Snag mortgage or pay cash for home?
Do the math and take into consideration how close you are to retirement before making a decision.
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Q: I am 58 years old and do not own a home. I have a monthly income of $1,500, $200,000 in liquid cash and $400,000 in retirement money. I would like to buy a home. Should I pay cash for it (about $150,000) or finance the purchase with a 30-year mortgage?
A: Homeownership isn't for everybody. That said, you can make a convincing argument that today's low interest rates and low housing prices — at least in many markets — make it an opportune time to consider buying a home. (Bing: What are interest rates on 30-year mortgages right now?)
A common question in this column is whether a consumer should prepay his mortgage. My rule of thumb is that if the individual expects to earn more after tax on his investments than he pays after tax in interest on his mortgage, he shouldn't prepay the mortgage. The more conservative the investor, the easier it is to make the argument that he should prepay the mortgage.
You can use the same rule for whether you should take out a mortgage. What kind of return are you earning on your cash investment? Odds are that even in the current low interest rate environment your mortgage rate will be 2% to 3% higher than the yield on your cash investment. I'm assuming your cash is held outside of a tax-advantaged retirement account because you list your retirement balances separately.
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Another reason to consider paying cash for the house is how close you are to your planned retirement. You're in your late 50s. I'd guess your planned retirement would be within the next decade. Taking out a 15-year fixed-rate mortgage will have you making monthly mortgage payments into your early 70s.
I used Bankrate's mortgage payment calculator to calculate a monthly mortgage payment on a 15-year fixed-rate mortgage at 3.5% for a $120,000 loan, assuming you would make at least a 20% down payment on the $150,000 purchase price. That monthly mortgage payment is approximately $858, well over half your monthly income. I'd rather see you pay cash for the house and set money aside to rebuild your savings each month than commit to this monthly payment.
It depends on what the future holds for you.
Will you stay in the house for 10 or more years?
At 58, I doubt you have any need for schools - and the taxes to support them.
My thought would be rent a house and keep all the cash.
Whether or not the value changes or the area declines you can always relocate.
borrowing money is never the correct option to paying with cash, wake up.
when i retired i paid off all my bill and bought a house for cash, remodeled house and living quite comfortly, the peace of mind knowing i owe nothing but utilities and food, is a blessing in it self.
do what you feel is right for you, i lost a lot of my retirement fund do to employers changing administrators and the second one was not as good as the first and the recession. but i am now financially free, i live good, and have money for a rainy day, and the money i would have paid for credit cards or mortgage payments go into savings each month.
Please !!! Lets remove the term "15-year mortgage" from our vocabulary ! I've never recommended a 15 year- vs- a 30 year mortgage. I don't care if your 20 or 85 years old and applying for a mortgage. You take "The Rainy Day Approach" and go with the 30 year mortgage. This will give you the lower of the two (required) monthly payments. Ask your loan officer to run the mortgage both ways, so you can see the difference. Once you have that, ask how much extra will you have to pay each month toward the principal on the 30 year, to payoff the loan at or near 15 years. You will be surprised at how low that figure is actually. They can run a new "Amortization Schedule" for you, until you have a comfortable payment and term.
You are making your payments with the extra principal each month. Something unforseen happens and you can't afford that payment. You're not required to, you just make the normal monthly payment until you can resume the payment with the extra principal, thus "The Rainy Day Approach".
The smart thing to do is to buy investment real estate that will pay for your own home. On what I used to make a hour I could never have afforded a the house I have now, or to retire at 45. Now my rental income pays for a house that I could not have afforded the taxes on when I worked, and the lifestyle to go with it. Most important I never have to give up time with my family for a job.
BTW you get more tax breaks on rentals than your own home, and even with the blood letting in real estate values nation wise, I am still up 300%.
2) You are eating up a huge amount of your liquid funds and if you pay in full with cash--with the dipping house market, your new purchase may loose value--it might end up being like you purchased a car (as soon as you drive off the lot, the car looses value). What I mean is that with a loan you will get great tax write-offs and you will not eat up your liquid funds. You keep your money in your pocket and not in the purchase of your house. Don't let the housing market control your funds
I would find a number that makes financial sense. You are in a great position. Great interest rates for 30 or 15 year fixed. The more you put down, the lower your monthly payments will be. My mom pays about $600 a month. She gets great deductions for the interest she pays and you could never find a place to rent that cheap in her area. She has it made. And she kept more cash in her pocket, giving her more power.