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  • OT - Financial advice

    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.
    Finance the 80K, and keep the 100,000K?

  • #2
    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 !


    • #3
      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.
      Free software for calculating bolt circles and similar: Click Here


      • #4
        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.
        I seldom do anything within the scope of logical reason and calculated cost/benefit, etc- I'm following my passion-


        • #5
          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.


          • #6
            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?


            • #7
              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!).


              • #8
                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).
                Master Floor Sweeper


                • #9
                  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.
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                  • #10
                    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.
                    Peter - novice home machinist, modern motorcycle enthusiast.

                    Denford Viceroy 280 Synchro (11 x 24)
                    Herbert 0V adapted to R8 by 'Sir John'.
                    Monarch 10EE 1942


                    • #11
                      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.

                      is a way to get a little better handle on this dilemma.

                      Dave J.


                      • #12
                        Oh dear!!!!

                        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.


                        • #13
                          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.

                          Keep eye on ball.
                          Hashim Khan


                          • #14

                            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?


                            • #15
                              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.