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I've managed to save about 350K, for a house that I hope to purchase in the next 2 or 3 years. I don't expect to buy beyond what I have saved. I also have a separate retirement portfolio that I will continue to contribute to for the next ten years that I am working (currently age 52). I am retired military drawing a monthly retainer from Uncle Sam that also goes directly to my retirement fund as well. I have no outstanding debts and my children have already completed college. With this background data in mind, would it be wiser for me to pay cash and flat out buy the house, or with interest rates relatively reasonable, take out a 10 or 15 year mortgage? I understand the advantages of deductible mortgage interest, while also being able to invest my existing capital versus simply spending my entire home savings on a purchase. Are there anything other factors that should be considered? Thank you.
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It comes down to your tolerance for risk. If you buy the home cash, your investment return is going to be about 6.5% on the money, as you save all the interest, plus a few other charges in closing costs.
If you finance the home, what will you invest in, to beat 6.5%? Cd's won't do it, so you would have to step up the risk/reward curve a bit to consistantly achieve such a goal.
You are in an admirable situation! Best of luck, whatever decision you make.
I have this question on my mind as well from time to time, some people believe that the tas advantage you get with paying your mortgage is greater then if you did not have a mortgage but after speaking with several financial advisors they had explained that if you do the math, you are better off owning your home free and clear. You can always use the equity in your home if a good investment opportuny comes about. If I was you, I would consult with a couple of financial advisors. Alsways get a second opinio, the consultation fee is well worth the knowledge. Good Luck
Buy 300k SKF.
Buy 300k SKF
What? No XLF puts? Why hold back and settle for 2:1 when you can get 10:1?
Seriously, I'd look into tax-exempt money markets and AAA (real AAA, do your homework) munis. If you're worried about inflation then sprinkle in some TIPS. Then look into something to rent for a bit until you can pick up a home, free and clear, from the bank. If you're in an area that's truly not bubbled, then you might only have to wait a short while while the credit bubble collapses, since home prices might not be all that bubbled -- but will still go down as a function of available credit. If you're within 50 miles of any bubble area, then wait and buy from the bank.
tax-exempt munis is way to go but GOLD is another option for you. if you are currently renting rightnow you are throwing money away :D(i'll be kicked for this several times). consider a state with low/no property tax and property values where you want to settle and buy a *huge* place there. probably oregon comes to my mind. good luck never ever think of the 4 bubble states.
northcarolina is another option.
1. 100K - home
2. 100K - business which you can run as an absentee if you have interest
3. 75K - metals
4. 75K - solid company stocks where P/E is in the low 10s or even single digits and it was trading in the 15s or 20s P/E last year and no major issues. they low just because the market is in a panic. do not put all the money in one shot instead do dollar cost averaging over 12/24 months.
never put all eggs in one freaking basket.
IF you are buying now, get a loan. The interest payments will be tax deductable.
IF you want to pay cash, wait until interest rates go HIGH... they have been up to 21% in our lifetime. When interest rates go above 15%, the price will have fallen a LOT.
You can save up to 70% of the price (is our guess) by paying cash later. Get a long term lease so they don't raise your rent.
I personally would have bought later with cash if I could.
Benny I agree with Azrob and Irenap. Avoid paying the 6.5% interest pay cash for the house. I wish I had another mortgage to pay off I certainly can't find anything thats that safe and pays more. Put a equity loan on the house and if you ever need any cash you can just write a check against it and maintain a zero balance while not using it. You get to retirement age and find that you need more income you can always put on a reverse mortgage on the house.
Equity loans are not necessarily fixed rates. A reverse mortgage is a waste of money, too. If you're going to pull a loan during inflation, then make it a fixed loan.
I still say save the money until prices go down and rent with a longer rental agreement. If prices went down 100-200K per house since the peak, and the loan would cost you double that by payoff, then just wait for interest rates to rise. They are doing that slightly now and there's a huge price change. What will prices do when the interest rate really climbs?
some stuff to consider:
aside from being a person who is in an admirable position, who is going to get your things when you die? if you leave a will, any estate worth over 2M is taxed 35% +/- there is practicly zilch in terms of taxable deductions for an estate too... if you invest in RE, you can trasfer the property (equity included) tax free, where as if you try to tranfer 350k in property +350k in lets say metals an asset that tracks inflation(like homes do in the long run) + what sounds like a half decent retirement fund, you may be leaving uncle sam a birthday gift.
also consider that the property will not "cost" 6% a year and (assuming you wait 1-2 years to buy as outlined above) could apreciate anywhere from 1-5% yoy depending on ALOT of factors including how well the major employers in your area fair during this recession. 10 - 15 years of equity will give you a good cushion in retirement without alot of undue risk... people nearing retirement are often coached to avoid risk
also consider that the only reason to equitize(that you have provided) a home is to bet that 1) the price of the home will climb and 2) to bet that interest rates will climb. number 1 because if you equitize a loan you are leveraging your $$$ somwhere between 10:1 and 3:1 meaning growth in the property value will be added to the equity you have whether or not you had that other 90% invested elsewhere. number 2 because if you take out a loan at 6% and interest rates climb to 8%(its at 2% now, fyi) then you are going to be paid 2-4% extra to keep the money in money markets, etc as opposed to your house... obviously if either bet is wrong, then the opposit occurs and you have to make up for losing equity or paying interest with some other investment.
also consider that in retirement you usually plan to replace ~80% of your current income(again +/-) but consider that if you are not paying for housing you can draw a significantly smaller portion of your nest egg (whatever % of your nest egg $26,500 +3% adjusted annually happens to be) that means more $ invested for more years and that means better returns
also consider that if you wait 2 years to buy, low interest rates will be a moot point anyway because banks will not be looking at mortgages as AAA bond debt but as Caa people debt and will charge you as such!
as you can see i am from the buy for cash before you retire camp... i am also from the dont invest a penny that you will need in less than 5 or 8 years in anything that isnt FDIC or AAA rated or Govt issued debt... start investing in metals and then we find a liquid based replacement for gold on a circuit board and it(gold) falls 50% overnight... nothing is safe(okay i would (and have) bet money on boomers medical needs/biotech(which could be trashed by the new healthcare system admittedly) green energy(which FYI includes nuclear and is probably a FAD so i will be waiting for this bubble to burst) and the new mideast/africa fund(which has the potential of being the next "emerging markets" fund assuming the region stableizes in the next 20 years)... i really reccomend them but they should make up no more than maybe 1%-5% of your portfolio each because you are so close to retirement also the BRIC index is looking cheap these days, considering that it makes up like like 1/2 of all of the people on the planet... BRIC will probably be a good bet too but like i said. it may be a few years before you see it.
Thanks for taking a few minutes to share your thoughts and knowledge concerning my home purchase question. I can see that there are numerous well-informed posters who frequent this forum, who don't mind providing friendly, sound economical advice. You've given me plenty to think about.
Buy outright, means less risk..... I would avoid risk right now...better to be safe than sorry....just not this year of course, rent till next year and see where your market is at?
i think wait untill 2012 and see where it is at, actually there are a lot of very smart people who say bad stuff will happen 2010-2012 and i would rather listen to them and be wrong than listen to NAR and be wrong... but yes, do decide for yourself and do seek advice from a CFA and for the next few years
For those interested in estate planning, it should be stated that the federal estate tax exemption is scheduled to increase from 2 million to 3.5 million in 2009. Further, it is my understanding that current law states that the estate tax is to be completely repealed in 2010 (though it is not wise to bank on that until it actually happens).
There are ways to structure your inheritance without using real estate, using a corporation for example. Consult an experienced estate planning attorney.
"Consult an experienced estate planning attorney."
Yep - always good advice!
In addition to the 6.5% return when paying cash you have the potential of annual increase of the poperty. 2%-5% should be expected after the market hits bottom.
Yea, in 2012..
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