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  • Finance or pay cash. New house

    So I know that variations of this topic has been posted. I think it was easy to say invest the cash in the market over the last few years but things seem to have changed in regards to market returns this year.

    I am in process of building a new home. The land was purchased outright. Construction costs around 1 million. I have the cash to pay the costs but can get a loan at 4%that would flip to a 30 year fixed after the build is finished.

    plus side of no mortgage is I can not pay for windstorm insurance which will be around 20k annually. Mortgage will require this insurance.

    cash flow to service mortgage is not an issue. Income is >750 with no other debt.

    I have a moderate level of risk tolerance With investing.

    Opinions?

  • #2
    Depends on your age, as in stage of life. If you are 15 years or more from retirement, I would take the mortgage and invest the difference. On the other side of this equation, that windstorm insurance is a big nut to pay.

    If you have significant holdings in the market and you will continue to have a large portfolio even if you pay cash for the house, then it would be reasonable to skip the mortgage by paying cash.

    What you don't want to do is to have a large portion of your net worth tied up in the house with limited exposure to the market. You want to have a balance of assets across different classes of assets, including stocks, bonds, cash, and real estate to weather the long term risks of ups and downs. Having diversified assets is best for limiting risk, as markets will tend to fluctuate over time. For example, right now stocks are tanking and the carnage is likely to continue as the fed ratchets up rates to tamp down an overheated economy and high inflation. But real estate is still doing well. Having significant assets across multiple asset classes is a good way to reduce risk.

    And don't forget, one of the best times to buy stocks can be when everyone else is panic selling. We aren't there yet, but we may be on the way.

    Comment


    • #3
      Take the 4% and run like the wind. Invest the difference.

      Comment


      • #4
        When you count the 20k wasted on insurance if you have a "4%" mortgage for 1M house, it is really 6% (plus add any other PMI or orig fees or things you need for borrowing?). Debtors will always pay higher rates - even debtors with good credit.

        It is not wise to count on getting better than 6% returns (just to break even!). Do you have a plan that's likely or sure to attain that?
        Maybe start/expand your own practice? Income real estate complex? Etc? Buying stocks or indexes or stuff with money you owe 6% on is not a wise plan at all. It's not as if you can't take out a home loan later (not that you will need to), and it'd be better than 6%.

        I would pay it off in full if you can and you basically gain 20k/yr insurance + 40k interest save which you can use to invest. You will sleep well... as well as gain the valuable ability sell quick without any lender approval tape if you ever wanted to leave the area or capitalize on a hot market. Debt is the most insidious form of slavery. At your income, let others have that headache of remembering if they transferred funds or mailed checks for their debt payments each month.

        Comment


        • #5
          Originally posted by Ronin1 View Post
          So I know that variations of this topic has been posted. I think it was easy to say invest the cash in the market over the last few years but things seem to have changed in regards to market returns this year.

          I am in process of building a new home. The land was purchased outright. Construction costs around 1 million. I have the cash to pay the costs but can get a loan at 4%that would flip to a 30 year fixed after the build is finished.

          plus side of no mortgage is I can not pay for windstorm insurance which will be around 20k annually. Mortgage will require this insurance.

          cash flow to service mortgage is not an issue. Income is >750 with no other debt.

          I have a moderate level of risk tolerance With investing.

          Opinions?
          Age / stage / risk tolerance.

          Now I would pay cash. Esp if you have 1M in cash ready.

          cash & done.

          Comment


          • #6
            Originally posted by White.Beard.Doc View Post
            ...right now stocks are tanking ...
            I missed this part (probably because I have this guy filtered)...

            The S&P is still up YTD and it's up 80% in past 5 years (includes Trump dump, Covid crashe, current Ukraine dip). If avg return 16% is "tanking," then I sure hope it keeps tanking and tanking until I retire.

            The moral of the story is you don't roll dice when you don't need to. Nobody knows what market returns vs real estate appreciation vs 6% interest+insurance fees winner will be.

            Comment


            • #7
              If you don’t have the insurance and your home is destroyed in a windstorm, what’s your plan? Self insure with your investments?

              my childhood home was pretty much destroyed by a hurricane when I was in elementary school. Not sure I could go without windstorm insurance in an area with high chance of storms

              Comment


              • #8
                Originally posted by Max Power View Post
                I missed this part (probably because I have this guy filtered)...
                My apologies if I said something at some point that has offended you. I am not sure what that might have been, but apologies just the same.

                Comment


                • #9
                  Originally posted by Max Power View Post
                  I missed this part (probably because I have this guy filtered)...

                  The S&P is still up YTD and it's up 80% in past 5 years (includes Trump dump, Covid crashe, current Ukraine dip). If avg return 16% is "tanking," then I sure hope it keeps tanking and tanking until I retire.

                  The moral of the story is you don't roll dice when you don't need to. Nobody knows what market returns vs real estate appreciation vs 6% interest+insurance fees winner will be.
                  S&P up YTD? I guess you mean in 1 year .

                  Comment


                  • #10
                    Plan to work at least til 65, 10 more years , in a decreasing capacity eventually. I enjoy working and it’s relatively easy. Regarding windstorm it would take a direct Cat 4 plus storm to destroy this house so I think I would be ok with self insurance.

                    Comment


                    • #11
                      I'm confused as to why you wouldn't want windstorm insurance. Seems very risky to have 1M invested in a home and no insurance. I lived through a hurricane destroying my house. It would be painful to have to shell out another 1M to rebuild.

                      Comment


                      • #12
                        Originally posted by Ronin1 View Post
                        Plan to work at least til 65, 10 more years , in a decreasing capacity eventually. I enjoy working and it’s relatively easy. Regarding windstorm it would take a direct Cat 4 plus storm to destroy this house so I think I would be ok with self insurance.
                        At age 55, with 1 M in cash, and plenty already in the market and 10 more years of work I would just pay cash. I know that is conservative but I don’t like debt.

                        At 48 i personally have zero mortgage.

                        In 2019 i was considering buying bonds (yielding close to zero) or paying down debt.

                        At the time I would have rather have a paid for home more bonds and I already had >4 M in stocks so I paid of house.

                        By for end of 2020 mortgage (3.375%) was paid.

                        No perfect plan, but I am happy.

                        As for insurance, is this house on the water or near the water? How often is there a cat 3 or greater?

                        OK to self insure (my brother did it with a small vacation home) but just realize it might add some stress to llife.

                        My brother had some stomach acid when storms were in gulf of mexico, and he was happy when he sold.

                        His vacation home cost 180k and he was still nervous. 1M is a lot bigger deal, but insurance companies suck and if you are not right on water you might be making the right decision.

                        Hard to know?!

                        Comment


                        • #13
                          Questions to consider:

                          1. Age / stage = 55

                          If you were 30 with nothing invested and a 30 year time horizon I would say 30 year fixed and invest everything in stock index funds for next 30-40 years.

                          If you were 65 and had 5M in stocks and 1.5 M in cash I would say pay 1 M cash and keep the 500cash as a beefed up EF and to fight SORR


                          2. How much do you have saved in stocks?
                          If low you need to put more in. If robust then pay cash.

                          3. Insurance?
                          On coast? likelihood of storms? Spouse thoughts?

                          4. Retirement plan? Goals? What if you had too retire early would you be ok? Current savings?

                          5. what if something happens to you? Will spouse be ok?
                          Disability insurance? Life insurance?

                          Comment


                          • #14
                            Originally posted by White.Beard.Doc View Post

                            My apologies if I said something at some point that has offended you. I am not sure what that might have been, but apologies just the same.
                            WB, you're never offensive.
                            I tend to think that the different POV's are a gift as far as helping us to be better investors.
                            We are not our investing beliefs and if someone disagrees, it doesn't mean we should dislike them.
                            Although it's hard not to be passionate about high conviction beliefs, sometimes they are right and we are wrong, or vice versa,

                            Comment


                            • #15
                              Originally posted by Dont_know_mind View Post

                              WB, you're never offensive.
                              I tend to think that the different POV's are a gift as far as helping us to be better investors.
                              We are not our investing beliefs and if someone disagrees, it doesn't mean we should dislike them.
                              Although it's hard not to be passionate about high conviction beliefs, sometimes they are right and we are wrong, or vice versa,
                              Totally agree.

                              Different POVs are probably more valuable, especially when the answers are not obvious (like in this case).

                              WBD is a very valuable contributor.

                              Lots of experience Investing in RE, stock market, etc.

                              Lots of experience dealing with life & working in medicine.

                              Wisdom.

                              Comment

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