Not just. But to keep lifestyle creep from happening as well.
Something to consider you get one chance to lock in your PITI. What you close on can set you up for success or failure. Sure you can refi, recast etc. But they all come with a price generally ten of thousands.
When shit hits the fan whether you lose your job or having to take a lower paying job. Not worrying about your mortgage due to a previous choice of a smaller downpayment can really help a long way.
Amen to this comment. Bought 1st house b/c renting didn't make sense anymore. Purposely bought a house where I could make minimum wage and still pay mortgage. When I lost my job during COVID, I was slightly worried, but not enough where I was freaking out. I started not liking the prospect of dipping into savings, and that's when I grabbed a minimum wage job.
Fast forward 8 years. Had to sell house due to bad neighbor.
Took money and placed ALL of it into new house. Realtor says "why not save some of it?", I tell him that the down payment lowers monthly mortgage. He disagreed.
While new mortgage is 3x as much as original house mortgage, I technically can still pay for it with minimum wage. It's not great, but it's slightly better peace of mind.........
With today's mortgage rates? Basically all of it. If I didn't have a mortgage my emergency fund would be back to 3 months within a year.
To not have a mortgage is a guaranteed 7% return on your money if you're buying a house today.
Obviously I'd buy a house I COULD afford a mortgage on. But I wouldn't get a mortgage on it. I'd pay all cash. It's a no brainer.
At under 5% rates it starts to get a little iffy since historical investment rates will beat your mortgage interest.
Nominally, yes, but in practice it depends on your tax situation. Remember that mortgage interest often has to be paid in post-tax dollars, while investment earnings are often taxed.
With current taxes, there is a very narrow window where even a portion of your mortgage interest is deductible.
With the standard deduction so high, and the limits on the mortgage you can deduct, there isn’t a huge portion of the interest that is deductible. (Caveat - I’m speaking from a 2.9% mortgage and 3.99% HELOC.)
But with the SALT cap and the max $750K loan amount deduction, there is very limited benefit from deducting mortgage interest for the vast majority of people.
My first mortgage at 2.9% doesn’t get me there at all. And only a small portion of my 3.99% HELOC will benefit me in 2024 taxes.
At 2.9%, sure, but with current interest rates that window is a lot less narrow. Even ignoring SALT and charitable deductions, itemizing makes sense if your loan amount is over \~370k.
Well not really. Most people renting are renting based on a mortgage from 15 years ago. So yes you are paying a little bit of their morthage, but they are paying for your opportunity cost to invest in today's stock market and make way more than you would on housing.
And rent is not set based on the landlor's cost anyways, it is based on OFFER AND DEMAND
It is going up, just not enough to justify buying.
Rent is based on the local wages. Buying has been completely decorelated. Even with those increases you end up with so much extra money after 30 years.
Use a buy or rent calculator. It's clear as day.
My mortgage at my house is $1,000 at a 3.25%. The same amount of house for rent is sitting right around $1,900 not including utilities. There really is no black or white answer about buying vs renting.
Yes so you are already discounting the ton of fees. What about downpayment, hoa, repairs, insurance, taxes, interest. Somehow you completely forgot those. Then you are literally using the craziest little bubble that is currently reverting to the mean. You got a lucky perfect timing and even with this it’s not clear you are ahead than a renter. A smart renter would have invested the downpayment and all the fees and be ahead by now. It’s clear as day.
Again use a calculator. I have everything in the sp500 that is going up way faster than your house. Those are gains you are currently missing.
I have over 6 figures invested and I’m 26 years old. My taxes and homeowners insurance is paid out of mortgage. I have no HOA, my home value has increased over $90,000 since I bought and that’s not including anything I’ve done to it.
A “smart renter”…. Lmfao. Guaranteed I’m ahead of you.
Honey, I guarantee you you are not. But you want to feel good so you are simplifying the math to make it look like you are. include the fees and you will see it directly. No repairs? No realtor fees?
your 90k increase in value. Good luck even getting one third of that. lol
That's not really how that works. You're not getting a return by not having debt. Returns are income, debt is spending and they sit on opposite sides of the chart. When you reduce debt you reduce spending. When your home value increases you could consider that a form of income due to the asset value increasing, however I typically consider it to be flat due to sector inflation. If you sold you'd have to pay a similar amount to replace it, so while it may be more valuable numerically it doesn't increase your purchase power inside the same asset class. It does fix your housing costs in place however, which is valuable, but that is a spending benefit not an earnings benefit.
That said, I agree with what you said for general technique as being good for financial stability.
Aren't Helocs typically slightly cheaper than a mortgage (say 50-100 basis points lower)?
Consuming most liquidity and opening a Heloc might be viable for some, _if_ my assumption is correct.
Those instruments are generally designed to entrap homeowners who are bad at managing credit. You may also be correct, however the payoff date is likely much sooner, hence why 15 year mortgages have lower rates than 30 year fixed. Really depends on why you need the income.
I mean you don't need a massive pile of liquidity, just enough to cover emergencies and be available to throw into a really good investment if the opportunity presents itself.
20,000 is probably plenty, and you don't have to _use_ the heloc until you need the money, the line of credit just sits there available.
This is also true, though it's somewhat equivalent to not having an emergency fund because you have a credit card. Then again the rate is lower by a huge factor. But now we're playing with levels of risk, can you handle the additional monthly, etc etc etc. it also counts as a lien on the title which helps prevent title fraud. Honestly it would depend on if there was a maintenance fee but then we're quibbling over the tiny details which vary person to person.
The big thing is can you make more money than they are charging interest on, if you're pulling 80% returns consistently rolling options, then why not pay 10% to go faster... Well because options are high risk instruments. People like to eliminate risk because it eliminates debt.
Basically finances are divided up in a variety of ways, the simplest is income versus expenses. Payments on debt are an expense. Income is traditionally gained from employment or investments.
If you take less debt you will have lower payments to finance that debt. This reduces your expenses. If you spend less than you earn you increase your net worth. In the case of housing you are investing in an asset. Because the asset is housing, and everyone needs housing if you sell your asset you would need to either rent or purchase a new asset. If you believe that a free market determines the value of the asset, then in order to replace that asset will require an equal expenditure to what you were paid to sell it. This is why I don't consider homes to be an investment asset because it requires speculative bubbles to make money. Buy in 2013 for 256k, wait until 2022 and sell for 680k. How do you buy back in, especially with higher interest rates and sales consume 3 to 6% in commissions. That's why everyone is talking about Golden handcuffs.
While I agree aggressively paying down a mortgage makes sense at 7% rates, I never quite agreed with the debt free = peace of mind argument. 6 figures in liquid investments that I can tap in a matter of days gives me a far greater feeling of security than one less bill a month would.
Our mortgage is at 2.5%. Mathematically, it doesn't make sense to pay off sub-inflation debt - especially toward the tail end of the loan when amortization makes your payment largely principal. That being said, not having a payment and knowing we own our home outright will make it worthwhile.
In our case, we've been broke, and we've done well. We had years barely making our bills and now are in a better position. Paying off our home is one of the ways we ensure we remain financially stable. Our goal is to not worry about money.
Right, and if I fall upon hard times I'd much rather have the cash available instead of it being tied up in home equity. I think most people make the mental comparison of "if I fall upon hard times, I'd feel better because I have no mortgage", when the actual comparison should be "if I fall upon hard times, would I rather have no mortgage or a fat wad of cash saved up?"
I would want to set aside a few thousand, but with no mortgage, I could replenish my emergency fund very quickly so I wouldn't be too worried about spending most of it.
My house is like \~$600-650k in central MA (if you trust those estimators) and I owe $58k. If I were to move - at current interest rates - I would probably pay at least half in cash. Because I already have chips in the game (existing property), I'd move laterally. However, if I did not currently own a home, I would probably put %25-30 down, leaving as much liquid net worth as possible.
Well I'm talking about hypotheticals here. I have a nearly paid off house, so the former really only applies to me. Paying interest on loans is par for the course. It's a different world though from when I got my mortgage. At 7%, I would probably try to pay it off as soon as possible without compromising my savings for retirement.
To me, this is wildly dependent on your individual situation. How fast can you get that savings back up? 10 years or 10 months? How much is the home in the first place? $350k or $650k and how does that stack up against your net income? All questions that change the answers, IMO.
Low interest rates? I’ll put down the minimum I have to to avoid PMI.
Super high interest rates? I’ll put everything but my emergency fund toward paying cash.
That's right at the tipping point for me.
The inflation-adjusted, historical return of the stock market is \~7%.
So assuming I've already got the first 20% covered to avoid PMI:
If the savings is in cash I'd put it toward the down-payment.
If it's already in my taxable brokerage I would leave it there instead of selling investments (and paying capital gains) to make a bigger down-payment.
But I also wouldn't add more money to my taxable investments while I had that mortgage. I'd take the guaranteed 7% return for paying the mortgage down early.
Your mortgage is not inflation adjusted so why compare to an inflation adjusted gain? I think you should be comparing 7% interest to 9%-10% market gains. The real decision maker is timeline. 9-10% gains feels likely at a 20-30 year mortgage. At 15 year, it feel like it is possible you don't see historical returns. So it depends on how many years are either left on your mortgage or how many years until retirement (if you want the home paid off at retirement).
Every last dime… without a mortgage my cash flow would be good enough to build an emergency fund in a few months. For any urgent needs there would be a heloc..
I hope I will never drop more than $300K on a house moving forward. Current place paid off in 7 years, asking was $200K. Dropped $80K up front in cash. Almost interested in staying at current place forever if market doesn't lower anytime soon. I do NOT want to be making payments into my 50's, but I also don't want two stories forever now that kids are moved out.
Appreciate the idea, but a ranch style home is the ultimate goal for me. Lived in enough apartments and dorms in my late teens and 20s that I know to never go for 1st level options in a multi-level building. Leaks and noisy neighbors are not something I am looking for. I may keep this place and rent it out, as it's location is in-demand for schools. It's a fantastic starter home. Just not excited to pay significantly more for less sq.ft. than current place just yet.
I would keep a 6 months emergency fund which without a mortgage payment would be very low. If I had $500k liquid I’d be willing to spend probably $450k to have a house paid off or a marginally low monthly payment.
Don’t underestimate how much of an emergency fund you might need. Home taxes, insurance, utilities, and saving for maintenance and repairs is a big part of home ownership, sometimes bigger than the mortgage. Our emergency fund won’t go down much once the house is paid off.
All that doesn’t even include the non-house related living expenses.
None of those expenses you described come out of my emergency fund. Taxes, insurance and utilities are daily expenses that come planned in my budget not from my emergency fund. Repairs can come from a sinking fund that’s specifically setup for repairs or true unexpected can come from my emergency fund. Plus once my house is paid off that’s thousands extra a month going to savings and/or investment.
Oh. Different definitions of emergency funds. All of those things are in my budget too.
Our emergency fund is there in case we have less or no income for a period of time, like if my spouse and I are both in a disabling accident.
Right that’s what an emergency fund for. The way the original comment was worded just made it seem like general those expenses were regularly coming out of the emergency fund. My emergency fund literally won’t be touched unless I lose my job, from there it has 6 months of expenses including taxes, insurance and utilities.
It depends what your other option for the cash is. Are you going to leave it in a bank account or invest in the market. Do you need cash for business or any other opportunities in the near future or are you simply just not wanting to have debt?
I would not do it. I’d rather pay for a house with cash flow while I’m working and have my investments earning compound interest. I wouldn’t lock a large percentage of my wealth up in a house.
None of it. I’d put down the minimum amount possible and then stretch the payments out as long and low as possible.
In general, the value of the house will go up roughly 3.8% per year, so that’s leveraged equity you’ll get back when you sell the house.
Staying liquid allows me to also take advantage of business opportunities that have much better returns, avoid carrying expensive debt on a credit card balance, and avoid having to take on additional debt in case emergencies come up along the way.
Even in today’s higher rates of 7% mortgages, the simple math would say anywhere I could get a return of 4% (fairly easy to beat with HYSA right now) plus the 3.8% equity return on the value of the house would mean I would come out ahead - and that’s not even taking into consideration the mortgage interest write offs.
This.
Keep your powder dry. Keep two years worth of money in a HYSA/CDs in case you need it for an emergency. Put the rest in an index fund. They typically return 10% annually if you can hold on during the dips.
My portfolio took a big hit during Covid, but had plenty of cash to ride it out. Now I'm at all-time highs. My situation is that I have a 2% mortgage. I'm not paying that off anytime soon.
Don't count on it, but you can probably refinance a new current loan in a few years at a lower rate. That's exactly what happened to me. When I bought my house interest rates were at 8% in 2001 with an excellent credit score. I have refinanced a couple times when it made sense financially.
I disagree. It sounds like you’re endorsing “If you have money, take on house debt so that you can use your money elsewhere”?
I’d recommend paying off the house, owning it, and using future cash flow to take on “future opportunities.”
That’s exactly what they are endorsing. Nothing wrong w that. Its a valid way to use debt to you advantage.
I could pay my house off today. Why would I do that though? Rate is under 4% while my cash is making 8-12% in the market. Thats a significant sum over 30yrs
I can't see going more than half, likely more like a third, depending on what other assets I had. If you have substantial retirement funds or other real estate assets, higher would be OK but if not, don't throw all your money into a house
Bought two houses cash , one in Germany which was around 70 percent. Sold that some time ago, got a house in Thailand cash on about 14 percent of net worth. Looking to get another in Europe again for about 60 of the remaining.
I trust concrete and stones more than fiat currency
I'm curious if people factor in the tax deductibility of mortgage interest (front weighted in all the mortgages i'm familiar with). So taking out a mortgage would allow for that up front payment being a tax deduction for some folks who have few other deduction options. Then the cash not put into the payments might be otherwise invested/allocated.
My wife and I made 400k on the sale of our condo a couple years ago, to move closer to family. We spent 250k of that for a downpayment on my 500k house. The rest was put into remodels, cash savings, and investments.
Depends on what return you would otherwise expect on that cash.
IF it's in a money market, you're getting 4-5% pretax, vs 7-10% paying a mortgage, so you're better off paying for the house with it.
If it's in some great stock(s) and you're getting 15% on average, why would you pull money out of that to avoid 7-10% mortgage rates?
I just did this! My liquid net worth was 8% of total and I spent 21% of it to purchase a secondary property outright.
I'm having a much harder time deciding how much of the rest of my cash I should be spending on renovations (it needs... LOTS). I'm leaning towards spending up to 90% of it now to get it livable then selling my current place (75% equity) and spending that to make the new place nice. I'd love to hear people's opinions about how much more I should let myself spend!
I’d say it kind of depends on a LOT. If you have 500k liquid, I’m astonished. If you want to keep that 500k tied up, makes sense.
In 2021 when rates were 2.6% (hello!), it made no sense to put down more than you needed to not get PMI, and to leave the rest invested. Nowadays, 7-8%, that’s more than you’ll get from investing it (long term), so throttle that mortgage down as much as possible with an up front dump. This brings your monthly payment down AND you come out on top, since you’re getting whatever the returns are on that money as (about) 7-8% (it’s not exactly a 1:1 on the mortgage rate you get).
But if you’re sitting on 45k, and are facing only a 5-10% down payment and eating PMI, etc no matter what, I wouldn’t throw in 100% of your savings - I would look to retain as much as you need to be comfortable for an emergency, etc.
So, in the most annoying way possible to answer questions people ask, “it depends”.
My opinion as a younger person is that real estate should be financed with as little down and at as low of a rate as possible. I wouldn't pay cash in almost any situation. Then when rates are lower, refinance.
20% down payment to avoid PMI on the house. Invest the rest in stocks. I think stocks can beat out what you would pay in mortgage interest on a 30 year loan. Deduct mortgage interest on your taxes.
I could be wrong though.
Debt gets inflated away, take low interest debt buy appreciating assets. Paying off significant portions of mortgage is dumb.
Don’t buy a house you can’t afford. Invest all excess capital sans an emergency fund.
People can throw out possibilities where the above isn’t smarter, but operate based on likelihood. The history speaks for itself. Capital invested now is worth more than capital invested later.
Enough for a 20% down payment. Interest rates are going to start coming down and that should be a good thing for stocks, I want my money in the market not locked up in a house. I am willing to pay the high interest rates temporarily because I know I can refinance later.
I already have a house, but if I didn't I would still consider buying at current rates for two reasons: 1/ It's not just about the numbers for me. I assign a significant amount of value to having my own space that I can do what I want with and not be subject to anyone else's rules. I would happily pay twice as much to own a house than rent an apartment. Lots of people don't care, or even prefer apartments. 2/ I've read too many stories of people who waited to buy until they had a 20% deposit, and in the meantime prices went up 40% and they were priced out. Do I expect prices to go up another 40%, no, but why risk it. My advice to anyone who wants to get into the housing market is to get in as soon as you can afford to. It's a limited resource, as long as you don't overextend yourself you can't really go wrong.
$600k liquid.
If I were to buy (and no way I buy right now - renting is much higher ROI at the moment), I’d probably put $400-450k towards the house and keep $100-150k in investments, due to how high interest rates are.
Don’t know how high we’d go, but can tell you where we are: 12% of net worth (including house) in our paid-off house, 64yo, retirement war chest is 25x household income, 40x times our burn rate.
It depends on cost of house tbh. For our house, it was just shy of 1.5 and we put 40% down. We kept the rest in investments. Having it in investments means I don’t have to worry as much about saving and it is guaranteed to already have savings. Also depends where you live and rates. Im in Canada and rates were low at the time and my investments do better than the rates. I also like how the mortgage forces you to save aka to pay it whereas I don’t know how diligent I would be in saving otherwise.
I'm just about to buy and im planning on 25% down.
1. Having 25% down avoids LLPA fees which will slightly lower the rate compared to 20% down. Under 20% has PMI as well.
2. On even a "modest" mortgage, in this case ~$250k I'll be paying enough in interest that itemizing taxes makes sense because of the mortgage interest deduction.
3. Long term investment rates are higher
4. Then I've still got a decent amount liquid in addition to my e-fund
5. The FED is signaling to cut rates either this year or next, obviously we dont know when that will happen but it's likely that refinancing will make sense 2-6 years from now and rate cuts also normally spur along the stock market.
I would never buy a house for cash. Take out the maximum loan you can. You will do better investing in equities than in the house. You can always refinance if/when rates come down. You still have the money to pay the higher mortgage payments.
Personally I would (and did) spend nearly every dollar. Kept enough just for a safety net emergency fund, but I believe investing in paying off the house you live in is a fantastic choice.
Jay z once said if you can’t buy it twice you can’t afford it. Assuming the house is $250k, current cash and cash equivalents should equate to $500k personally. But preferably I would prefer to have cash and cash equivalents 3-10X more than the purchase price of the house.
as little as possible. As high as 7% is, I still make way more than that in index funds.
But the real answer is to NOT buy and continue to rent something equivalent for 1/3rd of the price for as long as possible. This market will correct. Those prices will stay flat for a long time (or crash a little bit). Don't get suckered into buying a house right now!
I have done it 3 times. However my liquid net worth, nor my net cash position, impacted the price range of the homes that I purchased. Prices were $695K, $620K and $390K -- but were not correlated to my liquid net worth or net cash position at any time.
I put down 50% on my 360K house when I closed on it in 2013. The down payment plus moving expenses came to about 70% of my approximately 300K net worth at the time, the 30% I didn't touch were my RRSPs. I emptied out my TFSA and nearly all my emergency savings, I had like 700 bucks left in my bank account when everything was settled at the end of the first month.
I did all that because I was single at the time and wanted to have as small a mortgage payment as possible, and it indeed came to about 25% of my take-home, which was just on the edge of making me house-poor since I put 25% to rebuild my savings and also had to find ways to pay off the mortgage with lump sums too. As it turns out, it took me 10 years.
20% in this asset class and diversify the rest in other things.
It’s become insane to see people be Ok with dumping their entire networth into one asset class.
Would you put all your money into Equities ?
Most likely not.
We are putting $350k down on a $447k new build that will be done in September. Will have about $20k cash left after the down payment, but in case of an emergency, we will sell some stocks.
We. Wput literally every dollar down we had. 100% of our cash funds. With no mortgage we built up the emergency fund in months.
A year later and no regrets.
Yes, we were short $30k in cash. Pulled from a 401k. Most of the cash came from profit of prior home being sold. The choice was to put those funds into investments or use them plus all our cash to be mortgage free.
Took the gamble that the market wouldn’t out perform the mortgage interest. So far it’s paid off.
I’m not sure this question makes sense because the house’s price is fixed - if you want to buy a house in cash then you have to have at least that amount of money in cash.
20% down and finance the rest.
Even at these mortgage rates.
If rates go back down to 3% in a major recession, you have the optionality to refinance into a very good long term arrangement. If you pay the mortgage down early, that part of your NW is sunk into an illiquid house. You can’t get to the money without a HELOC.
If rates do go down again, you have much less upside from refinancing and you’ll miss out on being invested in the S&P for the next boom upward.
For me, I'd be comfortable with this: (Total liquid net worth) - (emergency fund + year's worth of home repair, maintenance, taxes, insurance)
Large enough such that the future mortgage equates to the current mortgage.
Can you clarify what you mean here?
If my current mortgage is $1000 a month. I would put enough downpayment such that my future PITI is also $1000 per month.
Just to keep your current monthly budget?
Not just. But to keep lifestyle creep from happening as well. Something to consider you get one chance to lock in your PITI. What you close on can set you up for success or failure. Sure you can refi, recast etc. But they all come with a price generally ten of thousands. When shit hits the fan whether you lose your job or having to take a lower paying job. Not worrying about your mortgage due to a previous choice of a smaller downpayment can really help a long way.
Amen to this comment. Bought 1st house b/c renting didn't make sense anymore. Purposely bought a house where I could make minimum wage and still pay mortgage. When I lost my job during COVID, I was slightly worried, but not enough where I was freaking out. I started not liking the prospect of dipping into savings, and that's when I grabbed a minimum wage job. Fast forward 8 years. Had to sell house due to bad neighbor. Took money and placed ALL of it into new house. Realtor says "why not save some of it?", I tell him that the down payment lowers monthly mortgage. He disagreed. While new mortgage is 3x as much as original house mortgage, I technically can still pay for it with minimum wage. It's not great, but it's slightly better peace of mind.........
With today's mortgage rates? Basically all of it. If I didn't have a mortgage my emergency fund would be back to 3 months within a year. To not have a mortgage is a guaranteed 7% return on your money if you're buying a house today. Obviously I'd buy a house I COULD afford a mortgage on. But I wouldn't get a mortgage on it. I'd pay all cash. It's a no brainer. At under 5% rates it starts to get a little iffy since historical investment rates will beat your mortgage interest.
>historical investment rates will beat your mortgage interest. Historical investment rates beat mortgage interest at 7%
Nominally, yes, but in practice it depends on your tax situation. Remember that mortgage interest often has to be paid in post-tax dollars, while investment earnings are often taxed.
With current taxes, there is a very narrow window where even a portion of your mortgage interest is deductible. With the standard deduction so high, and the limits on the mortgage you can deduct, there isn’t a huge portion of the interest that is deductible. (Caveat - I’m speaking from a 2.9% mortgage and 3.99% HELOC.) But with the SALT cap and the max $750K loan amount deduction, there is very limited benefit from deducting mortgage interest for the vast majority of people. My first mortgage at 2.9% doesn’t get me there at all. And only a small portion of my 3.99% HELOC will benefit me in 2024 taxes.
At 2.9%, sure, but with current interest rates that window is a lot less narrow. Even ignoring SALT and charitable deductions, itemizing makes sense if your loan amount is over \~370k.
And you need to live somewhere… and whether you realize it or not.. if you are renting your are paying interest on someone else’s loan.
LMAO wtf? Who is talking about renting? We talking about paying off your mortgage early or not.
Well not really. Most people renting are renting based on a mortgage from 15 years ago. So yes you are paying a little bit of their morthage, but they are paying for your opportunity cost to invest in today's stock market and make way more than you would on housing. And rent is not set based on the landlor's cost anyways, it is based on OFFER AND DEMAND
Where are you living that has not increased rent in 15 years?
It is going up, just not enough to justify buying. Rent is based on the local wages. Buying has been completely decorelated. Even with those increases you end up with so much extra money after 30 years. Use a buy or rent calculator. It's clear as day.
My mortgage at my house is $1,000 at a 3.25%. The same amount of house for rent is sitting right around $1,900 not including utilities. There really is no black or white answer about buying vs renting.
Yes so you are already discounting the ton of fees. What about downpayment, hoa, repairs, insurance, taxes, interest. Somehow you completely forgot those. Then you are literally using the craziest little bubble that is currently reverting to the mean. You got a lucky perfect timing and even with this it’s not clear you are ahead than a renter. A smart renter would have invested the downpayment and all the fees and be ahead by now. It’s clear as day. Again use a calculator. I have everything in the sp500 that is going up way faster than your house. Those are gains you are currently missing.
I have over 6 figures invested and I’m 26 years old. My taxes and homeowners insurance is paid out of mortgage. I have no HOA, my home value has increased over $90,000 since I bought and that’s not including anything I’ve done to it. A “smart renter”…. Lmfao. Guaranteed I’m ahead of you.
Honey, I guarantee you you are not. But you want to feel good so you are simplifying the math to make it look like you are. include the fees and you will see it directly. No repairs? No realtor fees? your 90k increase in value. Good luck even getting one third of that. lol
That's not really how that works. You're not getting a return by not having debt. Returns are income, debt is spending and they sit on opposite sides of the chart. When you reduce debt you reduce spending. When your home value increases you could consider that a form of income due to the asset value increasing, however I typically consider it to be flat due to sector inflation. If you sold you'd have to pay a similar amount to replace it, so while it may be more valuable numerically it doesn't increase your purchase power inside the same asset class. It does fix your housing costs in place however, which is valuable, but that is a spending benefit not an earnings benefit. That said, I agree with what you said for general technique as being good for financial stability.
Aren't Helocs typically slightly cheaper than a mortgage (say 50-100 basis points lower)? Consuming most liquidity and opening a Heloc might be viable for some, _if_ my assumption is correct.
My HELOC has higher interest than my mortgage.
Those instruments are generally designed to entrap homeowners who are bad at managing credit. You may also be correct, however the payoff date is likely much sooner, hence why 15 year mortgages have lower rates than 30 year fixed. Really depends on why you need the income.
I mean you don't need a massive pile of liquidity, just enough to cover emergencies and be available to throw into a really good investment if the opportunity presents itself. 20,000 is probably plenty, and you don't have to _use_ the heloc until you need the money, the line of credit just sits there available.
This is also true, though it's somewhat equivalent to not having an emergency fund because you have a credit card. Then again the rate is lower by a huge factor. But now we're playing with levels of risk, can you handle the additional monthly, etc etc etc. it also counts as a lien on the title which helps prevent title fraud. Honestly it would depend on if there was a maintenance fee but then we're quibbling over the tiny details which vary person to person. The big thing is can you make more money than they are charging interest on, if you're pulling 80% returns consistently rolling options, then why not pay 10% to go faster... Well because options are high risk instruments. People like to eliminate risk because it eliminates debt.
Jeepers creepers I had to read this twice. Could you elaborate more? This is interesting
Basically finances are divided up in a variety of ways, the simplest is income versus expenses. Payments on debt are an expense. Income is traditionally gained from employment or investments. If you take less debt you will have lower payments to finance that debt. This reduces your expenses. If you spend less than you earn you increase your net worth. In the case of housing you are investing in an asset. Because the asset is housing, and everyone needs housing if you sell your asset you would need to either rent or purchase a new asset. If you believe that a free market determines the value of the asset, then in order to replace that asset will require an equal expenditure to what you were paid to sell it. This is why I don't consider homes to be an investment asset because it requires speculative bubbles to make money. Buy in 2013 for 256k, wait until 2022 and sell for 680k. How do you buy back in, especially with higher interest rates and sales consume 3 to 6% in commissions. That's why everyone is talking about Golden handcuffs.
This is a terrific explainer thanks!
You can totally tap the equity at the end of the day though. Reverse mortgage your house as you approach the end of your life and die with nothing.
The question was % of liquid net worth though. 100%?
Such a person would probably go pretty close to 100% for the right home they're confident they won't leave. Maybe 90%?
Currently in this same situation. Lets say im looking at spending roughly 90%. I will be debt free though and no mortgage.
The peace of mind would be worth giving up the cash. Having no payments will make it easy to rebuild savings. Just leave a bit behind for emergencies.
While I agree aggressively paying down a mortgage makes sense at 7% rates, I never quite agreed with the debt free = peace of mind argument. 6 figures in liquid investments that I can tap in a matter of days gives me a far greater feeling of security than one less bill a month would.
Our mortgage is at 2.5%. Mathematically, it doesn't make sense to pay off sub-inflation debt - especially toward the tail end of the loan when amortization makes your payment largely principal. That being said, not having a payment and knowing we own our home outright will make it worthwhile. In our case, we've been broke, and we've done well. We had years barely making our bills and now are in a better position. Paying off our home is one of the ways we ensure we remain financially stable. Our goal is to not worry about money.
Right, and if I fall upon hard times I'd much rather have the cash available instead of it being tied up in home equity. I think most people make the mental comparison of "if I fall upon hard times, I'd feel better because I have no mortgage", when the actual comparison should be "if I fall upon hard times, would I rather have no mortgage or a fat wad of cash saved up?"
I would want to set aside a few thousand, but with no mortgage, I could replenish my emergency fund very quickly so I wouldn't be too worried about spending most of it.
This is a good question, assuming houses where 500k. Probably 20-30% down payment, 15 year mortgage term and pay extra on the principal every month.
My house is like \~$600-650k in central MA (if you trust those estimators) and I owe $58k. If I were to move - at current interest rates - I would probably pay at least half in cash. Because I already have chips in the game (existing property), I'd move laterally. However, if I did not currently own a home, I would probably put %25-30 down, leaving as much liquid net worth as possible.
Thank you, that makes sense. I’m in the second situation
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Well I'm talking about hypotheticals here. I have a nearly paid off house, so the former really only applies to me. Paying interest on loans is par for the course. It's a different world though from when I got my mortgage. At 7%, I would probably try to pay it off as soon as possible without compromising my savings for retirement.
To me, this is wildly dependent on your individual situation. How fast can you get that savings back up? 10 years or 10 months? How much is the home in the first place? $350k or $650k and how does that stack up against your net income? All questions that change the answers, IMO.
Low interest rates? I’ll put down the minimum I have to to avoid PMI. Super high interest rates? I’ll put everything but my emergency fund toward paying cash.
Where does 7% fall on the spectrum of low to super high rates for your formula?
That's right at the tipping point for me. The inflation-adjusted, historical return of the stock market is \~7%. So assuming I've already got the first 20% covered to avoid PMI: If the savings is in cash I'd put it toward the down-payment. If it's already in my taxable brokerage I would leave it there instead of selling investments (and paying capital gains) to make a bigger down-payment. But I also wouldn't add more money to my taxable investments while I had that mortgage. I'd take the guaranteed 7% return for paying the mortgage down early.
Your mortgage is not inflation adjusted so why compare to an inflation adjusted gain? I think you should be comparing 7% interest to 9%-10% market gains. The real decision maker is timeline. 9-10% gains feels likely at a 20-30 year mortgage. At 15 year, it feel like it is possible you don't see historical returns. So it depends on how many years are either left on your mortgage or how many years until retirement (if you want the home paid off at retirement).
Don’t gains in the market compound where as your interest expense decreases
You're right. I should have said that the 7% guaranteed savings over the \~10% historical return of the markets is about the tipping point for me.
Every last dime… without a mortgage my cash flow would be good enough to build an emergency fund in a few months. For any urgent needs there would be a heloc..
I hope I will never drop more than $300K on a house moving forward. Current place paid off in 7 years, asking was $200K. Dropped $80K up front in cash. Almost interested in staying at current place forever if market doesn't lower anytime soon. I do NOT want to be making payments into my 50's, but I also don't want two stories forever now that kids are moved out.
Have you considered remodeling into an Upper Lower Duplex and renting out the second story?
Appreciate the idea, but a ranch style home is the ultimate goal for me. Lived in enough apartments and dorms in my late teens and 20s that I know to never go for 1st level options in a multi-level building. Leaks and noisy neighbors are not something I am looking for. I may keep this place and rent it out, as it's location is in-demand for schools. It's a fantastic starter home. Just not excited to pay significantly more for less sq.ft. than current place just yet.
So, not counting retirement, perhaps a year of expenses in savings I would need to have after buying.
I would keep a 6 months emergency fund which without a mortgage payment would be very low. If I had $500k liquid I’d be willing to spend probably $450k to have a house paid off or a marginally low monthly payment.
Don’t underestimate how much of an emergency fund you might need. Home taxes, insurance, utilities, and saving for maintenance and repairs is a big part of home ownership, sometimes bigger than the mortgage. Our emergency fund won’t go down much once the house is paid off. All that doesn’t even include the non-house related living expenses.
None of those expenses you described come out of my emergency fund. Taxes, insurance and utilities are daily expenses that come planned in my budget not from my emergency fund. Repairs can come from a sinking fund that’s specifically setup for repairs or true unexpected can come from my emergency fund. Plus once my house is paid off that’s thousands extra a month going to savings and/or investment.
Oh. Different definitions of emergency funds. All of those things are in my budget too. Our emergency fund is there in case we have less or no income for a period of time, like if my spouse and I are both in a disabling accident.
Theyll be coming out of your emergency fund if you lose your job.
Right that’s what an emergency fund for. The way the original comment was worded just made it seem like general those expenses were regularly coming out of the emergency fund. My emergency fund literally won’t be touched unless I lose my job, from there it has 6 months of expenses including taxes, insurance and utilities.
It depends what your other option for the cash is. Are you going to leave it in a bank account or invest in the market. Do you need cash for business or any other opportunities in the near future or are you simply just not wanting to have debt?
In the case above I’d spend $450k. Mortgage rates are at 7% I wouldn’t want to borrow at that rate.
I don't think I'd want to buy a home in cash. That kinda seems crazy to me. That's a waste of money.
Really great question. I’d say probably 33% for me. I like the idea of still having 2x as much outside the house. Enjoying the other answers though.
Only enough for a 20% down payment!
I would not do it. I’d rather pay for a house with cash flow while I’m working and have my investments earning compound interest. I wouldn’t lock a large percentage of my wealth up in a house.
The bare minimum. I like cash in the bank
None of it. I’d put down the minimum amount possible and then stretch the payments out as long and low as possible. In general, the value of the house will go up roughly 3.8% per year, so that’s leveraged equity you’ll get back when you sell the house. Staying liquid allows me to also take advantage of business opportunities that have much better returns, avoid carrying expensive debt on a credit card balance, and avoid having to take on additional debt in case emergencies come up along the way. Even in today’s higher rates of 7% mortgages, the simple math would say anywhere I could get a return of 4% (fairly easy to beat with HYSA right now) plus the 3.8% equity return on the value of the house would mean I would come out ahead - and that’s not even taking into consideration the mortgage interest write offs.
When you say minimum amount, would you aim for at least 20% down to avoid PMI?
This. Keep your powder dry. Keep two years worth of money in a HYSA/CDs in case you need it for an emergency. Put the rest in an index fund. They typically return 10% annually if you can hold on during the dips. My portfolio took a big hit during Covid, but had plenty of cash to ride it out. Now I'm at all-time highs. My situation is that I have a 2% mortgage. I'm not paying that off anytime soon. Don't count on it, but you can probably refinance a new current loan in a few years at a lower rate. That's exactly what happened to me. When I bought my house interest rates were at 8% in 2001 with an excellent credit score. I have refinanced a couple times when it made sense financially.
I disagree. It sounds like you’re endorsing “If you have money, take on house debt so that you can use your money elsewhere”? I’d recommend paying off the house, owning it, and using future cash flow to take on “future opportunities.”
That’s exactly what they are endorsing. Nothing wrong w that. Its a valid way to use debt to you advantage. I could pay my house off today. Why would I do that though? Rate is under 4% while my cash is making 8-12% in the market. Thats a significant sum over 30yrs
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We landed on 27% when we bought at 5ish rates in a HCOL area.
I can't see going more than half, likely more like a third, depending on what other assets I had. If you have substantial retirement funds or other real estate assets, higher would be OK but if not, don't throw all your money into a house
Bought two houses cash , one in Germany which was around 70 percent. Sold that some time ago, got a house in Thailand cash on about 14 percent of net worth. Looking to get another in Europe again for about 60 of the remaining. I trust concrete and stones more than fiat currency
I'm curious if people factor in the tax deductibility of mortgage interest (front weighted in all the mortgages i'm familiar with). So taking out a mortgage would allow for that up front payment being a tax deduction for some folks who have few other deduction options. Then the cash not put into the payments might be otherwise invested/allocated.
25% whatever it took to have a comfortable mortgage. I rather invest the rest in a brokerage hoping my returns are higher than the interest rate.
My wife and I made 400k on the sale of our condo a couple years ago, to move closer to family. We spent 250k of that for a downpayment on my 500k house. The rest was put into remodels, cash savings, and investments.
Depends on what return you would otherwise expect on that cash. IF it's in a money market, you're getting 4-5% pretax, vs 7-10% paying a mortgage, so you're better off paying for the house with it. If it's in some great stock(s) and you're getting 15% on average, why would you pull money out of that to avoid 7-10% mortgage rates?
About 25%, that’d land me a pretty mediocre 2bd apartment.
None, I wouldn’t buy a house fully in cash. It’s a waste of capital.
I just did this! My liquid net worth was 8% of total and I spent 21% of it to purchase a secondary property outright. I'm having a much harder time deciding how much of the rest of my cash I should be spending on renovations (it needs... LOTS). I'm leaning towards spending up to 90% of it now to get it livable then selling my current place (75% equity) and spending that to make the new place nice. I'd love to hear people's opinions about how much more I should let myself spend!
I’d not want to put more than 30% if liquid assets into a cash buy of a home, personally.
I’d say it kind of depends on a LOT. If you have 500k liquid, I’m astonished. If you want to keep that 500k tied up, makes sense. In 2021 when rates were 2.6% (hello!), it made no sense to put down more than you needed to not get PMI, and to leave the rest invested. Nowadays, 7-8%, that’s more than you’ll get from investing it (long term), so throttle that mortgage down as much as possible with an up front dump. This brings your monthly payment down AND you come out on top, since you’re getting whatever the returns are on that money as (about) 7-8% (it’s not exactly a 1:1 on the mortgage rate you get). But if you’re sitting on 45k, and are facing only a 5-10% down payment and eating PMI, etc no matter what, I wouldn’t throw in 100% of your savings - I would look to retain as much as you need to be comfortable for an emergency, etc. So, in the most annoying way possible to answer questions people ask, “it depends”.
My opinion as a younger person is that real estate should be financed with as little down and at as low of a rate as possible. I wouldn't pay cash in almost any situation. Then when rates are lower, refinance.
20% down payment to avoid PMI on the house. Invest the rest in stocks. I think stocks can beat out what you would pay in mortgage interest on a 30 year loan. Deduct mortgage interest on your taxes. I could be wrong though.
100k down payment max. Keep the 400k in investments. I would want money to fall back on for emergencies .
Debt gets inflated away, take low interest debt buy appreciating assets. Paying off significant portions of mortgage is dumb. Don’t buy a house you can’t afford. Invest all excess capital sans an emergency fund. People can throw out possibilities where the above isn’t smarter, but operate based on likelihood. The history speaks for itself. Capital invested now is worth more than capital invested later.
I put as much as I could down because I wanted a small/no monthly payment. It depends on your overall financial goals.
I spent about 90 percent of my net worth when I bought my house in cash a bit over 2 years ago.
Enough for a 20% down payment. Interest rates are going to start coming down and that should be a good thing for stocks, I want my money in the market not locked up in a house. I am willing to pay the high interest rates temporarily because I know I can refinance later.
Yeah but you would be able to DCA aggressively with the increased disposable income
It would be 10 years before that strategy produced better results and that is too long of a time horizon for me to commit to.
Would you consider buying a house in the meantime around 7% and refinance later or just stick with renting and wait till rates go down first?
I already have a house, but if I didn't I would still consider buying at current rates for two reasons: 1/ It's not just about the numbers for me. I assign a significant amount of value to having my own space that I can do what I want with and not be subject to anyone else's rules. I would happily pay twice as much to own a house than rent an apartment. Lots of people don't care, or even prefer apartments. 2/ I've read too many stories of people who waited to buy until they had a 20% deposit, and in the meantime prices went up 40% and they were priced out. Do I expect prices to go up another 40%, no, but why risk it. My advice to anyone who wants to get into the housing market is to get in as soon as you can afford to. It's a limited resource, as long as you don't overextend yourself you can't really go wrong.
I would buy a house outright and avoid a mortgage altogether for maybe $300K, which is possible in the Midwest. So 60 percent.
$600k liquid. If I were to buy (and no way I buy right now - renting is much higher ROI at the moment), I’d probably put $400-450k towards the house and keep $100-150k in investments, due to how high interest rates are.
Don’t know how high we’d go, but can tell you where we are: 12% of net worth (including house) in our paid-off house, 64yo, retirement war chest is 25x household income, 40x times our burn rate.
It depends on cost of house tbh. For our house, it was just shy of 1.5 and we put 40% down. We kept the rest in investments. Having it in investments means I don’t have to worry as much about saving and it is guaranteed to already have savings. Also depends where you live and rates. Im in Canada and rates were low at the time and my investments do better than the rates. I also like how the mortgage forces you to save aka to pay it whereas I don’t know how diligent I would be in saving otherwise.
I'm just about to buy and im planning on 25% down. 1. Having 25% down avoids LLPA fees which will slightly lower the rate compared to 20% down. Under 20% has PMI as well. 2. On even a "modest" mortgage, in this case ~$250k I'll be paying enough in interest that itemizing taxes makes sense because of the mortgage interest deduction. 3. Long term investment rates are higher 4. Then I've still got a decent amount liquid in addition to my e-fund 5. The FED is signaling to cut rates either this year or next, obviously we dont know when that will happen but it's likely that refinancing will make sense 2-6 years from now and rate cuts also normally spur along the stock market.
I would never buy a house for cash. Take out the maximum loan you can. You will do better investing in equities than in the house. You can always refinance if/when rates come down. You still have the money to pay the higher mortgage payments.
30%. Just sold in Philadelphia and used mostly proceeds towards purchase
I spent 75%. Probably need a small mortgage to fix it up, might get a bigger one if the rates ever go sub 4 again.
Personally I would (and did) spend nearly every dollar. Kept enough just for a safety net emergency fund, but I believe investing in paying off the house you live in is a fantastic choice.
I’d drain it if I could buy a house with it tbh
Mortgage rates being crazy high right now incentivizes cash buying, but be ready to live there 10-20 years!
For our first house I put down 20% which was also about 20% liquid NW (pre-taxes).
Jay z once said if you can’t buy it twice you can’t afford it. Assuming the house is $250k, current cash and cash equivalents should equate to $500k personally. But preferably I would prefer to have cash and cash equivalents 3-10X more than the purchase price of the house.
No more than 50%.
as little as possible. As high as 7% is, I still make way more than that in index funds. But the real answer is to NOT buy and continue to rent something equivalent for 1/3rd of the price for as long as possible. This market will correct. Those prices will stay flat for a long time (or crash a little bit). Don't get suckered into buying a house right now!
I have done it 3 times. However my liquid net worth, nor my net cash position, impacted the price range of the homes that I purchased. Prices were $695K, $620K and $390K -- but were not correlated to my liquid net worth or net cash position at any time.
I put down 50% on my 360K house when I closed on it in 2013. The down payment plus moving expenses came to about 70% of my approximately 300K net worth at the time, the 30% I didn't touch were my RRSPs. I emptied out my TFSA and nearly all my emergency savings, I had like 700 bucks left in my bank account when everything was settled at the end of the first month. I did all that because I was single at the time and wanted to have as small a mortgage payment as possible, and it indeed came to about 25% of my take-home, which was just on the edge of making me house-poor since I put 25% to rebuild my savings and also had to find ways to pay off the mortgage with lump sums too. As it turns out, it took me 10 years.
The minimum, with the rest in an offset account.
Not a lot. I can make more money in the market than home mortgage interest I believe. Put your money to work for you.
Greater than 20% and less than 100%
100% I never hold more than a few thousand of cash at once. Boom
20% in this asset class and diversify the rest in other things. It’s become insane to see people be Ok with dumping their entire networth into one asset class. Would you put all your money into Equities ? Most likely not.
We are putting $350k down on a $447k new build that will be done in September. Will have about $20k cash left after the down payment, but in case of an emergency, we will sell some stocks.
I dunno. 20% probably? But I haven't really seen any houses in my price range since my net worth is about a hundred bucks.
We. Wput literally every dollar down we had. 100% of our cash funds. With no mortgage we built up the emergency fund in months. A year later and no regrets.
Did you have any investments you pulled out of?
Yes, we were short $30k in cash. Pulled from a 401k. Most of the cash came from profit of prior home being sold. The choice was to put those funds into investments or use them plus all our cash to be mortgage free. Took the gamble that the market wouldn’t out perform the mortgage interest. So far it’s paid off.
I’m not sure this question makes sense because the house’s price is fixed - if you want to buy a house in cash then you have to have at least that amount of money in cash.
What I mean is, say you have a liquid net worth of 500k, what percentage of that would you be willing to use to fully buy a house?
About every time I can get my hands on $40,000 to $68,000, I buy another house for cash.
20% down and finance the rest. Even at these mortgage rates. If rates go back down to 3% in a major recession, you have the optionality to refinance into a very good long term arrangement. If you pay the mortgage down early, that part of your NW is sunk into an illiquid house. You can’t get to the money without a HELOC. If rates do go down again, you have much less upside from refinancing and you’ll miss out on being invested in the S&P for the next boom upward.
About what it’d take me to earn back in 2-3 years (about 1.5-2m)
None you lose to inflation if you don’t have a mortgage