Financial advice....again

[Dr. Starcs]

I've already had so many questions answered by many of you regarding our (my family) financial situation.

But I've got another one

My wife and I (both in our 30s) have been able to pay off our house about 3 years ago. We are middle class folks and have saved since our teenage years.

We now are faced with a decision regarding our future. We may have the opportunity to sell our current house and buy another that would be a better location, bigger size and a slightly newer home for our possibly growing family (we have one child now).

Our dilemma is not whether we want to do this, but rather should we do it. We would have the money to pay for this new home with cash, but at the same time it would diminish our savings, while still leaving us plenty for an emergency fund.

I guess my question is: should we view buying a newer home with land as an investment? Or should we be hesitant to use our saved money to purchase this home?

Sorry for the long post, but I felt I should explain a little about where we are, etc.

Any help is greatly appreciated as we prayerfully consider our options. Thanks.

[LSUFan]

Cash Flow, very important.


If it's somewhere where the undesirables won't move in, I'd say do it if it won't hurt your cash flow that much. Land is always a sound investment, in the right areas.

My grandparents built (with their own hands) and sold homes until they achieved the size and location they wanted, and it was paid for in cash from the proceeds of the previous houses.

[ricepig]

Depends, is this money that will be used to buy it making a good return? If so, get a mortgage and let the other money continue to grow.

[PEtrader]

Depends, is this money that will be used to buy it making a good return? If so, get a mortgage and let the other money continue to grow.

This

[Dr. Starcs]

Ricepig and Petrader, can you further explain what you mean there?

Would taking out a mortgage not be somewhat counter-productive?

[HawgWild]

The money you'd use to purchase the house, what's it currently doing? Sitting in a savings account? Mutual fund, etc.? Do you have penalty free access to it if you withdrawal the funds? What type return/rate are you currently getting on this money? What rate would you get on a mortgage? Stuff like this. There's a lot to be said for being mortgage free but there's also much to be said for living in a place you really like. At your age, you're ahead of 90%+ of the population on your financial situation.

Congrats and good luck.

[ricepig]

Ricepig and Petrader, can you further explain what you mean there?

Would taking out a mortgage not be somewhat counter-productive?

This money you have to buy the new house, what kind of return is it paying you? If it's more than your mortgage will be, then I'd get a loan and buy the house. Sure, there's some risk, but there's risk in everything in the market. We can't tell your comfort level, that's something you'll have to decide, haha.

[Pulled(PP)pork]

why not pay cash and then with whatever your mortgage would have been, put that immediately back into the savings? 


PP

[Ragnar Hogbrok]

Depends, is this money that will be used to buy it making a good return? If so, get a mortgage and let the other money continue to grow.

If you mortgage, make sure you do a 15 year fixed. This will give you flexibility to either pay the mortgage as designed or pay it off early while getting, typically, a better interest rate. If you have the cash but are unsure whether you want to pay cash for a house, that would be my advice. Just keep in mind that if you pay cash, you won't pay any interest and the cost of the home will be the actual cost.

Really it boils down to your assets.  If you have enough cash to pay for the house and still have 3 to 6 months worth of emergency fund, I'd lean towards cash. If you don't, I'd lean towards the 15 year mortgage.

[Old Tusk]

What you should look at is what the cost of the mortgage vs compound growth of the cash. I just bought some land. The choice was to liquidate equities to pay cash or get a mortgage. A 15 yr. Fixed mortgage  of 150000 @ 6% costs 228k . 150000 invested @ 6% would yield 360k.

[ricepig]

Are you saying there's not a guaranteed 6% out there today, haha?

[JoeyCapital]

If there is I would love to hear about it.

[twistitup]

keep your house, forever.....it's the Warren Buffett plan

[Old Tusk]

The long term average gain on equities is over 8% so I would think 6% is fairly conservative.

[ricepig]

The long term average gain on equities is over 8% so I would think 6% is fairly conservative.

Getting the average investor to stay the course is the harder challenge.

[Old Tusk]

No. It is called a mutual fund.

[Arkansasbeaux]

Ok there is a term called "opportunity cost" that directly applies to your question. In it's simplest form, it just means the cost of doing one thing over another and vice versa. So let's take a look at a couple things.

First, you pay cash for the house. Pretty simple right? Not so much. Lets assume that you instead take out a 15 year mortgage for 250k at 3% interest. Total payments would equal $310,761, which 250,000 is the house and 60,761 is interest. Monthly payment's would be 1,726.45 for principal and interest alone. On the other hand, taking the same 250,000 and investing it for the 15 year period at a relatively conservative 6% annualized (depending on the allocation) rate of return, your lump sum would be $599,139.55. Take out the 250k originally invested and you get 349,139.55. The difference between the 349k and the 60k paid in interest would be 289k. So the opportunity cost of cash versus mortgage would be 289k. Now, that's in its simplest form. It doesn't take into account using the money from the monthly payments to invest. It doesn't take into account any tax advantages from a mortgage either. Simply put though, if you can make more in interest than you are going to pay, then you make the payments. If you are going to pay more in interest, you pay cash. Hope that helps.

P.S. I would also venture to say that if you have enough to pay cash for the house, you have way too much in cash beyond your emergency fund and you are doing yourself a disservice by not having that money working better for you than in a checking/savings account earning virtually nothing.

[LSUFan]

Lets assume that you instead take out a 15 year mortgage for 300k at 3% interest. Total payments would equal $310,761, which 250,000 is the house and 60,761 is interest.

What? 

[Arkansasbeaux]

Fixed it. Thanks for catching that. Meant for it to be 250k not 300k.