Concerns about paying mortgage early after cash liquid again

Question

I am considering locking up some cash in investments, even a 1 year CD, in order to get even a small ROI with thought that I might buy a house next summer (June onwards). Or perhaps earlier, if something presents itself. (I am, so far, a total non-investor in any active way other than some 401ks that I take no active involvement with).

I had wanted to possibly try to buy a house [EDIT: for personal reasons, not as an investment] in cash, in order to save the mortgage interest (and simplify the deal). But if my money is locked in a 1 year CD or some investment that it is not so liquid, I would not be able to do that next summer (without penalty).

But I really don't want to waste a year of the money rotting as no-interest cash.

So now I thought about buying the house with a mortgage to start, then, when the money was again accessible, paying off the mortgage in full at that point, rather shortly after the mortgage was opened.

What I'd like to ask are the following related questions:

• Does this plan make sense mathematically? It seems to me that it does not if the ROI from the investment, like a CD, is below the mortgage interest. Right now 1 year CDs pay about 1%, and mortgage rates for a 30 year mortgage are about 4%, so on that alone it seems like a loser. But if I invested in stocks, perhaps 1 year could show 4% or better returns--but it is money at risk. But on the third hand, I also don't want to just let the money sit with no interest for a year, particular given I might not buy any home next year, depending on life circumstances.

• Does it make sense in terms of the common rules about paying a mortgage off early? Are there bank penalties for doing this? I mean, imagine the home buyer takes a 30 year loan, but then five months into the loan he pays it all of with one big check. Is that permissible? Is there any tax, fines, penalties, or other reason to not do this?

• Is there a better strategy that I am overlooking?

Thanks for any light you can shine here, PF&M team.

Answer 1

1) Don't buy a house as an investment. Buy a house because you've reached the point in your life where you don't expect to move in the next five years and you'd prefer to own a house (with its advantages/disadvantages) than to rent (with its advantages/disadvantages). Thinking of houses primarily as investments is what caused the housing bubble, crash, and Great Recession.

2) Before buying a house for cash, look at the available mortgage interest rates versus market rate of return. Owning the house outright is slightly lower stress, but using the house as the basis for a "leveraged investment" may be financially wiser. (I compromised; I paid 50% down and took a mortgage for the other 50%.)

3) 1 year is short-term. Your money doesn't belong in the market if you're going to need it in the short term. If you really intend to pull it back out that soon, I'd stick with CD/money-market kinds of instruments.

4) Remember that while a house is illiquid, it is possible to take out home equity loans... so money you put into a house isn't completely inaccessible. You just can't move elsewhere as easily.

Answer 2

Does this plan make sense mathematically? - No not really. The housing market can be fairly volatile (depending on your location), and it is really a good market for buying right now. You're going to make 1 or 2% on your money over the next year and risk paying 10% more for the house (or more). Even if you had a loan at 5% - that would be 5% of what you still owe, not the full value of the house.

Does it make sense in terms of the common rules about paying a mortgage off early? - Yes, though make sure you have at least 80% of the house value so you don't get nailed with PMI (which may have a fixed duration).

Is there a better strategy that I am overlooking? - Yes, investigate buying a house now. I'm not saying rush into it - shop around and find a really good deal. Get a 15-year mortgage (or less) and put what you're able to down (maybe 80% down). You can then payoff the mortgage over the next year or two and not have the risk of the volatility of the market raising the prices on houses and you getting less for your money.

Answer 3

I don't like paying a house off early. Houses are quite illiquid investments. Lose your job, you can't get the money out. Housing prices go down, can't get your money out. Etc.

You are in a better state owing 50k more on a house and with 50k in the bank, and if that money gets you in the habit of savings and investing, all the better.