Cash or finance a $1M home? Considering stock returns and refinancing. Thoughts?

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  • #96581 Reply

      Help with a house decision! I am weighing two options: cash or finance. We do not currently own a home.

      1. Buy the home with a loan, 1.1m, 20% down (220k), 7% interest rate for 30 years.

      2. Buy the home with cash 1.0m (save 100k).

      The difference comes down to the 780k cash that could be earning interest in the stock market. Assuming a 10% average historical return and a 7% mortgage rate, that is 23.4k/year. The mortgage interest would represent about a 6k tax savings. Additionally, we will have to pay about 11k in capital gains to liquidate stocks to buy the home. 100k-11k/29.4k = 3. So 3 years to refinance before breaking even.

      Obviously, this math entirely depends on average stock projections. But am I missing anything else? I’d *hope* that we would refinance in 3 years anyway to a lower rate.

      Thanks so much!

      #96582 Reply

        Do you itemize your taxes or take the flat amount? Did you consider that aspect? I love the thought of a paid for house but cash is king.

        #96583 Reply

          Without knowing your age this is what we did. We had the same struggles, I’m in my late 30’s and my wife is late 20’s, our rate is 5.625% we have opted to have a 40 year mortgage 20% down to avoid PMI. We pay as if it were a 20 year but the difference is invested in VOO in a brokerage account. The idea being we can pay this off as an approx 15 year loan with the flexibility of having a 30 year payment if need be.

          We will refinance if and when rates are back in the 4-4.5% range and we know we’re staying long enough.

          Related: Cash or finance dilemma: Replace 12-yr-old SUV. $45K cash vs. down payment & 5% interest?

          #96584 Reply

            If you bought for cash, would this wipe out all or most of your liquid net worth?

            I think I’d be reluctant to pour everything into a house, but if you have, say $1.5M-2M, and thus would still have $0.5M-$1M liquid net worth after buying the house for cash, then I’d feel differently about it.

            #96585 Reply

              Some people can earn 15-20% in the market .. I would finance and I think my husband would say the same. Why be cash poor or maybe you won’t be

              #96586 Reply

                I think we got an interest rate reduction by putting 40% down. Zillow shows 6.375% for us if we were to purchase now – kind of in-between the two options you shared.

                #96587 Reply

                  Have you found the house? We were going to finance but ended up needing to pay cash to compete with 7 other offers.

                  #96588 Reply

                    We bought with cash. It probably wasn’t the optimal way to go, but I don’t regret it. We’re in a HCOL area and the monthly mortgage payments would’ve been huge if we’d only put down 20%. It’s nice to not have to worry about that.

                    #96589 Reply

                      Buy the house with cash. 7% is pretty and high and that matches the stock market. Save that $100K.

                      #96590 Reply

                        I’d pay cash.

                        By not having the mortgage, the cash you are spending is earning a guaranteed rate of 7% (the mortgage interest you are not paying), and it would also save you the cost of financing 80% of the mortgage, and the “$100,000” lower price (not sure where that is coming from since the seller is getting all cash at closing regardless of how you are raising it). and should rates come down substantially, you could always do a cashout refinance for 50-70% of the value.

                        Read on: Exiting M1 Finance: Navigating Changes and Alternatives

                        #96591 Reply

                          Here’s an option that you should explore: My credit union is offering a 6% 15-YR Jumbo mortgage or 5.625 for a 15-year non-jumbo.

                          I would shop around for a 15-year term mortgage, hope for around 6%, and use your cash to supplement any additional funds that you may need to pay the monthly mortgage. You”ll save around 1% annually in interest expense and build equity rapidly.

                          You also will need to liquidate fewer assets that will incur a tax liability immediately.

                          And if rates drop substantially, you can still refinance in 3 years or so, either into a lower-rate 15 year, or a 20 or 30-year term.

                          #96592 Reply

                            Depends on how you feel about servicing debt and your time horizon. I like to use the banks money to make more money, so I’d go with the 20% down and invest the rest.

                            #96593 Reply

                              At this point in my life, I don’t want a mortgage, a car loan, etc. We pay cash. The only loan I have done in the last 10 years or so, was a HELOC against a home we were going to sell to pay cash for a home we were buying. That is then paid off with the sale of the home.

                              #96594 Reply

                                Pay cash.

                                Your home’s value is very likely to increase and that capital gain is tax free under the primary residence exemption. If you are unhappy having a paid off $1M home, you can always take out a mortgage to invest in the market, although I doubt you will want to.

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