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This is a spin-off from another thread because it is slightly off topic for that thread.
Blahdy-blahdy-financial stuff that is none of your business and he figured that he could just put the money for the payments on the mortgage necessary to build the house into a savings account and it would take 8 years to accumulate the money to build the house and pay cash for it.
A mortgage to build the same house with the same payment would take 30 years to pay it off. 8 years vs 30 years of the same money every month to end up with the same result.
That compound interest on a mortgage costs a packet of money.
A couple of disclaimers here: In real estate, it is the land that goes up a lot more than the building. In this scenario, the land is paid for, so there will be no trying to keep up with the increasing cost of the building site.
The cost of building a house will have gone up in the 8 years that it takes to accumulate the money to pay for it. Yes, I know that and have not adjusted figures for it.
Still, there is a big savings involved with paying cash instead of borrowing the money.
Another disclaimer: I am always in favor of buying your residence, even if you borrow the money. If it is the same quality residence, it is almost always cheaper to buy than rent and if you buy, in 20 years you own a house. If you rent, in 20 years, your landlord owns a house.
Say it's a $100,000 house, FHA loan $3,000 down. Payments are $900 month for mortgage, property tax, PMI. Mortgage and property tax are deductible. Ignore that. We're going for simplicity. That's at 4% APR, doable.
96x900=$86,000. Add in the $3000 down payment. You're at $89,000.
Where were you living in the mean time? Your parents basement? Doable. But you probably had to pay rent. What's rent cost? Let's say $500 a month. Well, there went $48,000 real fast.
Oh, and then there's inflation. Don't go crazy, but just assume the house appreciates at 2% per year. Now you're looking at $117k to buy the same house. In your scenario with the land paid for, we're just talking about inflation and the cost of building material. That's with no real appreciation, just inflation. Your rent probably went up as well. And you've been paying property tax on land for eight years that's sitting there doing nothing.
Say it's a $100,000 house, FHA loan $3,000 down. Payments are $900 month for mortgage, property tax, PMI. Mortgage and property tax are deductible. Ignore that. We're going for simplicity. That's at 4% APR, doable.
96x900=$86,000. Add in the $3000 down payment. You're at $89,000.
Where were you living in the mean time? Your parents basement? Doable. But you probably had to pay rent. What's rent cost? Let's say $500 a month. Well, there went $48,000 real fast.
Oh, and then there's inflation. Don't go crazy, but just assume the house appreciates at 2% per year. Now you're looking at $117k to buy the same house. In your scenario with the land paid for, we're just talking about inflation and the cost of building material. That's with no real appreciation, just inflation. Your rent probably went up as well. And you've been paying property tax on land for eight years that's sitting there doing nothing.
Mortgage is a much better deal.
I think cash is only the way to go if you have no choice (bad credit).
We were able to use VA loans so no down payment and we live in California, so our market is a little crazy compared to the rest of the US.
We've bought two places in the past 5 years, bought one to live in and then moved and bought another and kept the original as a rental. The first place has jumped in value at least 75k over 5 years, the second we bought at 235K - two of the identical units just sold here for 350K.
Both places are financed at 3.75 fixed for 30 years. We've chosen to invest in our retirement accounts over paying down either mortgage at this point. That might change is the gov't does away with the mortgage deductions on eith property.
I think mortgage is a better way to go for most people.
Whether a mortgage is good or not depends upon the situation. I'll say that the newer mortgages that allow the lender to go after you for more money - even after a repossession of the property - are something that I would NEVER agree to. I'd rather buy a place on credit cards, get the Homestead exemption that makes it judgment proof, and THEN deal with a bankruptcy. The concept of a lender agreeing that "yep, this place is worth a million bucks" when real estate in some areas is extremely risky, is a lie. If it wasn't a lie, the lender would just be satisfied with a nice deposit and a repossession, wouldn't it?
The mortgage exemption only works for high earners with lots of debt. A long time ago, it made sense for a lot of people, but not anymore.
I know of one fellow who has been fighting and losing an ongoing battle with mortgage fraud related to the bundling and selling of mortgages. Even though he had paid his mortgage payments, the records weren't good enough and he was evicted from his own property, not even by the same bank that lent him the money.
When a job situation is iffy, a mortgage that is only supported by the income from that job puts the mortgage at risk. A downturn in the economy, and insufficient funds to pay a continuing mortgage payment means a person would have been better off renting. A lot of overleveraged people found that out the hard way in the past few years.
Having a mortgage also puts people at the mercy of insurance companies and Federally mandated back-door rules. Our house in Florida suddenly had to have flood insurance because of it being within a "flood plain" that had never flooded and was unlikely to do so. The insurance companies kept upping windstorm costs and then decided to leave the area entirely. People are now being told they cannot heat with wood or have an old roof or have anything even slightly out of code.
Mortgages are no longer worth it in my opinion. If you want to invest money, do it somewhere where the cost of insurance and taxes won't negate your profit. Buy small and inexpensive and buy cash. You'll thank me later.
There are few 15 and probably no 30 periods within which paying cash (vs investing) would provide a higher net worth if you paid cash - especially at 3% current interest rates.
Take a mortgage. Otherwise you're paying down a 3% loan with money that you most likely will be earning 8%-10% with over the long term.
There are few 15 and probably no 30 periods within which paying cash (vs investing) would provide a higher net worth if you paid cash - especially at 3% current interest rates.
Take a mortgage. Otherwise you're paying down a 3% loan with money that you most likely will be earning 8%-10% with over the long term.
Yep, look at how home sales prices have consistently increased, making it a really good investment. (Pay no attention to that $300,000 figure in 2008 and the $152,000 figure in 2013) That mortgage allows you to buy into a sure-fire market, where an 8% to 10% increase in property value is all but guaranteed. (NOT)
If you are lucky, and buy outside of one of the hazard or prime areas, you might even end up not having to deduct that yearly 1% loss for insurance and that 1% loss for taxes, and if you buy outside of a HOA or condo, you might be able to avoid those fees as well. I won't dwell on the costs of replacing roofs and appliances, painting and general upkeep, since those occur whether or not you have a mortgage.
BTW, I don't work for a mortgage company, but I HAVE held mortgages on property. It is a nice way to make money with little risk. Hmmm, maybe I could hold a mortgage on my own property, make money by owning the property and watching it rise in value, AND make money by paying myself the interest on the mortgage, AND taking the tax break. Yeah, that's it.
Yep, look at how home sales prices have consistently increased, making it a really good investment. (Pay no attention to that $300,000 figure in 2008 and the $152,000 figure in 2013) That mortgage allows you to buy into a sure-fire market, where an 8% to 10% increase in property value is all but guaranteed. (NOT)
If you are lucky, and buy outside of one of the hazard or prime areas, you might even end up not having to deduct that yearly 1% loss for insurance and that 1% loss for taxes, and if you buy outside of a HOA or condo, you might be able to avoid those fees as well. I won't dwell on the costs of replacing roofs and appliances, painting and general upkeep, since those occur whether or not you have a mortgage.
BTW, I don't work for a mortgage company, but I HAVE held mortgages on property. It is a nice way to make money with little risk. Hmmm, maybe I could hold a mortgage on my own property, make money by owning the property and watching it rise in value, AND make money by paying myself the interest on the mortgage, AND taking the tax break. Yeah, that's it.
On a pure investment basis, it is almost impossible for a cash purchase to outperform a mortgaged purchase. The cost of debt is very low considering interest rates and the tax break. The cost of equity is far higher.
I think the problem in general with paying cash for a house is that very few people can move out of their parent's house, with the dosh to buy their own place in hand. If you create the next Facebook while still in your parent's basement, OK, fine, might as well pay cash.
But for the vast majority, certainly it was this way for me, it was buy with a mortgate or else rent a place to live. At the time, most places it seemed to me to make more sense to buy, writing off some of the mortgage interest, than to rent.
All this is going to depend on what market you are buying or renting in, one income or two, how reliable the job(s) are, credit scores, yadda, yadda. I don't think a general answer can be formuated.
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