Quote:
Originally Posted by somigosaden
Someone I know was telling me about a house they bought a few years ago in California, and told me they paid cash for it. I was under the impression that paying cash for a house is generally a bad move, although I'm not entirely sure why. Assuming the interest rate for a 30-year fixed loan would have been around 4%, it's not obvious to me that paying cash is so bad, especially given that predictions for future stock market growth are around 5.2% (according to some Vanguard publication last year). So especially if you're buying in an area that isn't speculative, you could at least debate that saving that 4% is justifiable given the current potentially overextended S&P.
I think another big piece of the argument against paying cash is that you can't benefit from the mortgage interest deduction. In the case of the person I was talking to, they were retired and receiving little income, so income tax considerations are pretty negligible. So was buying a house in cash vs. taking out a mortgage clearly a bad decision?
Quote:
Originally Posted by thethrill009
Let's say "a few years" is 3.5 years, since Jan, 2019.
The S&P 500 is up 66% if you reinvested dividends.
https://dqydj.com/sp-500-return-calculator/
Can you show us why you think it is even close to tie up that money in a house? It's pretty basic math, figure out how much the house has appreciated (if at all) and subtract the mortgage costs. If he's older and collects SS or a pension, that is treated as income and there will probably be tax savings.
Maybe you think you have some incredible insights for the next 26.5 years, but it hasn't even been close the past 3 years.
I'm not exactly on either side, but a few points in their favor:
- the first $250,000 (single) / $500,000 (married) of capital gains on a personal residence, if you lived in it 2 of the past 5 years, is completely tax free. and you can keep doing this every 2 years if you want.
- if this is the bay area and they bought "a few years ago", they may be sitting on at least $500,000 in tax free appreciation
- if this was a few years ago, they could have theoretically hit the nut low for 30y fixed mortgage rates at 3.31%. It takes an awful lot of mortgage to hit the interest and state and local tax deduction under the current tax law due to the new standard deduction. Nearly $725,000 if you're just counting interest at 3.31% (theoretical) for a married couple (standard deduction of $24,000); or closer to $640k for today's 3.75% mortgage rates. Now I doubt that anyone predicted that the new tax law would have bumped the standard deduction up that much.