Definitely get a mortgage

If you are a disciplined person get a mortgage. It is a no brainer since you can get a 30 year around 4%. Once you figure in the tax benefit it is not even close. I understand not having a payment makes you feel good inside, it does not make financial sense. And also by paying cash you are more open to downside risk in your home.

I'm all for getting a mortgage but I don't understand that last statement. Wouldn't you be much more open to risk if you had your home leveraged?

No, I'm stating that he thinks that interest rates fluctuate during a loan's length for a fixed rate loan. They simply do not.

You are paying 3% of the principal in interest the entire time. The "averaging out" nonsense is hogwash. Unless he's counting fees or something as part of the interest. I'm not sure what part he is misunderstanding since it's not clear what he is saying (that you pay 3% of the loan amount over the life of the loan in interest? That is certainly wrong.) You certainly pay a greater percentage of interest initially (this is obvious since you have a greater principle), and having fixed payments means you pay very little of the principle.

Your point is a different one. It's not just as simple as your point (which is still valid), it also comes down to utility. If you value having money now available more than the cost it has to have the mortgage, it doesn't matter if the money sits under a mattress or is crushing Warren Buffet in the market. There's a considerable amount of utility in having liquid assets available rather than having them locked into home equity that takes considerable amount of fees to recover. When someone is young and their life situation can change drastically in a decade or less, having everything tied down into a place that makes it very hard to get out is a big disadvantage. If he could get a 4% interest rate mortgage, but could get 2% in short term CDs, I'd still recommend the CDs for him for a large portion of his money rather than the home equity. There's also significant risk in owning a home as you have a single asset that is hard to sell and could have significant dips in prices. Why not free roll if in a non-recourse locality, if it drops significantly, you walk with little loss (credit means less if you have cash), and if it rises, you get the gains. There's no reason to take on this risk when you have such an easy option available.

Of course, these arguments are totally different than what I was arguing with the other guy about, who it's possible I completely misunderstood what he was describing, but probably not. With a 4% monthly compounded interest rate on a $100,000 loan, it comes out to paying 3.97% for the first year. Of course at the end, the annual amount of interest will change because the principle changes so drastically so quickly, so the yearly "average" might vary a bit, but every payment, you are paying 4% interest on the principle. The larger period average will always be lower than 4% if any principle is paid off, so maybe that's what he's talking about, but it's not terribly relevant to the discussion, so maybe he just brought up an irrelevant point for some reason. Until the last few years, that number drops ever so slightly, so it's not anything to even worry about. So you move from a yearly 3.97% to 3.85%. Big deal.

If the values plummet, you walk away, and the bank takes the hit. If you pay cash, and the value plummets, you lose all of the value. The worst case in non-recourse states is losing your down payment + principle payments, and your credit. If you have 500k in cash at your disposal, losing your credit rating isn't really a huge deal in most cases.

I'm guessing that he's referring to the fact that you can walk away from the house if you have a mortgage. You're right that since you have your house leveraged and money in the market, you could lose money in both so you'd have a bigger loss. However, if you wanted to you could walk away from most mortgages with a damaged credit report, but not losing as much as if you owned the home.

I think the bigger thing is that VOdkanockers needs to state his assumptions. It's a no brainer IF the market returns more than 4% (or close due to taxes). Past returns do not predictors of the future so you have to be careful about that.

I'm no lawyer or tax accountant, but it's not as easy as walking away from an underwater mortgage when you have a ton of cash sitting in the bank. Sure, it could be done but it would involve illegal/unethical actions like hiding assets, etc.

I also thing there is some confusion between APR and interest rate.

That isn't how it works in a non-recourse state. in a nonrecourse state, it is exactly that easy. See stratigic defaults.

LOL, no.

On a fixed-rate loan the "effective interest rate" is exactly the same for every single payment for the entire life of the loan, with the possible exception of the final payment. You OWE MORE MONEY EARLY, so the interest payment is higher in dollars. Not in rate.

There's nothing "structured" about it. You simply pay the quoted interest rate (/12) every single month, and the balance of your payment goes to principal.

Your point is absolutely not an argument to choose to pay cash. If you think the prevailing investment rate (for something reasonably safe for the time horizon) over the time you plan to live there will be higher than the interest rate on the loan, you should consider financing it. If there are no other reasons or concerns, it's a no brainer (to finance).

That is true in general. However, there are situations where the lender can collect some limited funds from the borrower (such as the difference between the debt and the fair market value of the asset) even in non-recourse states such as FL.

The OP would likely be putting enough cash down to where this circumstance wouldn't exist.

Also, I am familiar with strategic defaults. I just happen to disagree with them.

this thread continues to confound.

i believe interest on housing loans are ~7% here in Australia.

This is such an unbelievable logic fail.

He's posted that same fallacy twice. I corrected it about 5 posts up. Obviously you pay the same percentage rate in interest no matter how long you keep the house.

And if you do the calculation he paid exactly the quoted interest rate on the outstanding balance. You are very confused, sir.

Your type of argument only applies to frontloading of fees and commissions in investments like annuities/insurance, or if you pay points to buy down the interest rate.

Re the OP:

Conserve cash, take the mortgage route for as much as you qualify for. Interest rates are headed up sooner rather than later and you'll be able to invest very safely at great rates. If you have a good realtor you will be able to buy more house but one that is also a much less volatile investment should you decide to move or to flip it.

Location location location. Look for areas that dropped the least starting in 2007 and are early in recovery. DONT be fooled by median prices for the zip code, they are heavily skewed by a few sales one way or the other. Look at houses that are directly comparable to what you are considering. I dont know Fl RE, but in Ca that would mean ocean view in relatively young developments.

Hey guys, similar question here. I'll keep it in this thread unless a new one is needed.

First time home buyer, can't find a lot of advice for my exact situation. I'm looking at houses in the 150k-170k range. I have 120k in a Vanguard retirement fund (I can take out any amount at any time, it's not an IRA or anything).

I'm pre-approved at 4% for 30-year, 3.375% for 15-year mortgage. If I go the 15-year route it may push the monthly payments a little high requiring me to use some investment money to make up the difference. My instinct is to stick to 30-year unless we find a house at the low-end of our price range making the 15-year monthly payments fit in our budget better.

I'm willing to use up to the full amount of investment money towards the down payment but my thinking is it's making more than 4% invested (?) so I'm better off paying 20% down to avoid PMI and keeping the remainder invested.

I plan on living in the house at least 5 years, probably 10 but doubtful for 30. My take from the thread so far is that it doesn't matter how long I stay with respect to my financing question. Yes?

I can provide more info if I've left out anything relevant, I'm mostly looking for a reassuring, "You're fine, good luck searching for a house" or, "Hey moron, you ever think about xxxx - it would save you $20k in the long-term."

Thanks.

You can borrow at 4% fixed for 30 years? Take it, take every penny you can. Repay as little as possible.

No comment on the rest.