OT: Mortgage advise, pay off or invest Options

[Always Looking]

Hi All,

I am considering moving out of state. With the equity I have in my home, I could either buy a home outright, or finance 80% (or something in between). I've been reading on the net and it seems that IF (big if) you can earn more interest from investments than the interest on your mortgage, you should finance the home and invest the cash. Most of the articles assume a 10% or 11% annual return on the cash. That seems VERY high to me. I get 5% on CD's and my 401k isn't much more than that.

Where do you get 10%??

What is the break even point where it makes financial sense to buy the house outright?

Thanks for the free advice.

Dan (IMG:style_emoticons/default/beerchug.gif)

http://www.usatoday.com/money/perfi/column...-mortgage_x.htm

[blitZ]

I would get the mortgage as the rates are still low, 15 year fixed is the least interest paid. Then invest your equity. Say you have 100,000 for example, see what your current investments will yield in 15 years, plus your new house will be paid off. If you pay cash for a house, no mortgage is nice, but will you save enough to equal what the time value of money will do with your current equity?

If your 401k is not getting more than 5%, I would research other funds.

[Porsche Rescue]

I have no definite answer but, think about taxes as you do the math.
The income from your investments will be taxed, reducing your yield.
Your mortgage interest will be a deduction, reducing your taxes.

[Always Looking]

I would get the mortgage as the rates are still low, 15 year fixed is the least interest paid. Then invest your equity. Say you have 100,000 for example, see what your current investments will yield in 15 years, plus your new house will be paid off. If you pay cash for a house, no mortgage is nice, but will you save enough to equal what the time value of money will do with your current equity?

If your 401k is not getting more than 5%, I would research other funds.

Thanks Blitz, I am considering coming to your neck of the woods. Woodstock OK?

[MarkV]

Leverage


Say you took $40,000 of the proceeds from your house and used it for a downpayment on a $200,000 rental house. Lets say the rental house appreciates a modest 6% in the first year of ownership. So, you took $40,000 and turned it into $52,000 in a year. That is a 30% return on your investment.

I know it's not really what you asked. My 401k and stock investments suck too. There are better ways to get a good return they just require more risk.

[blitZ]

I would get the mortgage as the rates are still low, 15 year fixed is the least interest paid. Then invest your equity. Say you have 100,000 for example, see what your current investments will yield in 15 years, plus your new house will be paid off. If you pay cash for a house, no mortgage is nice, but will you save enough to equal what the time value of money will do with your current equity?

If your 401k is not getting more than 5%, I would research other funds.

Thanks Blitz, I am considering coming to your neck of the woods. Woodstock OK?

You're moving quite a distance. Woodstock is well north of Atlanta and can a bit of a commute if you are working downtown. I haven't been there in a while, it used to be a quiet community, but like everywhere else around here is growing rapidly.

Good point about the rental scenario. A lot of folks here buy lakefront or beachfront properties and rent them. Can be an excellent investment as they can pay for themselves and growth in value can be very high.

[dakotaewing]

You need to consider many factors - it is not a cut and dry equation...
You will need to take into consideration your income, tax rate and the appreciation
(yearly average) of the area you are buying, as well as how long you will be
living in the home you are considering buying.. Also key to equation is that
the amount of principle you pay down on a 30 year the first 5-7 years is basically 0...
Its you paying interest...
Another thought for for long term is to pay cash for the house, and then take the money you would pay monthly on a 30 term mortgage and invest that each month...
Will will probably find that in 5 years the return on your investment (paying cash for the house and putting the monthly payment in the bank or 401K or bonds or whatever) will be higher than the return if you put all the cash into that investment, count your return on that investment and subtracted the amout you paid to the mortgage company...

FYI - I'm a mortgage banker...

Best -

Thom

[MarkV]

Rates are around 7% for a 30 year fixed rate. If you are in a 30% tax bracket you can deduct roughly 2% of the 7%. Inflation is around 3% currently. So if you take deductability and inflation into account you are borrowing money for close to (2%) nothing.

The idea of no mortgage is tempting. You might consider investing part of it and getting a 15 yr loan on your new house.

FYI - I'm a Real Estate Broker (IMG:style_emoticons/default/biggrin.gif)

[jgara962]

The best investment you can make is to spend some $ and talk to a financial advisor before you do anything.

[robby750]

I would pay cash for the house. Say your income is 50,000 per year. 30% tax is 15,000.

If the house cost 100,000 and you have a 30 year mortgage 7%, then you pay 7,000 in interest.

Deduct the interest from your income = 43,000. Tax would be 12,900.

You are reducing the amount you pay the government by $2,100 but you are paying the bank $7,000 to do so!

[rich brennick]

For a fresh view on personal finance, listen to "The Dave Ramsey Show;" usually on talk radio stations
in the afternoon.
Lots of common sense for the average "Joe."
Regards,
Rich

[dakotaewing]

One other thing you should definitly look at...
Look at renting your home in CA out and continue hold
it as an investment... The appreciation for some CA properties
I am sure exceeds anything the stock market is currently doing -
Talk to a professional property managment company to do this for you
since you are moving across the country - In this case in regard to
return, if you could find a tenant that would pay your PITI for the
property, it could be your wisest move....
But it also may be considered an investment property down the road, so when you
went to sell it, you may have to pay capital gains - consult your CPA before
doing this -

Best -
Thom

[lapuwali]

In answer to "where do I get 10%" (investment income), you need to look at equities (i.e., the stock market). Historically, the a genuinely balanced stock portfolio (like an index fund where the index is big, like the S&P 500, or all of NASDAQ) has returned 10% per year on average over long periods (20-30 years). There will be many years where you are way above that, and other years where you are well below it (and sometimes lose money), but on average, you'll net about 10% per year over the long haul.

CDs are a very safe investment, but correspondingly very low paying. Low risk = low (assured) return, high risk = high (potential) return. How much return depends on how much risk you want to take.

Putting a good chunk of change into a set of mutual funds or index funds will usually get you a decent, hassle-free stock portfolio. The funds I'm in are doing well this year, having paid out about 15% so far this year, after a fairly flat year last year, and have paid out about 10% per year over the past three years.

As others have said, you need to look at the tax issues with buying the house outright v. getting a mortgage. It depends on other income, so the math can't just be done here, unless you post your entire financial picture (which I wouldn't advise).

[street legal go-kart]

I think the gain on Calif real estate and the current value of property in our state dictates selling now.
Other than raw land we are not pursuing real estate in Ca.
Look at the market where you are planning on buying, talk to MANY real estate sales and banking pro's in the said area and make a decision based on whether the market is undervalued or not.
I am not a fan of big debt.
I think a debt to asset ratio should be around 1/4. In other words 100 dollars debt to 400 dollars liquid assets. (IMG:style_emoticons/default/beer3.gif)
This isnt always realistic especialy for a younger person but it is a goal.
By the way our managed market account earned 22% last year , an off year. 401 k's Suck.
Shop around , talk to people who will give you verifiable refferals and be prepared to change if results are not forthcoming.

JT

[riverman]

It's all about the spread (money in vs. money out). That's how the banks make most of their money. You know what you're going to be paying for your mortgage, but you don't know what you're going to make on your investments. That's your risk.

Risk is dependant on the investor and how much risk you're willing to take. Property ownership has traditionally been one of the most stable and lucrative investments to have (they're not making any more of it), but you also have to consider the impending housing bubble (brought on by the baby-boomers). The stock market should continue to be strong because all the wealth being passed between generations tends to end up there. But with the stock market, who knows? Things like the Crash of '29 and 9/11 can happen without warning. There is tons of advice and plenty of strategies. They're all pretty much a crap-shoot. Find something you're comfortable with and go for it. Don't expect to make a killing, and if you do, consider it a windfall.