with the gains either.

You do seem to have a disaster fund ready; good homeowner's insurance seems to be the next component needed. Closing in Portland! With Cash! F-yeah!
posted by Afghan Stan at 1:51 AM on August 1, 2018

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