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KiddZimaHater
12-26-2008, 04:35 PM
Lets say you've inherited $100,000, and are looking to purchase an $80,000 house.
Would you pay the 80K in cash, and keep the 20K.
-OR-
Finance the 80K, and keep the 100,000K?
:confused:

davidh
12-26-2008, 04:39 PM
now this will be interesting. . . . .

lets see:

home prices down, interest rates ? ? ?

home prices can;t do much less than rise. . .

stock prices down, they can;t hardly go anywhere but up,

money you didn;t need to earn or wouldn't miss if it disappeared ? ? ?

buy new machinery !

Evan
12-26-2008, 04:47 PM
These are deflationary times. Interest rates are rock bottom and cash is growing in value. Borrow the money and put the money into a cash based investment such as T bills or GICs. I would not invest in equities at this time as the shakeout isn't finished. The auto industry in particular is not finished consolidating. I won't be surprised to see Ford as the last man standing.

darryl
12-26-2008, 04:57 PM
You can try to balance the earning potential of the larger sum against what interest you would pay by financing. Chances are pretty good that you would pay more in interest than you would gain as return-on-investment-minus-costs- but maybe it depends on your saavy as an investor.

If you're asking the question here, that might suggest that you don't have good investment skills- personally I would pay it outright, then put the remaining 20k in some kind of plan that would grow- maybe not by a lot, but more securely, then use it as a buffer for emergencies and unexpected expenditures.

I'm sure you could get a lot of other advice, just as valid but contradictory, so you really have to assess your own situation and do what works for you. In general though, my gut feeling is to keep out of monthly payments for mortgages, etc as much as possible.

bruto
12-26-2008, 05:11 PM
This can be a tricky decision, owing to the "opportunity cost" of laying out the cash. Once spent, you can't spend it on something else, no matter how much you need it. On the other hand, if you can afford to pay cash, you'll pretty surely get more for your money. One of the things many people forget to factor in to the calculation for this kind of thing is how quickly you can replenish your savings. If you can afford to take out a mortgage and pay $n per month, then you can, at least in theory, afford to put $n a month into savings instead. Of course that takes discipline, but if you do it, you will almost certainly do better in the end, even at unfavorable comparative interest rates, because the earliest payments on a loan are nearly all interest on a balance that very slowly decreases for much of its life, whereas input into your own account is all principal, on which any compounding of interest begins immediately. If you finance a house over any long term, you'll end up paying much much more than the purchase price. If you do the math you'll find that it takes a much shorter time to return that principal if you have paid cash.

I would always vote for the zero debt option if you can afford it. It gives security and allows you to control your spending in a way fixed monthly payments can never allow. Especially if you can get the house for $80K and have $20K in cash left over, you'll be sitting pretty if you exercise some self discipline, even if you pay back less per month than the loan would require.

DR
12-26-2008, 05:19 PM
Do what is closest to your comfort level. Like, if monthly debt bothers you, pay cash for the house.


Something to consider in the down housing market. You might find an incredible deal on a foreclosed home that because of condition will not qualify for conventional financing. With all cash you call the shots. That would be my choice of scenario.

BTW, where the heck do you find a house for $80K?

dp
12-26-2008, 05:22 PM
Look at the rate of growth of the value of the house vs the rate of growth of the value of the invested cash. Which ever has the greatest return over the period of time you're interested in is the best investment.

The recent decline house prices has left a lot of people with upside down loans. On the other hand, the current economic downturn is going to reveal more scam artists like Bernard Madoff as people try to move their holdings to safer investments (they're finding they don't have any holdings to move!).

BadDog
12-26-2008, 05:32 PM
I agree with bruto (and others). For me, I tend to be very conservative and generally choose "no debt". As DR points out, there are numerous ways that this works to your advantage. Also, while I agree that stocks are still far to risky and likely to go (possibly much?) lower, I think that in most areas the housing market has stabilized other than the downward pressure from lack of loan options. While most who can wait it out are (and so not lowering prices), because loans are hard to come by, and with a generally stagnant market, "cash on hand" talks in a BIG way to "motivated sellers". To me, it's a no brainer IF you are planning to buy the house anyway AND you research your purchase well (i.e. don't buy in a socially collapsing market)...

Some think I'm throwing away money that could be "working for me" so that I come out ahead, but they often forget (until recently when most started crying) that this involves risk. I've forced myself into "investments" several times and ultimately regretted it every time (even after making over 300% interest in one year).

Evan
12-26-2008, 05:33 PM
If you finance a house over any long term, you'll end up paying much much more than the purchase price

The market won't stay depressed forever. This may be a fairly long shakeout process but it will end and the population pressure isn't going to go away. As long as enough money is safely invested to cover 50% of the obligations you are well covered and will undoubtedly see a significant return on investment over time in the house. If you borrow for the house just make sure you have the option to renegotiate or pay out at will. Right now having cash on hand is much more important than being debt free. The people in trouble are those that have debt and no cash. Tying up most of your cash in a house may feel comfortable but it greatly limits your ability to take advantage of possible opportunities. We are entering a time where those with ready cash are the winners.

If inflation begins to take hold, and it probably will in an undetermined amount of time, then pay off some debt with your cash. That secures the value of the cash if necessary but leaves options open for now.

Think about this:

You buy the house and pay cash. You have a house and 20K in the bank. You lose your job and can't find another right away. How long will 20 K last while you try to sell the house? What if you spent most of that 20K? You are up ship creek with no paddle.

You borrow on the house and put 10 k down. You have a payment and 90K. You lose your job and can't find another. How long can you live making payments and living in your house with 90K while you try to sell the house? What if you spent most of 20K? You would still have 70K to live on. You are smiling.

Peter.
12-26-2008, 06:19 PM
Dunno how things work over there but over here you can generally say that whatever you mortgage for you pay back twice. You can either put 20k down on a 80k mortgage then pay back 120 over the mortgage term or pay the 80k and keep the 20 as a buffer. No mortgage payments removes the biggest strain on your earnings.

mechanicalmagic
12-26-2008, 06:46 PM
I was raised to buy a house , pay it off, and die there. But these are strained times. And I have no crystal ball.

However, you do need to figure out how long you are going to live in the house. Given sales commissions and other buyer and seller fees, sometimes it makes MUCH better sense to rent. Another way is rent-to-own, where you lock in a price, and rent the house for a year. At the end of the year, if you still like the deal, you buy, with some small portion of the rent going toward the purchase price.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
is a way to get a little better handle on this dilemma.

Dave J.

oldtiffie
12-26-2008, 07:39 PM
This is "gambling territory".

If you can't afford to lose it, don't "play" with it.

If you can't sleep for worrying about it - don't do it.

The only real way to be dead sure of what something is worth is to buy or sell it. Its only worth what someone (you or someone else) is prepared to pay on the day.

Can you "realise" to crystalise" it as and when you want or need to? Are there any penalties or taxes involved.

Buying and/or selling a house for a new job can be very risky and expensive - particularly if that "good job" doesn't "pan out" for what-ever reason/s.

Keep at least 6 > 12 months normal expenditure in cash.

Keep out of debt.

Pay cash for everything.

J Tiers
12-26-2008, 08:02 PM
There is a way to have it "sort-of" both ways...

The way a home loan works, if you can get a long-term loan, like a traditional 30 year, is that for the first several years you are paying the interest on the loan.... If you look at your statement, you may find you are paying $800, and about $30 is going towards the principal.

Obviously it will take around 30 months (almost 3 years) to pay the first $1000 back, since the proportions don't change much in the early part of the loan. The first $5000 of principal may take you close to 10 years to pay back, but yet you are paying the same payment.

You always pay the interest on the last dollar FIRST.

Now, with very low interest, IF you can lock it up, this is not as important. But, with any reasonable interest rate, if you get the loan, and use part of your money to pay off somewhere in the area of $5000 very early in the loan, you save a great deal of money. Effectively you "step ahead" many years in the loan payment schedule.

And, if you are going to do this, generally you should NOT pay any "points". The "points" are really a bribe to the bank. You are bribing them to give you a lower interest rate. You pay the money either way, but the bribe goes in their pocket. The interest goes to the entity they sell the loan to, so they don't get it.

When we refinanced many years ago, I ran the numbers and found that by applying the "points" money as a principal payment right away, we saved much more than the slightly better interest rate would. My wife the actuary was surprised, but had to agree.

You MUST make certain that you CAN pay off early with no penalty, and you MUST be sure to clearly indicate what part of the payment is principal, and NOT interest. If you let it be IN ANY WAY doubtful, they will apply it to interest first, and the money is gone into their pocket. We always sent in two checks, indicating what was paid with each one, just to make it certain.

By doing this, you keep your options open. You can at any future time pay the entire mortgage, but meanwhile you can preserve your options and have the cash available.

BTW, while some say stock is bad right now, in reality there are bargains galore. You will probably NEVER see another market where the bargains are as good, and the chances of future gains as good, as now.

Many people are bailing out of the market every day, thus locking in their losses. If they didn't sell, their loss would be a paper loss, counted against their paper gains, assuming they got in years ago. If they bought in heavily 2 weeks before the downturn, well..... But even then, their losses are not locked-in and "final" until they sell the stock and take the (much diminished) cash value.

And, if by chance it does turn out that it gets a lot worse, you might not be very much better off with cash.

Basically, if it is a lot worse with banks failing and the FDIC paying, that may cause wild inflation, since the money to pay the guarantees will simply be printed, as and when needed.

oldtiffie
12-26-2008, 08:40 PM
I'd agree with you mostly JT, if your are very sure that:
- you were going to stay in that house for 30 years and were not going to die or have to move out of it in the meantime. "Moving house" is expensive;

- you could continue to pay the mortgage over the term of the loan (do you have "Mortgage Insurance" in the US? - it is pretty well a condition of most housing loans here in OZ). Getting a new or re-financing an existing loan on "favourable" terms may be very difficult if you "miss" a payment or "default" at any time;

- your house would not depreciate - or appreciate as much as you hoped for if the "neighborhood" goes "bad" or if a proposed or actual "development" did not cause your house to drastically depreciate or cause you to "move on/out".

Buying "stocks" is a gamble at the best of times, but the risk is less if you pay cash. Borrowing to pay for stock is bad enough but borrowing for "gearing" or "leverage" is a much bigger risk.

"Diversify" or "spread the risk" so far as is reasonable.

How will or can you pay for or (re?)finance for the increasing likelihood of more numerically, frequently and expensive medical bills as you get older?

Don't lend money to friends or family and DO NOT go "Guarantor" for ANYONE!!! And don't start giving them money either.

Money - or the lack of it - is the cause of far too much friction - in social and family circles.

Don't promise anyone anything in your Will. They may "resent" you spending "their" money (inheritance etc.) and they may resent lack of "support" when they "need it" - the more so if someone else seems to be more "favoured". You may well be worth more to them dead than alive.

Don't let anyone else use your assets as co-lateral in a loan or financing deal.

"Having" something and "owning" it are not necessarily the same thing. Check your "equity" in it - you may get quite an unpleasant surprise.

What is your situation if your Mortgagor/lender/bank goes "bad" or "under"? Where will you "stand"? Are you sure?

kendall
12-26-2008, 09:02 PM
I'm in the buy the house group.

But, I really hate payments, and pay cash for everything I can.

I may not have as many toys as the next guys, and they may not be as new as his. But they're mine entirely without payments and if I decide to spend a year roaming the country (galivanting as my grandma used to say) or a summer sailing (like I do at random intervals) I only have to worry about what I want for dinner, not how I'm going to make the payments on my toys.

I learned a long time ago that the less money you have going out, the less money you HAVE to bring in.

ken

J Tiers
12-26-2008, 09:02 PM
I'd agree with you mostly JT, if your are very sure that:
- you were going to stay in that house for 30 years and were not going to die or have to move out of it in the meantime. "Moving house" is expensive;

- you could continue to pay the mortgage over the term of the loan (do you have "Mortgage Insurance" in the US? - it is pretty well a condition of most housing loans here in OZ). Getting a new or re-financing an existing loan on "favourable" terms may be very difficult if you "miss" a payment or "default" at any time;

- your house would not depreciate - or appreciate as much as you hoped for if the "neighborhood" goes "bad" or if a proposed or actual "development" did not cause your house to drastically depreciate or cause you to "move on/out".


My advice assumes that the house is known, and WILL be bought either by financing, or by cash. And that the cash will not be "blown" on something else if the house is financed.

The OP is faced with a 'finance" or "pay cash" question, since he has the cash to pay for it.

The only difference then is whether the cash is "tied up" now, or later. The interest etc is basically a "fee for delaying decision" in that case.

The other considerations you bring up are basically general good advice, and don't relate directly to this decision.




What is your situation if your Mortgagor/lender/bank goes "bad" or "under"? Where will you "stand"? Are you sure?

In those cases, the law is generally that the mortgage is a stand-alone "asset". It was generally bought by an investor, subject to the terms of the original mortgage, bought from the original lender.

it is rare indeed that any receiver can go back and arbitrarily modify the terms of a mortgage after the fact. Contracts are not subject to retroactive modification on a whim, unless written to allow it. Subsequent purchasers are buying it "as-is".

Now, if you do ANYTHING to violate the terms of the mortgage, late payments, etc, THEN any receiver or purchaser can at will use the provisions of the mortgage contract which cover those cases. So read the fine print.

wierdscience
12-26-2008, 10:01 PM
These are desperate times for people wanting to sell houses.You could probably get a $100,000 house for $60,000 if you play your cards right.That leaves $40,000 to build and equip a decent shop with;)

Question is what will the expenses be on said house?Property taxes,utilites up keep etc.Do you have stable after purchase income to cover all that?

goose
12-26-2008, 10:06 PM
Get mortgage, putting enough cash down to avoid PMI (insurance). Take remainder of cash and invest in equities, keep diversified through index based ETFs (spyders (SPY), diamonds (DIA), etc. Not all at once, divide your portfolio into sveral segments and buy when market drops 5 percent from a high.

Gary

Evan
12-26-2008, 10:14 PM
For once Jerry and I are pretty much in agreement. There isn't even a "fee for delaying decision" since you have to live somewhere and unless you are living with your parents your rent will be at least as much as the payment on a low priced house. At 5.5% rate over 15 years the payment on 70K is around $500 not including taxes and insurance. It will build equity fast and still give you some serious in hand buying power/emergency cash in the bank. The likely appreciation from today's value will easily cover any interest cost.

As I said and Jerry reiterated make sure you have payout flexibility.

oldtiffie
12-26-2008, 10:48 PM
"The best laid plans of mice and men ........................... "


John Steinbeck took the title of his 1937 novel Of Mice and Men from a line contained in the second-to-last stanza: 'The best laid schemes o' mice an' men / Gang aft agley' (often paraphrased in English as 'The best-laid plans of mice and men / Go often wrong).
from:
http://en.wikipedia.org/wiki/To_a_Mouse

http://en.wikipedia.org/wiki/Of_Mice_and_Men

OK - so far.

But be very careful to whom your assign "Power of Attorney" - both "Enduring" and "Medical" - as you can come "seriously undone".

Same applies as to whom you appoint as Executor/s and Trustee/s in your "Last Will and Testament".

Tinkerer
12-26-2008, 10:58 PM
I'm in the pay for it crowd... you can always bank money you'd of paid to the Fat Banker.

First off don't jump on the first house you look at. In these days there are tons of value out there. Don't turn away from foreclosure properties. At this time you can pick up houses at fire sale pricing... sure they need a bit of work due to the copper thief's. I fact I looked at a place today valued at 117,000 3000+ sq. ft on 5 acres asking 19,900 wiring was there some plumbing cut out and a few windows needed replaced... I figure 6-10 grand to renovate and it's good to go. But do bring the county tax agent out before starting so you can get a reduction on the evaluation. Thinking along these lines you can have a house paid for and retain a large chunk of your inheritance.

And I'd stay away from the market at this time... plenty more Madoff's out there and at some point Uncle Sam's gonna say enough is enough to the bail out band wagon.

DR
12-27-2008, 12:20 AM
You "finance-it" guys should consider the possibility he can't qualify for a mortgage. Just having the cash doesn't automatically qualify a buyer unless he's willing to tie the money up as collateral for the loan.

J Tiers
12-27-2008, 12:25 AM
The "fee" aspect was intended to represent the added amount you would pay in interest if you finance instead of paying 100% cash.

Obviously if you pay cash, you instantly "lose" (into equity) the amount you pay.

But if you finance, you WILL end up paying more than the house "cost" in total, and so will really "lose" the excess amount paid in interest. The idea of paying the principal down up front is to avoid the larger portion of that excess, which is paid early in the mortgage before you have any serious equity in the house (other than your down payment).

Another reason for going finance is that you can to some extent offset the interest by the returns on the money you retain. That means that you really "lose" less, since you have a money stream from which to pay some of the interest, while you retain the capital. If the capital is sufficiently larger than the debt, you may pay at least the interest in full from earnings, thus zeroing out.

I should point out that you are going to pay some of your capital as your down payment portion of the purchase.... 10% or 20% anyway. So you will retain somewhere between about $84,000 and $90,000, not the full $100k. If you already have the down payment in hand without the $100k, you can do the accounting any way you like, but the money is still paid.

So financing has its advantages, even if you have the money to pay. It allows flexibility.

While still giving you the option to pay off the mortgage on demand, you retain your "cushion" of capital to back you up in hard times. It is often better to have capital plus some debts than to have no debt AND no capital.

And of course, a house payment is one of the best ways to establish good credit. The "credit rating" is used these days for much more than loans. It can affect employment, for one thing.

If you have NO debt, you also have no credit rating. You need some form of debt which you pay off reliably, to establish a rating. Crazy, in a way, but that's how it is. The system assumes we all will be in hock to someone, and rates everyone on how they handle it.

bobw53
12-27-2008, 01:23 AM
WOW!! what a loaded question.

I guess I'm in a slightly similar situation, trying to figure out what to do with money, I'm trying to get up enough money to get a house and get out of debt. Most of the debt is from getting a business moving, and its paying off, so the $$ is coming in, just not in a lump sum, and the houses out here are in the 100k range.

So, what I'm doing now, and I don't really know what I'm doing. I have my personal debt at a manageable level, which took about 6 months, one low interest rate card and a personal loan, which at $650 a month will be paid in 2.5 years, minimum payments are much smaller.

So, I've been slamming the savings account, and slamming on the debt in equal amounts. My plan from here is to ease off on the debt slamming(while still on the 2 year plan) and push a little more into savings (I want a house closer to the shop). At the same time I've been skimming off of the savings and putting it into a brokerage account.

J. Tiers said

BTW, while some say stock is bad right now, in reality there are bargains galore.

I don't know **** about the stock market, but he's right, the value of some companies that the government WILL NOT allow to fail are valued less than they own in office furniture. It really doesn't take a genius to figure out when some of these stocks are going to take a big jump, even if just temporary, many others are just insanely undervalued. Its money I didn't have before, so its worth taking a gamble, however, I've got about 3 months of living expenses sitting safe in savings.

Back to the buy it cash or get a mortgage... I hate debt, debt sucks, but if you can work with other people's money, do it. This is a machining board right? so think machines. I've got 3 major money makers right now(and a bunch of other crap) sitting out here. The first one made its first chip on 2/4/2008, the newest has been in service for only 6 weeks for a total investment of $54k in machines, add in another $25k or so to buy tooling, transportation, wiring and the forklift to get them off the trucks(bought not rented). Those machines have pulled off $158k(I total it up on the machines themselves, sharpies). I would consider that a better investment.

Personally, I would take the money and dump all the high interest debt, keep the school loans and what not. Put 50% down on the house and invest the rest, weather it be in tools(toys/money makers), stocks, something. With 50 or 60k left, you can do a lot, I've had two rich guys in the past year offer to finance machines for me for a safe return of 8-10%(thats better than a mortgage). Buy a plow truck, my old man just made $1600 in 15 hours of plowing last weekend (bastard made me shovel, I'm only going home in the summer from now on).

I guess its how hard you want to work to make the money work for you. If you don't want to work and will blow the money on an H2, big screen TV's, $100 dinners and cruises, then buy the house in cash, if you are willing to work to let the money work for you, then mortgage the house and use the money to make money.

Richard-TX
12-27-2008, 08:47 AM
Lets say you've inherited $100,000, and are looking to purchase an $80,000 house.
Would you pay the 80K in cash, and keep the 20K.
-OR-
Finance the 80K, and keep the 100,000K?
:confused:


Pay for the house in cash. There is no financial reason to get a loan. Take the balance and invest it.

As always, situations are never this clear cut. Don't try to be a hero. Get a good CPA/fiancial advisor and do what they tell you to do.

Your Old Dog
12-27-2008, 09:07 AM
I haven't read the entire thread so I may be repeating someone else's response.

I think it has a lot to do with how good YOU KNOW you are with money matters. Some people don't mind going out and buying a car on credit when the expect to be layed off next week. They would be well advised to buy the house and be done with it.

If you are really good with money, planning and savings then I'd probably do as Evan suggest.

Because the road to hell is paved with good intentions, I know from many years of experiance I would have to pay off the house, spend 20K on a nice shop for it and then figure out how to pay for my taxes, food, energy and health care.

GKman
12-27-2008, 09:11 AM
Do you ask your barber if you need advice about getting a tooth filled?

nheng
12-27-2008, 09:55 AM
Not to go OT too far but for DR and Weird, We have my FILs house in northern NH on the market for over a year. Was up around $110k, and a solidly built older house, not much of a job market to speak of. Last year it had major interior renovations due to frozen pipe damage. 2nd floor has refinished hardwood floors that are absolutely stunning. New kitchen, dining area floors, ceilings walls, painted, etc.

Talk about that shop. This has several including normal basement with low ceiling, 2nd small shop that was his print shop (letterpress) and the big shop which was wood and metal. All connected to the main house. The big shop has its own hot air oil furnace.

The offers are slow and far between and we are currently entertaining the $70k range.

added - before you even ask, the tools are GONE :)

As far as the OP dilemna, it depends on whether you'd like money sitting in the bank being doled out slowly or being debt free ... always a good feeling, especially in the current market.

Den

Seastar
12-27-2008, 10:14 AM
Borrow some of the money.
Listen to Evan.
Cash is king!
Don't get sucked into the market yet.
We ain't seen nothing yet!
Good luck!
Bill

bob308
12-27-2008, 10:27 AM
look for a place you really like.[ out in the boonies away from people is what i like.] pay cash then it is yours then you are not as hard put to keep your job as in kissing ass because they expect itor a slow down like we are in now. if you have to you can take a job any where and not have to worry about making a house payment

Evan
12-27-2008, 10:40 AM
Another way to look at the "finance it" approach is this:

Regardless of where you live you have to pay. If you rent you get to stay another month.

If you finance the house you get to stay and pay about the same as rent while you build equity. You can build reasonably good equity by financing for a reasonably short term such as 10 or 15 years. You won't be "paying twice" since if you are renting none of what you pay is retained as equity. You can also build "sweat equity" by improving the property. This can often be very lucrative if you make the right improvments. You can also gain market equity if the market prices improve.

If you put your cash in the house it won't change these factors. But, you will no longer have the cash and it won't be available except by giving up the place you live in. Debt is not a bad thing if you have the ability to cover it.

We do not have a mortgage on our house. Instead we have a secured line of credit with interest at prime. We pay about double the amount each month required to cover the interest. Right now we are laughing as the interest rates dive for the floor. We have the flexibility of paying only the interest at any time with no raised eyebrows at the bank although we never have.

Cash in hand is worth what the cash is worth. Cash in a house is worth nothing even if you sell it unless you plan on becoming homeless. Whether you pay cash or finance you get your name on the title and will make the same gains if your equity situation improves.

When the going gets tough cash equity in a house is of no help. It won't pay the taxes or buy power, heat and food. It isn't portable and can only be realized by leaving to rent someplace if you can sell which puts you in exactly the same situation as a house loan but with no equity.

loose nut
12-27-2008, 12:18 PM
you make it sound like no matter what you do your screwed

Evan
12-27-2008, 12:25 PM
Not exactly. It's all a matter of how far you have to bend over in times like this. The bottom line is simple. Cash talks and if you don't have any then you have nothing to say.

bruto
12-27-2008, 12:26 PM
Another way to look at the "finance it" approach is this:

Regardless of where you live you have pay. If you rent you get to stay another month.

If you finance the house you get to stay and pay about the same as rent while you build equity. You can build reasonably good equity by financing for a reasonbly short term such as 10 or 15 years. You won't be "paying twice" since if you are renting none of what you pay is retained as equity. You can also build "sweat equity" by improving the property. This can often be very lucrative if you make the right improvments. You can also gain market equity if the market prices improve.

If you put your cash in the house it won't change these factors. But, you will no longer have the cash and it won't be available except by giving up the place you live in. Debt is not a bad thing if you have the ability to cover it.

We do not have a mortgage on our house. Instead we have a secured line of credit with interest at prime. We pay about double the amount each month required to cover the interest. Right now we are laughing as the interest rates dive for the floor. We have the flexibility of paying only the interest at any time with no raised eyebrows at the bank although we never have.

Cash in hand is worth what the cash is worth. Cash in a house is worth nothing even if you sell it unless you plan on becoming homeless. Whether you pay cash or finance you get your name on the title and will make the same gains if your equity situation improves.

When the going gets tough cash equity in a house is of no help. It won't pay the taxes or buy power, heat and food. It isn't portable and can only be realized by leaving to rent someplace if you can sell which puts you in exactly the same situation as a house loan but with no equity.
All that may be true, but it still doesn't take into account the basic question that must be answered for any loan: where does the monthly payment come from? If you can afford to make that payment, why can you not afford to put aside that much after you've paid out the cash? If the original poster isnot in immediate need of more than the $20K left over, he should be able to replenish his savings at the same monthly amount, or even a good bit less. I still maintain that if you do the math, the only way a loan puts him ahead is if he's on shaky ground already, if he or his spouse is unable to exert the self-discipline required to pay himself what he would pay the fat bankers, or if he's buying into the upward slope of the bubble market, which nobody is now.

I realize not everyone will agree, and there are circumstances where leverage makes sense, but I still think the basic rule should be you don't spend money you don't have, and don't borrow money you do.

J Tiers
12-27-2008, 12:26 PM
When the going gets tough cash equity in a house is of no help. It won't pay the taxes or buy power, heat and food. It isn't portable and can only be realized by leaving to rent someplace if you can sell which puts you in exactly the same situation as a house loan but with no equity.

Yes indeedy.....

It is called 'liquidity"........ Many corporations go bankrupt every year not because they are broke, but because they have a "liquidity crisis", the cash is tied up and not available except by selling something, so they can't pay their debts.

I know people who are poor as churchmice, but own valuable property. they can't get anything for it except by selling it all, and they can't do that. So they struggle to pay the taxes on it to avoid losing it altogether.

If the house value is lower, that means that cash is effectively worth MORE.
When you sell anything in those conditions you lose money, because it can be bought for less dollars than you paid for it.

I LIKE debt-free living. But I like having cash also. Not because I spend it, but as a reserve.

Since you will HAVE the money, paying the loan isn't a problem, and you'd probably pay the loan out of regular earnings anyhow. But not having cash could be an issue.

You can invest cash, a form of purchase, like the house, with similar problems. Or lend it out by putting it in the bank, either deposits or CDs. That keeps it earning but also available. You will probably get no better than 4% or so in a CD now, but it beats under the mattress.

Since you are in the US, your cash in the bank as a CD or deposit is covered by the FDIC. So if the bank folds, you don't lose.

If ALL the banks are folding, and the FDIC is worthless, then only gold or hard assets are worth anything, and then only if you are armed and can hold them against all comers. That wouldn't be affected by whether or not you have a loan, or a house, etc............ so that simply does not figure in.

gellfex
12-27-2008, 06:01 PM
One simple way to approach it is which is a better investment, the house or some other place to park the money. The part not being addressed in the financing argument is the tax advantages of a mortgage bring down the effective rate another point or 2. So if you can buy a house at an effective 3%, isn't there some better returns available for your cash? At this exact moment, cash is king, everyone is terrified. But the markets will return.

If it was me, and since you post here I assume you're handy, I would leverage that cash and invest it in residential rental real estate in a couple of years when prices are flatlined. My wife has an uncle whose family became rich buying RE during the depression. My wife and I own 2 buildings with 9 apartments, and are expecting to use equity from them to buy again when this dust settles. Remember, when prices fall, rents are usually way more stable than prices, often going up slightly, and when you buy rentals, the rents are counted as income on your mortgage application.

There's simply no better way for guys like us to leverage a little money into a lot with relatively low risk, even in volatile times. Remember also, if you buy a rental that pays it's expenses, it simply doesn't matter if prices drop. You invested not to flip it but to have the tenants buy the place for you. And that last dollar you pay in 30 years on a mortgage is worth only $.30 in today's dollars, but the rent rises keep up with inflation the whole time giving you an increasing stream of cash in addition to paying off the loan.

Retirement could look a whole lot different depending on what you do now.

Sophiedoc
12-27-2008, 07:08 PM
I am certainly no financial guru but then it seems neither are most of the stock brokers or else most investors would be out of stocks for a while but in fact most were left holding the bag and hoping the market recovers if you live long enough.I see hyperinflation ahead probably in 2-3 years and if so you can pay off your debt in cheaper dollars provided you are in the workforce and wages keep up.It is very difficult for me to understand why our(US) gov't has severely limited domestic purchases of I and EE bonds when we are so deeply in debt--I remember WW2 when bonds were pushed to the hilt to pay for the war? why not sell our debt to Americans instead of to the Chinese,Japanies,Koreans etc unless something like default is anticipated?

J Tiers
12-27-2008, 07:19 PM
It is very difficult for me to understand why our(US) gov't has severely limited domestic purchases of I and EE bonds when we are so deeply in debt--I remember WW2 when bonds were pushed to the hilt to pay for the war? why not sell our debt to Americans instead of to the Chinese,Japanies,Koreans etc unless something like default is anticipated?

Most likely the reality that americans don't save, won't save, and are not customers for bonds.

And don't have any money because they don't save, won't save, and blew it all on chinese goods or German cars.

rbregn
12-27-2008, 09:10 PM
pay off your house and save the rest. plain and simple

Michael Moore
12-27-2008, 11:51 PM
FWIW and YMMV: we paid off our house early, and because we had no monthly house note when the chance came for both of us to take "early out" retirements we were able to do that because our fixed monthly expenditures were low.

We didn't save any significant interest amounts because we were pretty much in the "95+% principal payment" range on the note. We had the cash on hand and we felt a lot more comfortable knowing that the house was ours.

We had people tell us how shocked, shocked I say, they were that we had all that equity just sitting there, and how we should pull it all out and put it in the stock market and make some money. :eek:

Our experience is that all those "any 30 years in the stock market shows an increase in your investment" advisories are one of those "averages" things. There are people out there who hit the jackpot on stocks every time, others who come to a draw, and still others who are going to lose their shirt on every investment. Our attempt at doing some investing put us in the latter group. But wait, on the average other people were doing well. Fine, on the specific we lost real cash, not paper profits.

We aren't planning on moving, so having a muchly reduced yearly "nut" to make on our house (taxes and insurance instead of taxes+insurance+monthly mortgage payments of $1400) works for us.

It may not work for other people. But we don't have worries about living in our car, and our savings seems to slowly increase over time.

We aren't gamblers. Anyone who can look at the "rational" stock markets over the past 10-20 years and not see the resemblance to casinos populated by crazed weasels high on cocaine doesn't seem to be looking very closely. :)

I'm sure some people have pulled out all the equity in their house and put it on stock "black 32" and won big. But there seem to be a lot of houses in foreclosure these days.

cheers,
Michael

Evan
12-28-2008, 12:45 AM
Losing the use of 80,000 dollars in order to avoid a 400 to 500 dollar payment each month makes no sense at all. This is especially so since the 80,000 doesn't go up in value as the house does. Cash invested in a house you live in is the same as cash under the mattress when it comes to earning money. All you need is your name on the title and that doesn't cost 80k.

bob ward
12-28-2008, 12:52 AM
Lets say you've inherited $100,000, and are looking to purchase an $80,000 house.
Would you pay the 80K in cash, and keep the 20K.
-OR-
Finance the 80K, and keep the 100,000K?
:confused:

I would steer a middle course, assuming you are talking about a place to live in rather than an investment property, and also that you can meet repayments on a loan.

In these uncertain times cash is king. I would be putting 20k down on the house and financing the 60k, but, and this is an important but, I would be making payments as though the loan was 80k. See post #13 for why that is important.

In the present climate, other investment opportunities will present themselves. Keep 80k in the bank, stay cashed up, and you can take advantage of the opportunities.

mechanicalmagic
12-28-2008, 01:11 AM
I find it amusing that many folks have opinions. With no real numbers.

In some parts of the US, housing values have fallen 20%-50%, and there is no guarantee we have hit bottom, what happens if it goes another 25%.

Invest in the market, WTF. Please provide an investment that had retained value for the last year, much less increased in value, and pick one for the future 6 months.

Hindsight can be 20-20.

Dave J.

dp
12-28-2008, 01:35 AM
So what we've learned here is that is an uncertain place to ask about how to manage $100,000 :)

J Tiers
12-28-2008, 01:52 AM
True, we don't know kiddzimahater at all. I assume he is younger, but don't know that.

It depends on many things. The first thing is whether you are close to retirement, or far away. The closer you are, the less ability you have to tolerate downturns, because you will be wanting to turn some of it into money, either thru liquidations, or just pulling out interest/dividends instead of re-investing it. Obviously if values took a dump, you are possibly getting less than your investment back.

When you have a probable 30+ years of earnings and contributions to make, a 2 year downturn is just an opportunity to buy more investments.

Any decent financial adviser will tell you that.

But there are some really bogus advisers around. They will sell you things because they get a commission or kickback, not because they are the best for your situation.

In most cases, if you have a job, you may as well stay as liquid as you can. pay for the house out of on-going earnings, and keep the cash earning in whatever investment suits your risk tolerance and time to retirement.

But I would not necessarily invest it in stocks, certainly not as a lump, and maybe not at all, depending. This despite there being screaming deals out there.

if you are going to invest in stocks, do NOT buy individual stocks. You can't do the research, don't bother. Do mutual funds, and get into the best ones you can. Some really good ones are no-load, so an investment fee is NOT a n indicator of returns.

Do not do it in a big lump... do it in the smallest increments possible, and over time, like every month. Dollar-cost averaging usually wins out in the end.

If you really need to preserve the capital, CDs are as good a way as others. You can get several that mature at intervals over the year, so you always have some cash coming up penalty-free. FDIC protected. (not true of many "money-market" funds). Rates will be low, but you can still get 4% to 5% around here, dunno about elsewhere.

if it is reserve cash, as I assume, you probably want to trade off some potential return in order to get safety and access.

I would still, if you are early in your career, invest maybe 15% in teh stock market. Over time it generally pays off. Usually if you miss just a few specific days over 5 years, you will sacrifice much of the total gains over the period.

Don't "time the market". Nobody can, it never works. just invest regularly, in the minimum amounts allowable, and don't watch the values, you are wanting the long term if you have many years to go yet.

And, NEVER pull out the money in a downturn if you can avoid it. If you do, you are just enriching me, at your expense.

That is what people do who "buy high and sell low". They buy at a peak when they finally decide it is too good to pass up. Then they sell near the low, when they "can't stand it any more". That is how you pi$$ away money in the market.

bobw53
12-28-2008, 02:07 AM
I find it amusing that many folks have opinions. With no real numbers.

In some parts of the US, housing values have fallen 20%-50%, and there is no guarantee we have hit bottom, what happens if it goes another 25%.

Invest in the market, WTF. Please provide an investment that had retained value for the last year, much less increased in value, and pick one for the future 6 months.



So... you're conclusion is.... don't buy a house since it may lose value, and don't invest the money.

Back to the house, 20k down leaves 80k in the bank to play with, assuming no other debt, you have a $500+ on a 15 year note and a $350+ payment on a 30 year note, you also have a roof over your head. If your vehicle is paid off, and you are single, you could live on a minimum wage job, not easily, but you could without touching the money in the bank. You're paying rent anyways for a roof over your head, so whats the difference, except equity.

As for #s. How many times have you seen people that need money NOW. My grandfather got himself into some legal trouble a while back(he's an idiot) and NEEDED 35k, NOW(to keep his ass out of jail). Sold off some of his property for 35k in really quick short order to somebody that had the cash right then and there. They sat on it for a few months and sold it for 75k.

People are getting desperate from over indulging, deals like that are going to come along quite a bit. If you have the CASH and can afford to buy it and sit on it until the right buyer comes along, you can make out quite well.

80k is also a nice big chunk to start a business with. The 6% or so that you are paying to keep that cash in hand is pretty much like buying a tool, whether its a set of wrenches or a milling machine, its only going to make you as much money as you are willing to work it.

On the personal level, a $500 a month mortgage, big deal, I can probably collect that in cans a month if it came to that. The security of the cash that can do work for me, that would help me sleep at night.

tony ennis
12-28-2008, 02:14 AM
As low as interest rates are, I'd borrow the money at a fixed rate. If you get a 30 year loan and make one extra payment a year you cut the loan to about 19 years. So 20% down as this secures the lowest interest rate, then one extra payment a year.

This leaves you with a considerable war chest that's earning interest.

jcarter
12-28-2008, 02:37 AM
The best move I ever made was going to see a financial adviser. Most people are not as smart with money as they think they are and I am no exception. My financial guy helped me with planning a budget, purchasing my house( I now own two) ,purchasing vehicles and investing in retirement savings. These people do not cost you money out of your pocket so it's crazy not to use their services. There are many of them out there, just look in the yellow pages under investments. You will be amazed at what they will help you with.

dp
12-28-2008, 02:49 AM
The best move I ever made was going to see a financial adviser.

In July, right after I retired from a large online travel company (dot commmmmm!) I turned over my entire life's energy to a financial adviser. Since then it has lost nearly $200,000. They're not perfect. Left to my own devices I probably would have lost all of it, but I know I'm not perfect. Granted, nobody expects the Spanish Inquisition vis-aivis the global economy. Using perfect hindsight it was probably an impropitious time to retire :)

Evan
12-28-2008, 06:11 AM
I find it amusing that many folks have opinions. With no real numbers.

In some parts of the US, housing values have fallen 20%-50%, and there is no guarantee we have hit bottom, what happens if it goes another 25%.




No real numbers? Exactly where do you think I got the values for a 15 year mortgage at a 5.5 percent interest rate?

House prices on national average have fallen to year 2000 levels. They are still 4 times higher than they were in 1940 AFTER adjusting for inflation. In the mid sixties I was earning enough money to buy a new car with 2 to 3 months salary and a house cost just over a year's pay.

The price of real estate has ballooned way out of proportion to the level of income. In large part this is directly traceable to the granting of credit based on the sole qualification that the recipient be breathing. What is happening now is called a Correction.


Invest in the market, WTF. Please provide an investment that had retained value for the last year, much less increased in value, and pick one for the future 6 months.

T bills, Guaranteed Investment Certificates, Money market based funds and any other cash based investment. For the next six months cash based investments are a good choice which is what I have been recommending. It's also where my money is and I haven't lost a dime.

J Tiers
12-28-2008, 11:09 AM
The best move I ever made was going to see a financial adviser. Most people are not as smart with money as they think they are and I am no exception. My financial guy helped me with planning a budget, purchasing my house( I now own two) ,purchasing vehicles and investing in retirement savings. These people do not cost you money out of your pocket so it's crazy not to use their services. There are many of them out there, just look in the yellow pages under investments. You will be amazed at what they will help you with.

Those are EXACTLY the people to avoid like the plague...... They absolutely DO live off your money, but in a hidden way that costs you much more in the end.

Their only income is kickbacks and bribes from the funds they recommend. Commission, it may be called, but it is a kickback, and it pollutes their advice, twisting it to their own advantage as much as yours. They also usually have access to only a certain restricted set of funds and investments, and often live with corporate instructions to "push" certain investments.

When you only have a hammer, everything looks like a nail..... So their answer to your every need is going to be something they sell, regardless of your situation. An honest one will send you elsewhere, but they gotta live too.

When they need to make their house payment, they will sell you a dog in order to get money. They have to.

What you want, is a 'fee-only" planner. Not a "fee based" *, but "fee only". Yes, you WILL pay them. But they are working for you, not a fund, or a corporation. They usually will do one-time for a set fee, or ongoing planning for a small percentage.

Since they are working for you only, their advice is not based on kickbacks or bribes from the funds and investments they recommend. If they don't give good advice, they stop getting clients.

* The "fee-based" designation means that while you do pay them, they also accept kickbacks and bribes from the funds. So their advice is not more independent than a frankly commission agent, but they take some money from you as well.

A.K. Boomer
12-28-2008, 11:31 AM
As low as interest rates are, I'd borrow the money at a fixed rate. If you get a 30 year loan and make one extra payment a year you cut the loan to about 19 years. So 20% down as this secures the lowest interest rate, then one extra payment a year.

This leaves you with a considerable war chest that's earning interest.



I believe this is about the best simply put diagnoses, you take advantage of all the options and manipulate them in your favor and save a BOATLOAD of money's all while keeping your payments at a bare minimum and not tying up your cash,,, whats not to luv?

A.K. Boomer
12-28-2008, 11:37 AM
Those are EXACTLY the people to avoid like the plague...... They absolutely DO live off your money, but in a hidden way that costs you much more in the end.

Their only income is kickbacks and bribes from the funds they recommend. Commission, it may be called, but it is a kickback, and it pollutes their advice, twisting it to their own advantage as much as yours. They also usually have access to only a certain restricted set of funds and investments, and often live with corporate instructions to "push" certain investments.

When you only have a hammer, everything looks like a nail..... So their answer to your every need is going to be something they sell, regardless of your situation. An honest one will send you elsewhere, but they gotta live too.

When they need to make their house payment, they will sell you a dog in order to get money. They have to.




Its kinda like trusting a doctor to give you medicine --- ooops sorry, whole nuther topic...

J Tiers
12-28-2008, 12:11 PM
Its kinda like trusting a doctor to give you medicine --- ooops sorry, whole nuther topic...

Or a thief to guard the bank.......

Evan
12-28-2008, 12:36 PM
Or a thief to guard the bank.......

It's common practice to hire computer hackers to advise on security. That is how probably the majority of systems security consultants got their start.

A.K. Boomer
12-28-2008, 12:44 PM
Thats a nice comforting little tidbit of info, Its weird but im really starting to see a pattern here, its almost as if money follows corruption or corruption follows money, I cant tell which because they both seem to show up instantaneously... :(

steve45
12-28-2008, 01:13 PM
I'm truly amazed that in 55 replies, NOBODY has mentioned Dave Ramsey's principles.

First, establish an emergency fund of several months worth of expenses.

Second, get out of debt. If you owe money on credit cards, cars, toys, etc. pay them off.

Then, consider buying a house. Pay cash if you can, or put down a large down payment. 15-year (or less) fixed rate mortgage. Payments shouldn't be more than 1/4 of your take home pay.

In this market, it might be wise to see how low prices get before buying.

Precious metals are a really dumb idea. If everything goes to crap, what are you going to do, take a gold bar down to the store and trade it for a loaf of bread? The gold price is about what it was in the mid 1980's. If you want something secure, buy 9 mm ammo. You can barter with that quite easily.

By the way, we're waiting for the paperwork to pay off our mortgage. It will be great entering 2009 debt free!!!!!

dp
12-28-2008, 02:02 PM
I'm truly amazed that in 55 replies, NOBODY has mentioned Dave Ramsey's principles.

But the OP got 57 answers to questions he didn't ask ;)

J Tiers
12-28-2008, 03:08 PM
It's common practice to hire computer hackers to advise on security. That is how probably the majority of systems security consultants got their start.

By that time they are no longer thieves.......... you think. And I doubt they directly are put in charge of security anywhere specific, with all the passwords etc. I wouldn't do it........

The advisors from Ameritrade etc, make money off their advice, directly. if they advise you NOT to invest in their stuff they starve.

The fee-only folks advise without that inherent conflict of interest.

J Tiers
12-28-2008, 03:09 PM
But the OP got 57 answers to questions he didn't ask ;)

Silly silly.

1) he got a lot of answers that are directly on his subject.

2) some of the questions he SHOULD HAVE asked.

Evan
12-28-2008, 03:23 PM
By that time they are no longer thieves.......... you think. And I doubt they directly are put in charge of security anywhere specific, with all the passwords etc. I wouldn't do it........

If they are any good they won't need passwords. There is no such thing as a secure machine or operating system if you have direct console access.

This is not the only example but it is probably the most famous.



Legendary hacker Mitnick turns legit

Mitnick, as he recounted during his lecture, began hacking as a
teenager in California, tapping into various telephone networks before
moving on to the kinds of corporate network break-ins that earned him
five years in a federal prison.


"Last night," he said at the beginning of his talk in his typically
wry, dead-pan manner, "I had dinner with the CTO of a security
company, and invited a friend to come along." When he asked his friend
later that evening if he had told their dinner partner where they had
met, the friend told Mitnick he had described them as "neighbors."


"That was partially true," Mitnick told the audience. "He was my
neighbor in federal detention."

Following his release in 2000, Mitnick - who is now in his early
forties - transformed himself from one of the world's most famous
hackers to one of its most sought-after on-line security consultants.


When he was released, Mitnick wasn't even allowed to use a computer.
http://seclists.org/isn/2006/Feb/0103.html

J Tiers
12-28-2008, 06:21 PM
If they are any good they won't need passwords. There is no such thing as a secure machine or operating system if you have direct console access.


Which they should not have. If there is any security problem, it should be "obvious" from outside, with "obvious" being relative to experience and ability.....

if a system is secure, then nobody who doesn't HAVE to have access should have it. They can advise all you want, but no "internal" hands on.

I am relatively security-oriented. There is a system here on-site where I am now that none of those guys can get into in any useful manner.

kvom
12-28-2008, 10:05 PM
Here's a different option.

30-year mortgage rates are about 5.15% right now, the lowest in memory. If you can deduct the interest on taxes then the effective rate can be even lower.

However, home-equity rates for those with good credit ratings are at prime, currently 3.2%.

So an option is to buy the house the cash, then take 80% ($64K) back in a no-closing cost home equity loan at prime (if you qualify). Then you have $84K to invest IF you find a suitable investment, At the current time I'd suggest municipal bonds, as they are some of the highest-yield good quality investments going.

Of course, there are the usual qualifiers about risk tolerance, ability to make payments, other debts outstanding.

Evan
12-28-2008, 10:38 PM
There is a system here on-site where I am now that none of those guys can get into in any useful manner.


Don't bet on it if it is online. There have been several challenges over the years presented at large to try and break in to certain very special secured networks running custom operating systems. The motive is advertising of course except that each time it has backfired. Every time this sort of publicity stunt is conducted the system in question has been penetrated. That is why the Defense Department uses two separate networks. The real classified material is on a network that has no connections to the internet at all. It's known as the "Air Gap Defense" and it is the only certain way to prevent a remote compromise.

J Tiers
12-28-2008, 10:40 PM
Oooh..... I don't know that I like that one at all. At least not in bonds..... they are "sorta" liquid, right now...... But no guarantees in future.

You do NOT want to be caught out with debt and have your debt payoff money tied up in stuff you can only sell at a discount below your cost.

The ONLY almost totally liquid "instruments" are CDs, in the FDIC arena, or money market fund shares, which have a higher risk. The CDs have a withdrawal penalty for early withdrawal, but can be structured to come up regularly enough to be fairly OK.

Money market is riskier, and is likely to "break the buck" in crazy conditions which require you to pay back the debt early.

With either of those, your interest rate advantage is slim, and hardly makes the fees, fuss, and bother worth it, since the best I see now is around 3.9% apr for CDs.

The savings account is going to net you a loss.

if you want the cash, the best way to have it is not to put it out on the house. Take a loan, pay a chunk of principal right away, and have the cash earning as much as you can safely as you pay off out of your salary/wage earnings.

You then still have the cash and can weather bad conditions better than with a house and no cash.

Evan, I can guarantee they cannot get into it. You would agree if I could discuss it. You may feel free to speculate on how it is handled.