Home Buying in Lewistown>Question Details

Midwestflynb…, Home Buyer in Quincy, IL

Is it wiser to mortgage a home or pay cash?

Asked by Midwestflynbabe, Quincy, IL Thu May 26, 2011

My current home has been an asset of a trust. I own it outright. I already know the house appraises close to $100,000 more than we paid. I need to downsize, but I also want to make the right decision as far as taxes and reinvesting the profit from the house. I can afford a mortgage payment and I would like to be able to access the profit for any repairs or remodeling I might need to do on a newer home.

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Why not consult with your tax professional and or financial planner and see what option best suits you...
0 votes Thank Flag Link Thu May 26, 2011
It is wiser to buy out right, you save origination fees and writing fees, interest payments and so much more, yes there are deductions you can take, but they are nothing compared the interest you pay. All of the appreciation of your home is yours, where as with a mortgage you never really see the appreciation since you interest soaks it up. You buy a home with a mortgage you will have paid three times its asking price or more at the end of the loan. The appreciating value of the home went to the bank not you, had you paid for the house outright, that appreciation would have been all yours and of course all profit to you. So is it wiser, yes it is, but if you can't afford to buy out right then you are at the hands of the money lenders, who would by the way, tell you it is so much more advantageous to have a mortgage than it is to buy with cash. The advantageous part would not be to you but them!
0 votes Thank Flag Link Thu May 26, 2011
That is an excellent question! Which is more important to you? Long term effects of purchasing a home with a loan, paying taxes, or having a nest egg to fall back on should something happen? I would take the most important thing and truely analyze all of the pros and cons to each. If you still do not have the answer perhaps a financial planner could best assist you with the answers you are looking for. I wish you luck! That for me would be a hard decision as well.
JoAnn Thaxton,Realtor
Remax By the Water
0 votes Thank Flag Link Thu May 26, 2011
While I tend to agree that cash is the better option because it is less risky and gives you a piece of mind, the better financial option is always to take the loan. Sarah runs through some of the numbers, but what she leaves out is that you can invest the $200k and possible make $15,000 to $20,000, which will more than pay your interest.

I would not worry about the tax implications as much because it really washes out. If you take the loan, then yes you get a deduction, but you probably more than offset that deduction with capital gains, interest, or dividends.

It really comes down to the fact that you can get a loan at a pretty low rate and if you feel your investments could beat this rate, then you are better off investing the money and taking the loan. For a lot of people, I think they may believe that they can beat the interest rate on their investments, but it is not worth the risk.
0 votes Thank Flag Link Thu May 26, 2011
ALWAYS pay cash if you can. Do the math. If you borrowed $200,000 for 15 years at 5%, you would pay $9791.31 in interest the first year. If you are in a 28% tax bracket, you would get to deduct $2741.57 of that. Why would you spend $9791.31 to save $2741.57?? Or, over the live of the loan, you would pay $84,685.45 in interest to save $23,711.93.

If you need to downsize, find a home you can pay cash for and pay cash to do the repairs. Invest the rest and then invest the $1581.59/month (from $200k loan) payment. Your savings goes up in a hurry and you never have to worry about a house payment.
0 votes Thank Flag Link Thu May 26, 2011
This latest recession has provided more questions than answers: Taxes would be the first consideration; do you need the tex deduction, (one of the few we have left.) But there are a lot of other thoughts: If you sold, you could carry the paper and have a monthly incone. If the Market went down again, YOU, not the bank, would take it on the chin. And you age would factor in it to, I'm going thru the adjustment where I know I don't have 30-40 years to rebuild my nest-egg. I guess the fact that you can have these possibilities is a very good thing; a lot of people would trade places with you.
0 votes Thank Flag Link Thu May 26, 2011
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