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I can afford to buy a house (to live in myself) in cash. Most of my investor friends tell me this would be a dumb idea, because I could earn more in interest by buying the house with a mortgage and investing the rest of my money.

I get their arguments, but they appear based on less-than-certain assumptions:

  1. I'd be able to get a reliable return on my investment higher than what I pay in interest for the mortgage.

  2. I'd keep the mortgage long enough for my investment returns to exceed the cost of interest.

1 is probably a safe assumption, although by no means a given. Currently, no guaranteed-return investment instruments (e.g., CDs) would come close to paying an interest rate that equals or exceeds the ~3.5% interest I'd pay on a mortgage. The stock market does beat that, of course, but it could tank.

2 is where I think a lot of people fail to understand the financial benefits of buying a house in cash. Because of amortization, the amount I would pay in interest each year for my mortgage would be very high at the start of the mortgage, and would decline gradually. Effectively, the cost of the mortgage in the first year would be much higher than the nominal ~3.5 percent interest rate of the loan.

As a result, I'd have to keep the mortgage for more than a decade before my yearly investment returns started to exceed what I pay in interest each year on the mortgage. Given that most mortgages last only 5-7 years before people refinance or move, it seems uncertain that I'd end up with more money in the long run by taking out a mortgage.

At the end of the day, buying the house in cash seems smarter to me, which is effectively the same as getting a guaranteed return equal to what I'd otherwise pay in interest for the mortgage -- which, again, would be many thousands of dollars in the first year I own the house.

(Also, another reason not to get a mortgage is the new US tax law's implication that I, along with 94% of the rest of the country, will not itemize my deductions because I won't hit the standard deduction. There are, effectively, no tax advantages for mortgages anymore for most people.)

For the record, my main reason for buying the house in cash is emotional, not financial. I'll sleep better knowing that if I were to lose my job, I won't have to worry much about leaving the house, because my only major monthly expenses are property taxes (which are pretty hefty here in New York, but still less each month for this five-bedroom house than it would cost to rent a one-bedroom apartment in the same town).

Still, I'm looking for an answer for my friends who are overlooking the complexities of mortgage amortization and how that impacts the real cost of a loan within the first decade or so. Am I wrong?

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    "Effectively, the cost of the mortgage in the first year would be much higher than the nominal ~3.5 percent interest rate of the loan." I don't think this is correct, unless there are very weird mortgages in New York. True, almost all your payment goes to interest, but it shouldn't be more than 3.5% of the principal. – Rupert Morrish Jan 10 '18 at 1:00
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    you cant put a price on good sleep or the health that comes with it. you can always leverage the house later. be prepared for everyone to tell you how to fix your house or manage your money. make up your own mind and enjoy your new house. dont bother proving your friend wrong, tell them you took a mortgage and invested in bitcoins. then when they crash, blame them for the bad advice. thats how to win this argument. – DaFi4 Jan 10 '18 at 8:28
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    Your friend most likely is not thinking at all, but blindly repeating the catchwords the financial advisor scammers have put in his head. Taking mortgage to make risky investments is one of the dumbest things an average Joe can do, althought it's also what most scammers would love him to do, because they earn a lot of fees on it. – user45830 Jan 10 '18 at 10:09
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    "For the record, my main reason for buying the house in cash is emotional, not financial. I'll sleep better knowing that if I were to lose my job, I won't have to worry much about having to leave the house" - That is the only reason I would personally need to buy with cash. Maybe I highly value my sleep, but good sleep helps me enjoy life, so this is a case where money actually could help buy happiness! – Todd Wilcox Jan 10 '18 at 17:15
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    Can you really do better than your mortgage rate (given that it is a guaranteed, risk free investment - not the house obviously but avoiding the mortgage). I wonder how this could be true - if it were, why would a lender be willing to lend at that rate? And also, avoiding mortage fees. Might only be a few percent but that is significant on the margin. Assuming it is not a huge fraction of your net worth, I believe that a house purchased with cash could be a good investment. – John K Jan 10 '18 at 20:26

19 Answers 19

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Ask your investor friends if you already owned the house, would they be advising you to take out a mortgage in order to invest elsewhere. If not, ask them to explain the difference between taking out a mortgage on the day you buy the house and taking the same mortgage out the day afterwards.

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    From which (+1, btw), you should ask them why they are not all taking out mortgages on their own homes in order to invest – Mawg Jan 10 '18 at 10:15
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    There are cases when taking a mortgage upon buying the house is different than a mortgage on a previously owned house: the risk assessment is different (one is buying to live in), and there may be housing incentives by the government in place. In the UK and Brazil it does. – Mindwin Jan 10 '18 at 11:55
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    To continue the argument - why not borrow money on everything you own - cars, collectibles, investment property, business assets. After all - borrowed money is cheap compared to investment returns, right? I know one person who did this to the tune of millions of dollars, went bankrupt in 2008 and lost EVERYTHING. – D Stanley Jan 10 '18 at 14:17
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    @DStanley Lots of people did that also in 1929. History doesn't really repeat itself, but it does rhyme. – a CVn Jan 10 '18 at 14:22
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    You're all doing it wrong. You don't borrow money on everything you own and then try to invest it wisely. You borrow money on everything you own and use it to speculate on bitcoin. It's a plan that can never, ever fail! – aroth Jan 11 '18 at 12:26
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I think you have a misunderstanding in point 2:

Effectively, the cost of the mortgage in the first year would be much higher than the nominal ~3.5 percent interest rate of the loan.

No, the rate of your loan is how much interest you pay relative to the outstanding balance. In the first year of a mortgage with a constant monthly payment, yes, you pay more interest (as a percentage of your payment) because your outstanding balance is higher. You will pay slightly less than 3.5% of your loan balance in interest over the first year (it's slightly less because you're gradually reducing your principal amount as well).

So yes, you can earn more than 3.5 on average by investing in equities than you pay in mortgage interest.

Where the difference comes is risk. Paying off debt (including a mortgage) is effectively a risk-free investment, since your interest rate is guaranteed. Gains in the stock market are not guaranteed. Some years you'll gain 30-40%, some years you'll lose 30%. When the investment is borrowed and tied up in a house, a market crash can bring a seemingly fool-proof plan to its knees. When your house is paid for, you have no worries about losing the house in a bear market.

(I'd bet that many "smart investors" lost their homes in 2008 when their leveraged investments cratered)

Another difference is liquidity. If your house is tied down by a mortgage, then it is harder to sell, risks being underwater if the market value decreases, etc. Cash flow is also important as you will be required to make a mortgage payment each month. If you get into a cash crunch you might find yourself tapping the investment, reducing future gains and triggering potential capital gains taxes.

It is true you might get a tax deduction for mortgage interest (although you are correct that there's a bigger chance now that you won't be able to itemize), however you can also get a tax deduction by investing money in tax-advantaged accounts such as retirement accounts and education IRAs.

A wiser plan would be to pay cash for the house, invest the amount you would be spending on a mortgage, let it grow, and sleep easy.

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    @RonJohn You have a minimum amount that you need to get to pay off the mortgage, plus a slightly more complicated closing. Granted it's not a huge burden but it is a consideration. – D Stanley Jan 10 '18 at 1:12
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    Paying a mortgage is effectively a risk-free investment? For whom? You mean for the mortgage company? For the customer the investment would be the house and not the mortgage, and that isn't risk-free... – Mehrdad Jan 10 '18 at 9:16
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    "Paying a mortgage is effectively a risk-free investment, since your interest rate is guaranteed" This is the key - at the same risk level, you will typically find no better investment than just paying off your mortgage [or, using cash in the first place instead]. There is an argument that it might be worth taking on higher risk + higher return investments instead of paying off your mortgage, but that is not so clear-cut any more. – Grade 'Eh' Bacon Jan 10 '18 at 14:05
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    @Mehrdad For person paying. It doesn't matter if I have a fixed cost and consider it a change in income or I just reduce cost - my net income is guaranteed to increase by 3.5% of principal per year even if it is not technically an income. In similar way increasing assets and decreasing liabilities is the same assuming they have the same risk profile for you. OTOH for mortage company it is definitly not risk free as many buyers of mortage derivatives found the hard way in 2008... – Maciej Piechotka Jan 10 '18 at 17:16
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    @JimmyJames I'm not talking about risk regarding the value of the house - that's the same whether you have a mortgage or not. If you have a mortgage and can't make the payments, you can lose the house. I'm talking about paying the mortgage versus investing it. The mortgage payment is known (zero "risk") - equity investments are not. Plus, you can't just "walk away" and not lose the money you should have paid - the bank will come after you for the difference. – D Stanley Jan 10 '18 at 17:48
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I think you're right.

However... unless (1) you're very rich, or (2) the house is very cheap, or (3) you're buying one house with the proceeds of another, then buying with cash is going to wipe out a significant percentage of your liquidity.

That's why I'd get a mortgage, and plan on paying it off in 10 years.

EDIT: Life is a balancing act, and becoming cash poor is almost as out-of-balance as being in hock up to your eyeballs.

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    "People don't get rich borrowing money and leveraging." LOL. Three words: real estate developer. – RonJohn Jan 10 '18 at 5:57
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    @rocketman if paying cash for a house turns you "house rich and cash poor", then you won't have any cash when you really need it (like to pay medical bills, etc). Life is a balancing act, and becoming cash poor is just as out-of-balance as being in hock up to your eyeballs. – RonJohn Jan 10 '18 at 15:33
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    I prefer "house rich and cash rich", which is what people who pay cash tend to be. Paying cash highly correlates with people who understand value and maintain an adequate emergency fund (in cash) for such unexpected life events. So, buying a house with the last bit of one's cash would be foolhardy. – rocketman Jan 10 '18 at 17:06
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    "rich people don't borrow money - correct." Uh, not correct. It's the opposite of correct. – JimmyJames Jan 10 '18 at 17:49
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    @rocketman So if you lived in a paid for house, would you borrow money on it to store it in an emergency fund? No one is (or at least I'm not) talking about the "last bit" of cash - but borrowing money on your house to either save it or invest it in risky investments is not wise. – D Stanley Jan 10 '18 at 17:50
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I think it's important to look at numbers.

Let's consider a $100,000 house.

Case one: Buying with cash

In this case, the risk is having all your eggs in one basket. Many people use the term "investment" when mentioning houses, but that's debatable. Rental properties are an investment. Primary residences? I'd personally say no. There is nothing that requires the value of your home to go up. If it turns out that next year your house is worth $100,000, then you're already losing money due to inflation. If the value goes down you lose even more. At the end of 15 years with no additional investing, you merely have the value the house, regardless of whether it went up or down.

Case two: 20% down payment

Let's say you put $20k down and invest $80k. You get a 15 year loan for the $80k you still owe on the house, at 3.25%.

Over the course of the loan you pay $102k total (rounding up). So $22k in interest.

Let's assume the $80k investment earns 8% annually. After 15 years that will grow to $234k

Evening things out

In case 2, you can argue that your payments every month count as additional investment, which doesn't exist in case 1. To make things fair for case 1, let's say you invest $450 a month, or $5400 annually. I'm too lazy to break it down by what the amortization schedule says. Invested as a lump sum yearly and gaining the same interest as the investment in case 2 (8%), this comes out to $147k. $87k less than what your investment does in case 2.

So you saved yourself the cost of $22k in interest, and missed out on earning $87k. Or the reverse for case 2 where you accept the $22k as a risk, and you're betting your returns over 15 years is greater than that amount. As long as the markets do better than your interest rate, the large up-front investment always fares better.

Conclusion

Ultimately it comes down to the 'day after' you buy the house. In case 1 you have a house and no investments. In case 2 you have a large investment that is immediately ready to grow. Mathematically speaking, the investment will always win as long as your annual return is greater than your annualized interest rate on a loan. This is also why many people on this site don't recommend paying off a 1.7% car loan early, and to instead put those extra funds into investments, because beating 1.7% annually is pretty easy outside of recessions/depressions.

Edit

If you want to take capital gains into consideration, the situation is a bit different. For this set of numbers I'll use a more conservative 5% for the annual return, and assume the max capital gains of 20%.

Case 1:

  • Investing 5400 a year @ 5% return will give $117k. With capital gains: $94k.

Case 2:

  • Starting with $80k and no additional investment will give $158k. With capital gains: $126k

Through 'guess and check', I found you're able to still beat the $22k interest with a rate of only 3.8%. I tried using the annualized amortization schedule numbers, and the rate can go as low as 3.4% in that case.

And the caveat to all of this is: OP is the only one who knows the real numbers/rates. 10 year loans have even lower rates than 15 year loans. It could be that OP is looking at a $600,000 house in which case all of these numbers get bigger, but the math still works out the same.

This just underscores my point: whether OP is willing to take the risk of getting a mortgage and investing or wants to buy the house outright is up to OP. However, the two situations only look close in my answer because I'm trying to be fair and assuming the OP can save $400+ per month. It's reasonable to think OP can, because they won't have a mortgage payment, but if we go any further it's all speculation. OP can decide for themselves which risks are acceptable or not.

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    Please tell me where you think you can consistently and risk-free make 8% interest. And where you would NOT have "all your eggs in one basket" in that same investment (ie, a single stock-market). – Dragonel Jan 10 '18 at 19:00
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    This does not account for inflation rates and for how the house will change its worth. – svavil Jan 10 '18 at 20:58
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    The value of the house is immaterial. He will end up owning the house in all scenarios. – drxzcl Jan 10 '18 at 22:44
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    8%? Yes please. Does it involve buying Bitcoins? – Vince O'Sullivan Jan 11 '18 at 11:48
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    @Dragonel historical return rate in the US is ~7% per year. Some people assume a 5% return to be conservative, and it depends on how risk prone your investments are (bonds certainly wouldnt be that high). You can do the math and see that, in order to gain more than $22k investing, you would only need a return rate of ~3.8%. – Shaz Jan 11 '18 at 14:03
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You can buy a house in cash, then immediately set up a HELOC ("home equity line of credit", a common type of loan offered by banks and mortgage companies that is backed by home equity, that does not require you to incur the debt or accrue interest until you draw on the line of credit, typically with a checkbook or debit card issued to you) to maintain liquidity, getting the best of both paths.

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    And with the new tax code, the HELOC interest is not deductible (with limited exceptions). – JoeTaxpayer Jan 10 '18 at 16:16
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    @JoeTaxpayer - And because of that, demand will be lower, which means interest rates will be lower, making the HELOC even more attractive. So who cares about the deductibility unless you already have a high interest loan. – Dunk Jan 10 '18 at 19:46
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    Time will tell. HELOC is typically “Prime +X%”. Not really sure low HELOC demand will help push prime rate lower. – JoeTaxpayer Jan 10 '18 at 19:55
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    And for those of us who have never heard of a HELOC, that would be a home equity line of credit. AIUI, it's like a mortgage, but you don't get all the cash at the start; rather, you can draw on it whenever you like, and only pay interest on what you borrow. It's like a credit card secured on your house. – Tom Anderson Jan 12 '18 at 17:49
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    As @RonJohn says in a comment on another answer, the bank can cancel or freeze your HELOC at anytime. It would suck if they did that right at the moment when you really needed it. – Emery Lapinski Jan 13 '18 at 0:15
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There are answers of varying quality here and some of this will likely repeat some of that. There are a lot of things to consider here and I think it will help to organize the key factors.

First of all, your assertion that the interest is higher at first is completely incorrect as mentioned in other answers. Your rate is what you pay on the remaining portion of the loan. So your first payment will pay a month's worth of ~3.5 interest on (more or less) the entire initial balance of the loan. The next will pay interest on a slightly smaller amount and so on and so forth. In the later part of the loan each payment goes almost entirely to principal. You are over complicating this. There are other costs that you pay with a mortgage that you will not recoup. That's what determines how much you need to earn on the investments to break even.

You need to think about how much cash will you have left after the purchase. When you own a home you need be able to maintain it. You'll need a new furnace at some point. A new roof. A new water heater. Appliances. You need to furnish it. If you buy a fixer-upper and improve it, you can save a lot of money. But in order to fix it up, you will need cash.

The money you put into a home cannot be accessed unless you either sell the (entire) home or take out a loan. You can sell 10% of your shares. You can't sell 10% of your home.

If you purchase the home outright, you assume the entire risk of its value dropping. If you have a mortgage you have an option to walk away. Yes, it will totally wreck your credit for 7 years but people have done it. During the housing bubble people took loans against their equity and bought a boat. Then they walked away from the home with the boat. Not saying I would do this or that you should but you can treat the mortgage as a hedge against tail risk such as a biblical flood.

One advantage of paying cash is that you may be able to get a better deal. Having sold a home and my dealing with my buyer's contingency and the buyer's buyer's contingency stressed me because my new home purchase was contingent on their contingencies, it became clear what an advantage it is to come in with an offer in cash. You may be able to get away with low bid on the home.

If buying a house will basically leave you with no rainy day fund, you should surely NOT do it. Consider 15 or 10 year mortgage and/or a bigger downpayment. You'll get a better rate and keep more cash on hand.

4

It may depend upon your location.

In Virginia, per § 58.1-803 :

a recordation tax on deeds of trust or mortgages is hereby imposed at a rate of 25 cents on every $100

In other words, a 0.25% additional tax is imposed on the borrowed amount by the state, that you would not have owed if you paid all cash.

Furthermore, localities (counties, cities) then impose an additional tax, for example 1/3 of the state tax. So you are up to 0.33% tax.

Other reasons to pay cash are to avoid closing costs, especially appraisal. Title insurance and homeowners insurance become optional if you pay cash.

Also, you can make a stronger offer to the seller with less contingencies if you can pay cash.

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    Don't skip Title insurance and homeowners insurance. If the seller didn't have full title you won't be protected if you don't have title insurance. If the house burns to the ground it is the same thing as burning a pile of cash if there is no homeowners insurance. – mhoran_psprep Jan 10 '18 at 14:18
  • @mhoran_psprep You're probably right in most cases, but in my area people will pay ~$600,000 for the house just to tear it down. Two houses on my street were donated to the fire department to intentionally burn for for training, to get a tax deduction. Burn my house down, and the value will be almost unchanged. The value is the land. – DavePhD Jan 10 '18 at 14:56
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    If I paid cash then there'd be even more reason to make sure I'm covered by Title and Homeowners insurance than simply a requirement of some loan, probably even some incentive to be over-covered. – Dunk Jan 10 '18 at 20:00
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    The answer siad title and homeowners are optional. I suggested that skipping them wasn't a good idea for most people. – mhoran_psprep Jan 10 '18 at 20:09
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You need to think about how much cash will you have left after the purchase. When you own a home you need be able to maintain it

Very true. You do not give your age or where the money comes from. A very common problem with inherited wealth is to spend too much without making provision for maintenance/unexpected problems. Having enough cash to buy a property outright is a huge advantage , you can always remortgage later if conditions allow.

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What reasons are there to not use a loan? Handful of thoughts off the top of my head (Cleaned up to highlight the "Risk" aspect and simplify):

  • Take Risky options
    • Lower/no insurance requirements
    • Waive inspection
  • Costs
    • Closing
    • Higher forms of insurance "required"
    • Interest
    • Inspection requirements
  • Leverage/edge vs others
  • No paperwork

Risks - Are you looking for more risk than a bank will "Support"? Want the edge in a bidding war? Cash only, no inspection, no paperwork - stuff that others who go through loans will have to tackle while you can simply sign?

Costs - in addition to the 3.5%, there are tons of other "costs" that mean you need to make "more" than the 8% to break even. From closing costs to taxes on that 8% you make. From inspection fees to late fees. All costs you need to factor in vs the "investment" options available that you may or may not get.

Other similar lists exist, such as this penny hoarder article

Reasons to use cash:
1. You Can Negotiate a Better Purchase Price
2. You Avoid the Hassle of a Mortgage
3. You Can Close Faster
4. Your Credit Report is Not an Issue
5. You Save Money on Interest
6. You Save Money on Closing Costs
7. You Save on Future Costs
8. You’ll Have Permanently Lower Housing Costs
9. Your Home May Be Easier to Sell
10. You’re Unlikely to Ever Lose Your House

Problems With Paying Cash
1. You tie up a lot of money in one asset class
2. You give up a degree of liquidity
3. You give up leverage

The Verdict
It all depends on your particular situation and goals
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    "Insurance requirements - Loan companies can require minimum insurance for car loans. Pay off the loan (or don't have one) and you can carry lesser forms of insurance. Same applies to home loans. Inspection costs - same as insurance. Costs you have the option of skipping that the bank might require. They are going to be less willing to take risks." Yikes - these are dangerous suggestions. Home inspections are a must for buying a home, and insurance should be as well. – Grade 'Eh' Bacon Jan 10 '18 at 14:08
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  • @Grade'Eh'Bacon While I would agree that home inspections and higher forms of insurance (IE: Not just liability) are smart... The question is "Why would I not?"... and not being REQUIRED to have above the minimum (IE: Full coverage on a car loan) is a decision some people make to secure the purchase. No loan means you have that as an option. I didn't say it was smart to use it - but that's a choice some people can make. – WernerCD Jan 10 '18 at 16:50
  • @MichaelKjörling My answer isn't meant to be a discussion about why or why you don't choose to insure or what levels you choose... But simply to point out that not being required to get insurance is a valid reason in the pile of valid reasons to skip a loan. – WernerCD Jan 10 '18 at 16:52
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    @WernerCD Without having these warnings in the answer itself, your answer seems to suggest that taking less insurance than what is required by the banks is an obvious bonus. It would be a bit like saying "A benefit of cooking at home vs at a professional kitchen is that you aren't legally required to sanitize your equipment" [when of course, you should be sanitizing your equipment at home, just like a restaurant is legally required to do]. – Grade 'Eh' Bacon Jan 10 '18 at 19:56
1

One actually needs to earn a rate of return on investment greater than the mortgage rate plus the taxes on the investment. Unless you have a long-term investment, you would need to use your marginal tax bracket percentage (but I used 20% to go easy on the investment alternative).

One also needs to earn a "Risk Premium" on the (no guarantee) investment. No investment comes with zero risk, there are ways to mitigate or reduce risk (and then AIG happens). Guarantees require a counterparty, and they require payment to accept risk. Suppose the effective cost for risk is 10% (can you really get a high rate of return with low risk? read about 'beta' and 'alpha'), but it is probably closer to 25% (long-term).

Then you need to earn more than the net Rate of Return,

RateOfReturn * (1.0 - TaxRate) * (1.0 - RiskPremium) > MortgateRate
RoR * (1.0 - .2) * (1.0 - .1) > MorgageRate

Or

RoR > MortgageRate / 0.80 / 0.90 = 3.5 * 1.25 * 1.11 = 3.5 * 1.385
RoR > MortgageRate / 0.80 / 0.75 = 3.5 * 1.25 * 1.33 = 3.5 * 1.667

depending upon your investment risk, you may need to earn 5.5-6.5% to break even on return. And it isn't worth the trouble to break even, so you want to earn something (hence the '>' sign), suppose that you want to earn 10%-20%, how much higher must RoR be? [Exercise for the reader: what is needed RoR at 20% tax, 25% risk, and 20% earnings?]

  • You will buy Homeowners Insurance either way.
  • You save many mortgage costs (appraisal, escrow, et al)
  • You have negotiating leverage when purchasing (could be worth 5%-10%)

Since you bought a house and paid cash, suppose you want to buy a rental property? Now you can buy that rental using leveraged money (it is an investment), and it is easier to borrow, because you have a lower debt to income ratio.

The safest investment you might buy is a Money Market, FDIC insured to $250K, which pays what rate? What is the current rate being paid by A* rated bonds?

Do you know how many days over the past 100 years the stock market average (which beats 80% of professional mutual fund managers) has closed up over the previous day (and how many days it has closed down)?

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Just make sure you don't put all your cash in the house. Mortgages with large down payment are typically very cheap, much cheaper than a typical car loan for example. So it might be wise to get the mortgage and have the money to buy a new car/boat/whatever two years down the road, instead of having to borrow or wait until you save enough.

Of course, if you have enough cash for the house and for foreseeable future purchases, you don't need the mortgage.

1

I know this is an unpopular idea so let me preface this with I'm not a professional and this is just my opinion.

I've considered this option as well a few times. Does it make sense to pay off loans entirely or to continue to pay on them and invest those funds elsewhere. I have to break this answer up because theres a couple things I keep in mind.

  1. I have multiple investments like many here and the thing that I love most in them is reduced risk. I always look to reduce risk if things go south.

    So, in regards to your question. If the housing market were to tank again, I'd rather have a few thousand of my capital tied up in a loan on a house as opposed to 200k or 300k of my capital tied up in a house that's worth half. Let the bank take the risk.

  2. My second point is what are you ACTUALLY saving each month. Let's say I have a mortgage of 1300 a month. Obviously that mortgage isn't just principle and interest. It's made up also of escrow for taxes and insurance as well.

    I don't know about most people but my taxes and insurance make up the bulk of that monthly payment. Guess what, you pay that loan off and you STILL have a large monthly payment for taxes and insurance. So you tie up hundreds of thousands of your liquid capital into equity on a house that you still have to pay monthly for? Seems like putting all your eggs in one basket.

Now the only caveat here is I WOULD recommend making at least 1 extra mortgage payment per year. Making just one extra payment a year would reduce your 30 year loan down to something like 17 years, vastly reducing the amount of interest you pay. The biggest fallacy I see people make is they buy a 100k house, pay on it for 30 years, end up paying 2.5 times as much for it and then sell it for 200k thinking they made a huge gain.

  • "I'd rather have a few thousand of my capital tied up in a loan on a house as opposed to 200k or 300k of my capital tied up in a house that's worth half. Let the bank take the risk." This statement seems odd to me. If the market tanks, you are the 'equity holder' in the value of the house. The bank will always get its money back, up to the point of bankrupting you if every other method fails. If you own a mortgaged home, you have more risk than if you own a home free and clear, because you will still owe the mortgage regardless of home value. – Grade 'Eh' Bacon Jan 15 '18 at 18:25
  • @Grade'Eh'Bacon Right, but if the market tanks and I have 100% of my initial capital tied up into it instead of 3% then I'm taking a 100% risk with my initial capital and I still have the same monthly responsibility to meet taxes and insurance which is 80% of your monthly mortgage. However, if I put only 3% of my capital into it or 20% then I can insulate that other 80% in other markets. Stocks, bonds, cryptocurrency. Anything to make it diversified. – Anthony Russell Jan 15 '18 at 18:27
  • @Grade'Eh'Bacon it does fluctuate based on your numbers. It's not an incorrect statement though. In my experience the taxes and insurance are the majority of the monthly mortgage. – Anthony Russell Jan 15 '18 at 18:33
  • @Grade'Eh'Bacon well that's the magic of the internet. You don't have to take everyone's advice. This was just an avenue that wasn't covered yet and is how I approach this situation. I offered it since I have first hand experience with this exact question. The OP is always free to not take the advice. – Anthony Russell Jan 15 '18 at 18:37
  • Let us continue this discussion in chat. – Grade 'Eh' Bacon Jan 15 '18 at 18:46
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  • At the end of the day, buying the house in cash seems smarter to me, which is effectively the same as getting a guaranteed return equal to what I'd otherwise pay in interest for the mortgage.

  • For the record, my main reason for buying the house in cash is emotional, not financial. I'll sleep better knowing that if I were to lose my job, I won't have to worry much about leaving the house, because my only major monthly expenses are property taxes

These are two great reasons for buying a house outright if you can. Both of them are about reducing risk. It makes sense for a hedge fund to take on risk in order to increase returns. For most people who are not wildly wealthy, it makes sense to do the opposite. Risk has multiple costs - the cost of stress and worrying, the cost of the energy you will have to spend resolving problems like being broke, the cost of being forced to move or take on a less than ideal job. That's why insurance exists.

As you point out, setting off interest payments against tax could have been a good counter-argument, but it no longer applies.

  • What does your last sentence mean? Interest is still a potential tax deduction, assuming he's above the standard deduction threshold. – JoeTaxpayer Jan 21 '18 at 14:39
  • @JoeTaxpayer he specifically stated in the question that he wouldn't be above the threshold and wouldn't be itemizing. – jwg Jan 22 '18 at 7:49
  • I completely missed that. Apologies, and a +1 for you. – JoeTaxpayer Jan 22 '18 at 10:11
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I'll sleep better knowing.....

I'll take this literally. Case closed.

One can offer all kinds of math, analysis of the market over time, etc. Or my own experience, Retired, With Mortgage, in which I documented how my decision, to go with the mortgage, was right for me. (Note, mine wasn't exactly mortgage/no mortgage, but a look at my retirement account return vs mortgage cost). The fact that the market return was quite higher than the mortgage in the 15 year period I discussed was interesting for the fact that the timeframe contained 2 major crashes including the dotcom bubble and great recession.

That's what your "friends" are likely to tell you. The math.

If that sentence I quoted is true, the potential extra money isn't worth it. The only concern I'd share with buying a house with cash is that you have a proper emergency fund set up. A budget with no mortgage payment is great, but as you note, you'll still have property tax and insurance to pay.

Last, the mortgage for some acts as forced savings. Look at it this way - you have $XXX, a sum which I'd label as "retirement savings" if I saw it on one's balance sheet. A big chunk of that gets spent. I'd suggest you take the non-mortgage payment, not due each month, and funnel that extra money to the retirement account, don't let it just slip into the budget as extra spending.

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I'm buying a house (to live in myself) and can afford to buy it in cash. Most of my investor friends tell me this would be a dumb idea because I could earn more in interest by buying the house with a mortgage and investing the rest of my money.

My question here is do you want to buy the house as an investment or a place to live?

I am in London UK and own a house. I wish to move. I have found probably three places I would like to move to in four years, in each case, before I could complete the sale process, a cash buyer turned up within a week and completed the sale. Sale buying chains can take months. I would suggest that, if you can do an outright purchase, that you find a place you want to live in for whatever reason. I have considered let to buy and buy to let for financial reasons but my own home is the place I wish to live in.

  • 1
    Question: buy with cash or a mortgage? Your answer: it's hard to buy and sell a house simultaneously. But the asker doesn't seem to be selling an existing house. And it's entirely possible to get a mortgage amount approved ahead of time. Or buy the house with cash up front and then get a mortgage to free up the cash. I don't see how this addresses the asker's question in any way, shape, or form. – Brythan Jan 11 '18 at 3:00
  • I see what you mean. Others here have answered the purely cash point of view from an american perspective which i know little of. Buying a place to live , and buying for investment are different scenarios however. – beerbug Jan 11 '18 at 13:00
  • This editor sucks. know that a much better return can be had from buying a 2 or 3 bed freehold property within 20 minutes walk of a town or transport hub.Cash is a huge advantage and you can re mortgage later. Pre morgtage is not an option for me (UK), i have recently abandoned the property investment market but that was purely due to changes in UK taxation rules, property does remain a profitable investment for some however. – beerbug Jan 11 '18 at 13:15
  • On a more helpful note , in the UK there are sometimes free seminars for those wishing to invest in this way. Lots of practical and experienced people there, perhaps you can find similar. The general feeling i get is that trying to mix investment property with the house you wish to live in is not a good idea. – beerbug Jan 11 '18 at 13:28
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Paying cash is better because usually it's a fixer-upper that you can get for a good price or through Sheriff sale or through a local community public housing sale we're basically cash is King.. through my own experience you buy with cash, get a good price, and then you live in the home that you just bought and you fix it up while living in it and either have a small loan that you're paying off but you're living in the home that you're fixing for profit so it's a win-win that's my opinion..

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One alternative possibility: Take out a mortgage on the property you want to live in and buy another property with your cash and rent it out. You should be able to get enough rent (after costs) to cover the cost of the mortgage. Once the mortgage is paid you'll then have two properties.

Of course, you do need to buy a rentable property and keep it occupied and maintained but all good investments require work.

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There are plenty of good answers here already but there's something that should probably be noted: an increase in value of your house is less certain than an increase in the value of your investments.

While most of the argument for buying via a mortgage vs. buying in cash boils down to overall investment returns being higher than mortgage interest rates, there's also the additional benefit of diversifying your assets.

Lets look at one of your points:

At the end of the day, buying the house in cash seems smarter to me, which is effectively the same as getting a guaranteed return equal to what I'd otherwise pay in interest for the mortgage -- which, again, would be many thousands of dollars in the first year I own the house.

While it's true that you would save on interest payments, the value of your house could also decrease. And while it's entirely possible, if not likely, the value of the market as a whole could also decrease, you are exposed to much greater risk by having all of your money in a single asset vs. diversifying it.

There are also non-market risks that could cause a house to lose value, many of which are not typically covered by homeowners insurance. Examples include:

  • Major structural flaws
  • Mold
  • Legal issues
  • Termites
  • Flooding

While these may not be an end-all for your home value, they could significantly decrease how much the property is worth, and/or could make selling the house later on significantly harder. While something like termite damage, flooding or mold would still likely cost you money in repairs with a mortgage, if you spend most of your cash on a house, you could end up with much less cash after paying for repairs.

While you may still lose more net worth if your house decreases in value under a mortgage (as you still need to pay the same amount of interest), you would still have a larger cash value than you would if you had spent all your cash on the house.

Additionally, having most of your value in a house as opposed to cash or other assets makes it significantly harder to even realize your losses: if your house loses a large chunk of its value, you still need to sell it in order to get cash in hand. And selling a house is a lot harder than selling other forms of securities such as stocks, bonds or funds.

The Takeaway: When you buy a house in cash, you are effectively putting all your money into a single asset. A smart investor would not recommend put all their money in a single stock or even a single market. Putting a large chunk of your value into a single asset is not a very good idea, even when it serves a purpose as a residence.

  • I will say that it is actually very unlikely that the value of the property will go down, in the short run yes, but not in the long run (and you don’t buy a house with short term expectations). Find the price of any house, probably in most of the developed countries worldwide, and the price today will be higher than it was 20 or 30 years ago - and that price will be larger than the price 40-60 years ago. – ssn Jan 16 '18 at 20:26
  • @ssn I would be less concerned about the market factors affecting the value of the house and more about factors specific to the individual house. A house is a physical thing and can be affected directly by the world around it. While something like mold, flooding or termites may or may not have a long term impact on the home value, if you spend most of your cash on the house, you could burn through an emergency fund fairly fast. And while it's possible to easily sell securities, extracting value from a home, especially when you need it to pay repairs is harder. – Rob Rose Jan 16 '18 at 23:42
  • I guess it depends on where you buy/live - where I come from things like flooding or termites is not an issue; mold yes, but that should be fairly avoidable if you maintain your house properly. Most other issues are covered before purchase by an inspection and insurance hereof. – ssn Jan 17 '18 at 10:30
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One possible eason is flood insurance. Say you buy a property where the land is worth more than the house. The mortgage lender will, at least in my experience, require you to carry flood insurance for the outstanding balance of the mortgage, rather than replacement value of the house.

PS: To elaborate a bit, you need to look at the total cost of the mortgage, not just the stated interest rate. There are often various costs tacked on, like PMI if you're buying with less than 20% down, or in my case, required flood insurance coverage that was well above the house's replacement cost. (And of course there are possible benefits, like deductible interest.) In my case, the original 4.5% mortgage was effectively closer to 6%, which meant it was (at times) more reasonable to pay down the mortgage rather than invest in what I thought* was an overheated market.

*Correctly, as it turned out, as the times were around 2005-07.

  • Even if that were true (is it?) it really isn't clear from what you've written what the implications would be from this, much less which course of action you favor. – Wildcard Jan 12 '18 at 5:08
  • @Wildcard: Well, it has been true for me. For about the first 10 years of my mortgage, I was paying roughly an extra $100 or more per month for insurance that was well above the replacement value of the house. That I've almost always paid over my minimum monthly mortgage payment (so the outstanding balance is now close to replacement value) should give you a clue to what I'd do. But it's a matter of running the numbers for someone's particular circumstances. – jamesqf Jan 13 '18 at 4:13

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