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My wife and I have nearly $600,000 in our investment portfolio. Should we buy a home outright or get a mortgage?
My wife and I are in our mid-30s. We have no kids and no desire to have a family, and we’re currently sitting on about $580,000 in our investment portfolio. This amount does not include our retirement savings.
We think we know where and how much we want to spend on a house (around $400,000), but we don’t know how we should buy that house. Is it better to take out a mortgage and have the gains from our investments pay off the mortgage over time? Or should we just purchase the house outright? We’re obviously thrilled to even be in a position where that’s even a consideration, but we just haven’t found any solid advice for which is better.
—This question appeared in “Market Watch Newsletter.”
I posed this question to my Facebook audience. I will share some of our comments below:
I’d probably pay cash or I’d put 60-75 percent down. You can build the savings back up. But a lot of wealthy people carry a mortgage and hold on to cash.
I’d say put 40-50 percent down in cash and pay the rest in 10 years or less. A mortgage is “good” debt.
I don’t like to owe people, I’d pay it in full. The house would have to be move-in ready.
Damon says: They did an amazing job on having $600,000 in investments plus an untold sum amount in retirement savings.
I wonder if this money was saved or inherited. For $600,000 is a ton of money for them not to have a mission statement or purpose as to why they saved this money in the first place. Did they save this money with the intent to buy a house or start a business? For the sake of my response, I’m going to assume this money was saved and not inherited. I’ve come to observe over the years that people who live below their means, sacrificed, did without and saved a lump sum of money be it $5,000 or $5 million, have a difficult time spending the money they saved.
If we knew and understood the purpose of the $600,000 that was being saved, it would be easy to offer up an opinion that coincides with their goals and objectives.
Given the fact that we don’t know the purpose of this $600,000, let’s consider the purpose of money. The purpose of money is to provide for needs, wants, goals and desired lifestyle. Last and most important, the purpose of money is to make one feel secure, financially speaking. When it comes to saving and investing money, you’re either saving and investing for a specific purpose, be it emergencies, vacation, car, college, house, business, retirement, or wealth. Or you’re saving to build wealth to supplement or replace your earned income in the short or distant future.
We know he wants a house in the $400,000 price range. We know he has approximately $600,000 saved with no purpose attached to it. I think we just found a purpose.
Let’s look at this from a purely, logical, mathematical, risk-based perspective:
Fact: No investment is as secure as a paid off debt!
Fact: Interest rates on mortgages at the time of this writing is in the 7 percent range.
As a result, not taking on a mortgage because you have the money to write a check for the house is a sure-fire way to get a 7 percent risk free, guaranteed return. No investment can guarantee you a risk free, guaranteed 7 percent return on your investment. NOT ONE! What do you eventually do with a lump sum of money you’ve been saving for retirement? You create a monthly income stream similar to a social security check, pension, or annuity. If you don’t have a mortgage payment like most people do, you’ve effectively created a situation where you need less money to live on. Not having a mortgage payment is akin to having a pension check, social security check or annuity payment.
With that being said, write a check for the house!
Damon, I have another perspective. It’s hard to let go of money you’ve been saving your whole adult life. But that’s not the only reason. If you are withdrawing from your 401(k), the downside is that you are paying a boatload of taxes on that money all at once. If you get a decent rate, I think it’s best to take out a mortgage. When you are forced to withdraw from the 401k you can use that money to pay your mortgage, taxes and insurance. You still have the remaining funds in the 401k earning interest, etc. Plus you’re only paying taxes on the small percentage you are required to withdraw. To me, it’s six in one hand and a half dozen in the other. Our school of thought is not to tie up money unnecessarily.
Damon says: I understand where you’re coming from. There’s a huge difference here from an income tax perspective. The $600,000 isn’t inside a retirement plan. As a result, the tax hit is based on the capital gains tax rate which is capped at 20 percent, not the ordinary tax rate that a distribution from a 401(k) will subject one to, which has a cap rate at 37 percent depending on tax bracket.
Money inside of a 401(k) is intended to be a paycheck replacement. I agree with you if the money was inside a retirement plan. There are instances where the 401(k) balance is relatively small and the mortgage balance is relatively small where it makes sense to use retirement proceeds to pay off the mortgage.
I would say if you get enough cash to pay off your house before you put all your eggs in one basket, talk to someone you trust. You can take the extra cash and invest in generational wealth. We were told to look at your interest rate and pay three times the interest with your mortgage two weeks after you pay your mortgage. In the credit world it shows that you can manage your finances and receive more credit. The era we live in now credit is everything and cash is pennies. The good thing about this discussion is it’s never just one answer. It’s all about the ultimate goal.
Damon says: Lakesha, you say create generational wealth then you say credit is everything and cash is pennies. Generational wealth is about passing on assets to your heirs. You can’t pass your credit score to your heirs. Debt is a byproduct of credit. Any debt you have attached to the asset reduces the equity you pass to your heirs. You also mentioned someone advised you to pay back three times the interest. I’m not clear on the advice here so I’ll look at it from two angles:
- If they’re advising you to pay extra on the mortgage to reduce the overall interest and pay the mortgage off early, I pose this question, why pay interest at all when you can simply buy the house outright and use what would have been a mortgage payment and invest the money every month to create generational wealth; both a house and an investment you can pass on to your heirs free of debt?
- Here’s what’s you said. If you take out a 30-year mortgage, you’d pay nearly three times the amount you paid for the home in interest. Example. Say you took out a $250,000, 30-year mortgage at today’s interest rates of 7 percent.
You borrowed $250,000: Monthly Payment: 1,663.26: Total Payment: 598,773.60: Total Interest: 348,773.60. You borrowed $250,000 and you paid back $348,778.60 in interest for a total payback of nearly $600,000. That’s 40 percent you paid back in interest. You can avoid paying 40 percent in interest expense over 30 years by writing the check for the house.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website @ www.damonmoneycoach.com.)