Home Buying in 94109>Question Details

NLB, Home Buyer in San Francisco, CA

If I can pay cash for a home, what are the benefits of getting a low-rate mortgage instead?

Asked by NLB, San Francisco, CA Thu May 10, 2012

My friend is telling me I should get a mortgage since interest rates are so low and put my money into a stable money market fund to put my cash to work and earn interest.

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There are many benefits of getting a low rate mortgage! ESPECIALLY when long term interest rates are so low, it makes sense to utilize leverage instead of spending all your cash. Once you spend all your cash, it's GONE, and cash can be a very nice thing to have around, for many reasons. Why not use someone else's money for very cheap, and keep your cash on the sideline? If you keep a good deal of cash on the sideline, that would allow you to buy more real estate in the future if the real estate market takes a dip.
0 votes Thank Flag Link Fri Feb 14, 2014
The saying goes, use money from others when its cheap. You can have a comfortable mortgage, tax savings from the interest being paid, use the excess money to buy another home or securities. Its a win/win situation for you...
0 votes Thank Flag Link Thu Feb 13, 2014
The interest rate you receive on your reverse mortgage loan will be to most important factor in determine how much you will be able to borrow/receive today and how much will build up over the course of the loan. Just as with a forward mortgage (think of a refinance) where you would want to secure a low fixed rate this is the same concept with the reverse mortgage. The interest rates and fees are all determined based upon home value and what loan you decide to go with. I know a lender that is very competitive in regards to rates and fees.

http://www.reversemortgagelendersdirect.com/reverse-mortgage…
http://www.reversemortgagelendersdirect.com/california-rever…
http://www.reversemortgagelendersdirect.com/reverse-mortgage…
http://www.reversemortgagelendersdirect.com/reverse-mortgage…
http://www.reversemortgagelendersdirect.com/reverse-mortgage…
0 votes Thank Flag Link Thu Sep 26, 2013
If you are a savvy investor, you may just want to invest that cash and live with a mortgage?
0 votes Thank Flag Link Thu May 17, 2012
The obvious answers to me include the tax write off on a mortage, as well as the ability to preserve and invest your cash in more lucrative investments.

Although historically home buying is a good inveestment, this is not been true the past 10 years. While many people want to own their own home, at this moment in time, your money could probably be put to better use.
0 votes Thank Flag Link Wed May 16, 2012
If you can make a better return than your mortgage rate with your cash in some other investment, it might be good to get a mortgage. Also, your cash will be more liquid in the bank. But you also may have additional closing costs when getting a mortgage you would not have when buying cash.
0 votes Thank Flag Link Fri May 11, 2012
I think your friend is advising you wisely. I would argue to do the same. Put down 20%-50% and then put the rest into a safe investment account. In CA we are still getting good yields on tax free municipal bonds. They are safe and give you tax free income. You can use a portion of the income to offset the mortgage payment.

If you need help with financing, I can lend in your area.
Feel free to send me an email or give me a call!
0 votes Thank Flag Link Fri May 11, 2012
Generally speaking, people use other people's money (OPM) to leverage their earnings.

If you can make (conservatively speaking) more money somewhere else, then you can go for a mortgage. Age should be considered as well - as most people try to pay off their mortgage by their retirement.

To give you an idea: 400K mortgage 3.75% interest 30 yr fixed P&I = $1,852.46 Interest paid over 30 yr period $$266,886. If the term is 15yr fixed and rate is 3.5% P&I = $2,860, interest paid over 15 yr period $114,715.

Besides money market fund (not that great of an interest, especially considering inflation), there are many other investment options for you.

F.e. investment of your self-directed IRA (SD IRA), real estate investments of different kinds...and more...

In the end of the day, besides math, you got to be very comfortable with whatever choice you make.

Hope this helps,

Irina Karan
Beachfront Realty, Inc.
IrinaKaran@gmail.com
0 votes Thank Flag Link Fri May 11, 2012
I think your friend should refer you to a good money man who can invest your money and get you a return of more than 4%.

With that said, you must be doing something right because you have enough cash to purchase a home. But, if you consider inflation and the cost of money, money is actually free right now because the cost of living is around 4%.

One thing you may want to do is use the cash to negotiate a better purchase for yourself, and then pull 65-75% back out when you refi. This way your money can work for you and when rates go back up in a couple of years, you will be sitting pretty with a 4% loan that will look like a storke of genius.

Best.

Tap
0 votes Thank Flag Link Thu May 10, 2012
Getting a mortgage will cost you money up front for lender fees, additional title fees, and points. A mortgage will also cost you money in terms of the interest you will pay on the principle, anywhere from 3.875% to 5% these days, depending on the loan amount.

If you pay all-cash then you save a ton of money because the monthly interest due on your mortgage will be significant. If you got a mortgage at 4% it would be worth it if you could invest that money and earn more than 4% compounded monthly, especially since the interest paid on a home mortgage is still a tax deduction. It may not be for long though. The Fed is thinking about eliminating the mortgage interest deduction.

You could run the numbers, but I wouldn't bother. I don't think it is possible to invest in anything as safe as a home and earn more than 4% these days. Plus, just knowing that you earn your home free and clean makes you feel great. However, if you think you will need some cash in the near future, then you may want to get a mortgage.

Want some help finding that home you will own free and clear? I deal mostly with buyers and would like meet and consult with you.
0 votes Thank Flag Link Thu May 10, 2012
Lots of good answers below. The only reason to pay cash in my view is to be more competitive with your offer. Otherwise, money is so cheap it makes no sense not to finance.
0 votes Thank Flag Link Thu May 10, 2012
I think your friend is right. Rates are so low right now its like free money. Why tie up your liquidated cash.
In terms of cash giving you leverage... That clearly depends on your local market. Maybe you may get the deal because you're all cash but getting the deal less than others because of it usually is unlikely in low inventory markets.
Why don't you get pre-qualified by a good local lender so you can make that decision when the time comes. It's not like it will hurt.
Good Luck.
0 votes Thank Flag Link Thu May 10, 2012
Hi NLB,

Here is a thought for you.

Buying with cash can sometimes sway a seller towards your offer compared to an offer with a financing / appraisal contingency. You may get a slightly better deal this way.

Now how do you " have your cake and eat it" ?

You set a purchase as an all cash trnasaction and work with a lender who will lend on it straight after closing. They need to know this well in advance of you writing the offer, but if you do this then you can save a little on the purchase price and pull 80% of the cash out and put it in the investments you want too.

I always think outside the box, so if you want some good ideas and a great agent as well give me a call.

Matthew
0 votes Thank Flag Link Thu May 10, 2012
I think that this is a very personal decision.
If you are trying to obtain a house in a very competitive market, offering all cash will increase the odds of obtaining the house desired. However, there will be other alternatives for your cash to earn perhaps greater interest in the market, but with risk as to the markets ups and downs.
Remember that you don't fully own a house until you have paid off your mortgage, so I am of the personal consideration that if you are moving for a long-term investment in a great space you want to live, paying off your house can be a very smart decision!

Isaac Wigley-realtor
http://www.sfpropertysearch.com
415-710-9336
0 votes Thank Flag Link Thu May 10, 2012
If you invest your money elsewhere and your return is greater than the property mortgage, then the difference is your profit. Say instead of an all-cash purchase you borrow $500K @ 4%. If you invest the $500K elsewhere and the investment yields 6% for example, then your potential profit is 2%. Of course you would need to weigh the risk of the investment and the tax consequences.

Also, in the event inflation takes hold, your mortgage will seem smaller and smaller as time goes on. That is as long as you have a fixed rate.

One last item to consider is the deduction of your mortgage interest payments. I hope this was helpful.

best of luck,

Oggi Kashi - 415.690.3792 direct
Broker Associate, Paragon Real Estate Group CA DRE 01844627
All data from sources deemed reliable but subject to errors and omissions, and not warranted.
Web Reference: http://www.oggikashi.com
0 votes Thank Flag Link Thu May 10, 2012
Essentially your friend is correct. What you need to do is run the numbers and find the difference between the interest you would be paying on a mortgage (a figure that's at a record low right now) and the interest and/or dividends you could earn by putting that money "to work" for you and investing it. If structured properly, you should come out ahead by taking out a mortgage and investing your cash.

Cheers,

Toby


Toby Jackson
Better Homes & Gardens/Mason-McDuffie Real Estate
2200 Union Street
San Francisco, CA 94123
Mobile: 415-627-8200
Office: 415-921-0113
http://www.bhghome.com/JacksonHomes
DRE#01798961
0 votes Thank Flag Link Thu May 10, 2012
the main advantage aside from not having to use your own cash, is that you deduct the interest on the mortgage so the money is costing you very little
0 votes Thank Flag Link Thu May 10, 2012
Leveraging cash is the way to go if it is done correctly. I agree with your friend, and your friend is on the right track to future wealth where money is concerned. If your friend has not run potential numbers for you related to available cash, additional investments and home purchase then I feel confident your friend will be more than happy to do this for you. You have a smart friend leading you down the right path. Good luck to you!
0 votes Thank Flag Link Thu May 10, 2012
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