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Home purchase in cash in LCOL area vs financing

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  • Home purchase in cash in LCOL area vs financing

    I wasn't sure if I should place this in real estate, personal finance or investing, and is one of those "shower thought" moments. For those of us that live in LCOL areas and make higher than median physician income, would it be a crazy idea to buy a home in cash, rather than financing it. One of my dilemmas in purchasing a home here in the next few months is overpaying for the region because of inflated home prices. Prices are inflated here (and many other places) simply because of favorable interest rates.

    400k home around here can get you something between 2500-5500 sq ft, with the lower square footage usually being "nicer" or coming with 5+ acres of land. The larger square footage usually comes with necessity to put money in for updates.

    While it would make sense for someone to definitely finance this if they made 50-100k, if one could save that amount of money in 2 years while still hitting 15-20% savings rate in investments, then could it make sense to wait and purchase a 400k house in cash?

    Things that also factor into this decision making is a potential interest rate rise in the next 18 months which would potentially reduce some of these home prices. Obviously, the opposite is also possible. The market could continue on its rise, real estate could continue, and that 400k house could have a selling price of 430 in 2 years.

    Am I undervaluing the time value of money by not shooting for a 20% down payment, a 15 or 30 year fixed mortgage and having the difference invested somewhere? If I'm someone who simply wants to save enough money to retire by 55 without utilizing leverage, would this be crazy?

    Happy Saturday!

  • #2
    Crazy, no.
    You lose the whole point of leverage over a long investing timeline.


    • #3
      You’re not crazy at all. Another option to consider is to finance and pay off aggressively.


      • #4
        I don’t think it’s a bad idea.

        I’m in a similar situation, except that an 1,800-2,000 square foot house built in 1950 goes for $600K-700K around here and rent on a 1200 square foot apartment is about $3,000/mo. Housing prices seemed to have flattened over the past year, and might go down, up or sideways in the future, and the stock market may go up or down.

        So I will likely put down 40% to start, and pay the house off quickly, depending on what upgrades are needed.

        But I’m rather debt averse and monthly payment averse. I don’t like the idea of paying $20,000 per year in interest with housing prices back up at the highs.

        I am fairly certain about two things however: 1) No one has ever been home shopping, even during the last housing crash, without being fairly certain the the current housing inventory is over valued. 2) The day after I buy, both the housing market and stock market will crash significantly.


        • #5
          A home is primarily a consumption item.
          The question of leverage can raised on any purchase or investment. It's just math. Your net worth won't be impacted by cash purchase or mortgage.
          You will pay interest and have less liquidity. You can pay cash and get a heloc, You can buy stocks on margin.
          The basic rule of thumb is not to finance items for consumption. What makes you think you should? Two years or even an additional 6 months isn't going to move the needle. Pay cash. Or put 50% down and pay it off in a year. Debt is debt regardless of the security pledged. Debt costs you additional money. Why do you want to buy debt?


          • #6
            We bought our home in cash. Best decision ever. 1) still debt free with 100% cash flow minus taxes in MY pocket 2) 100% protected asset in our state 3) you can control your insurance premiums and save additional money 4) no loan closing costs


            • #7
              If it was me I'd pay for it in cash. Mortgage interest and closing costs are guaranteed. Investment returns are not.

              You can always use the cash flow to invest regularly after the purchase to avoid too much investment risk at once, it's not 2010. Back then my answer may have been different.

              If you change your mind, you can always still tap the equity via HELOC and, usually up to $500K, avoid any closing costs.

              Buy the least expensive home you need (including any remodeling). You'll have even more you can put towards investments by minimizing property taxes, insurance, maintenance and repairs. A primary residence is a place to live, not a good investment.

              Isn't it great for finances to live in LCOL? I'm there as well.


              • #8
                Definitely not crazy, it's more about your debt and risk tolerance. A paid off house is a big priority for me. Part of our 5 year plan includes paying off the house we bought last year. And we are young ish :-)


                • #9
                  Originally posted by wideopenspaces View Post
                  Definitely not crazy, it's more about your debt and risk tolerance. A paid off house is a big priority for me. Part of our 5 year plan includes paying off the house we bought last year. And we are young ish :-)
                  Awesome! It has always been my rule to pay off any leverage within 5 years as well. I've recommended people consider that here if it's feasible for them.

                  -not so young ish:-)


                  • #10
                    If you can still meet your investing goals then not having a mortgage is a luxury that you can likely afford.


                    • #11
                      I'll play devils advocate and suggest a fixed rate 15y mortgage. Put the rest into taxable investments (or whatever). This assumes you won't spend it instead. Or buy more house than if you paid in cash. A quick google suggests HELOC rates are not going to be close to mortgage rates, but perhaps someone knows better.
                      That said, have considered paying ours off early. But it's probably not the right move historically.


                      • #12
                        If you do pay in cash please take a picture of the briefcase full of cash that you bring to the closing. That might be reason enough to do it.


                        • #13
                          Originally posted by Lordosis View Post
                          If you do pay in cash please take a picture of the briefcase full of cash that you bring to the closing. That might be reason enough to do it.
                          Preferably with handcuffs to your wrist.


                          • #14
                            I was expecting more people to say I was crazy. I do think that if you're in a financial position to have annual gross earnings above the cost of a house, this could be an option. Also, if you're in an area where renting a 3 bedroom apartment still about 1000/month, it doesn't put as much pressure to have more room.

                            More importantly, I asked my significant other how long she could tolerate living in this apartment, and she said she is ok with staying in the apartment as long as we needed to.

                            In regards to the suitcase... prior to purchase, I will only talk to agents via a land line (preferably a pay phone) and using a voice distorter. The drop off will be at a bridge.


                            • #15
                              From a purely financial perspective, putting your money in cash towards an outright mortgage free house purchase is a sound financial decision. Your monthly cash flow can then go to investments rather than to your mortgage payments.

                              And the alternative, also from a financial perspective, would be reasonable as well. Take a low interest rate 15 year mortgage on a house and invest the extra cash that would have otherwise gone to the house purchase.

                              For me, this would lean more towards a lifestyle decision and less of a purely financial decision. Both choices are financially sound and will not have a major substantive impact on your future net worth. Things like current needs in terms of location, commute, space, yard, and keeping my spouse reasonably happy would factor greatly in the decision making process. Finally, if you buy a reasonably sized house that won’t have unusual or excessive maintenance costs and you live there for a long time, it tends to help build the net worth to some degree, and in the meantime it gives you a nice place to live and supports a happy life. Don’t try too hard to time the housing market unless there are unusual circumstances at play.