Preferred method of payment

[Zelig]

It makes absolutely no sense to do this, beyond a stash of cash for emergencies. The interest that you get on savings is always going to be less than the interest you pay on the mortgage - unless you know something I don't, of course.

The most sensible procedure is to pay your mortgage off as soon as possible i.e. don't get a mortgage that doesn't let you do this.

The banks borrow short and lend long. You, as a consumer, must work, as far as you are able, against this by borrowing for as short a time as possible. That is if you are interested in maximizing the worth of your earnings - you may not be.

It absolutely makes sense to do this. Mortgage rates are at historic lows, you can very likely get better returns from other investments. More importantly, you home equity is part of your investment portfolio, and putting 100% of your portfolio in equity for a single piece of real estate is incredibly risky due to its lack of diversity.

I personally wouldn't want my portfolio more than maybe 30% in real estate - which you can incidentally do just as well without a mortgage with REITs.

 

[classical_hero]

Mostly credit, but for small purchases I use cash.

 

[Grisu]

Or, the market could crash on you, you bought high and now have a $100k mortgage on a house worth $50k... Now you are paying, over 30 years, $200k on a house that is worth $5ok... expected to mature at a rate of 5% per year... you got hosed

the house might only be worht 50k if you sell it, but the real worth surely is higher (meaning it would not be possible to build the same house for 50k), so unless you want to sell the house, the worth of it doesn't matter (except for tax reasons, and here 50k would be better, no?)

True, but rent is typically lower, you aren't STUCK there for 30 years, etc. You also don't have to pay insurance (sometimes) and real estate taxes...

que? when is rent ever lower than a comparable piece of real estate? Your landlord likes to earn money, so if renting is cheaper than owning....it kinda doesn't work. Currently, I pay about 66% in mortgage interest of what I paid in rent for a much smaller place a year ago.

The real estate market, when not in a bubble, is generally a 5% growth in value per year... if you can't outperform that in your investment, you don't deserve a house... And, you can also wait to buy low, get a short sale with cash, etc...

and mortgages (while not in a bubble) are usually lower than 5% so you should be able to outperform that with the money you didn't have to pump into your house.

add to that that in some places (such as where I live) it's pretty much impossible to own a house without debt unless your filthy rich. A typical one-family unit (nothing fancy, mind you) around here costs in the range of 800k to a million...try saving up that kinda cash...

 

[Mise]

The interest rate on my savings account is higher than my mortgage.

What I currently pay in mortgage is half of what it would cost to rent the identical property in the same building.

One thing that nobody's considered is that a mortgage is really the only time a regular person can ever make a large leveraged investment. This is incredibly significant. Sure, over the long term, a house might increase in value by no more than inflation, so 2.5% or something. But if you're geared 75%, as most people are when they take out a mortgage, the 2.5% gain on the total value of the house leads to a 10% return on your initial investment. Of course, the gearing changes over time, as you pay down your mortgage, complicating the calculation. And it works the other way too: if your house falls in value by 2.5%, you take a 10% loss on your own equity. But any calculation that compares saving $100,000 to putting $100,000 down on a mortgage must take it into account. And it must especially take this into account when comparing real (i.e. inflation adjusted) returns. It would be flawed to say "house prices increase in line with inflation, whereas stocks increase at 5% above inflation, so investing $100,000 in stocks will yield a greater return than taking out a mortgage". That may be true, but it depends on what the inflation rate is, and how geared you are...

 

[kochman]

the house might only be worht 50k if you sell it, but the real worth surely is higher (meaning it would not be possible to build the same house for 50k), so unless you want to sell the house, the worth of it doesn't matter (except for tax reasons, and here 50k would be better, no?)

Brick and mortar value depreciates over time... so, no.

que? when is rent ever lower than a comparable piece of real estate?

Where I live in FL.

Your landlord likes to earn money, so if renting is cheaper than owning....it kinda doesn't work. Currently, I pay about 66% in mortgage interest of what I paid in rent for a much smaller place a year ago.

I'd have to see real comparisons side by side to know if that matters.

and mortgages (while not in a bubble) are usually lower than 5% so you should be able to outperform that with the money you didn't have to pump into your house.

No they aren't, we are seeing historically low prices, they are almost always higher than 5%. When I got my 6.125% it was LOW for 2006 and years before.
Check the stats on this, you'll see I'm right.

add to that that in some places (such as where I live) it's pretty much impossible to own a house without debt unless your filthy rich. A typical one-family unit (nothing fancy, mind you) around here costs in the range of 800k to a million...try saving up that kinda cash...

You are in Switzerland, no?
The situation is different there, on a lot of levels. Prices are higher because people tend to keep houses in the family, (at least in Italy, I know you aren't there, but are you in the Italian part of CH?) rather then sell.
This leads to less supply, and more demand... I remember looking to buy when I lived in Italy, a small city in the North... it was EXPENSIVE. NYC expensive almost, and it was not a metropolis.
Mortgage rates are probably somewhat different as a result.

 

[Zelig]

que? when is rent ever lower than a comparable piece of real estate? Your landlord likes to earn money, so if renting is cheaper than owning....it kinda doesn't work. Currently, I pay about 66% in mortgage interest of what I paid in rent for a much smaller place a year ago.

It happens, it really depends on location.

Lots of places in Canada are full of people who want to own real estate and have easy access to mortgages. Especially for higher-end places to live, the rental supply is relatively high, and the supply of people who can afford higher-end places and still choose to rent is relatively low.

I know my house is cash-flow negative, the owner is paying more on the mortgage than he collects on rent, not even taking into account taxes, utilities, maintenance, etc.

 

[Borachio]

The interest rate on my savings account is higher than my mortgage.

.

Oh, I don't say this kind of thing can never happen in the very short term. But in principle it must mean the bank goes bust in the long term.

 

[Zelig]

Oh, I don't say this kind of thing can never happen in the very short term. But in principle it must mean the bank goes bust in the long term.

I suspect banks have an order of magnitude more in mortgages than they do in savings account.

 

[Mise]

Obviously each individual will have different circumstances, face a different property market, have different interest rates, different tax treatment, different attitudes to risk, be at a different place in life (start of career = wants to move aroudn a lot; later on = wants to settle in one place), etc etc etc. So anyone making broad, sweeping statements about whether it's worth investing in property is stupid and wrong.

P.S. "stupid and wrong" is one of my favourite ways to end a sentence.

 

[Borachio]

I suspect banks have an order of magnitude more in mortgages than they do in savings account.

Aye, and that's the current problem.

 

[Grisu]

Brick and mortar value depreciates over time... so, no.

it does, but it is measured in decades at least.

Where I live in FL.

I'd have to see real comparisons side by side to know if that matters.


No they aren't, we are seeing historically low prices, they are almost always higher than 5%. When I got my 6.125% it was LOW for 2006 and years before.
Check the stats on this, you'll see I'm right.

I guess there's a rather big difference in the real estate market between FL and Switzerland, then

Mortgages were extremely high in the 90s (arount 7-8%) but that was really an anomaly, here's the average mortgages in the last few years in Switzerland

You are in Switzerland, no?
The situation is different there, on a lot of levels. Prices are higher because people tend to keep houses in the family, (at least in Italy, I know you aren't there, but are you in the Italian part of CH?) rather then sell.
This leads to less supply, and more demand... I remember looking to buy when I lived in Italy, a small city in the North... it was EXPENSIVE. NYC expensive almost, and it was not a metropolis.
Mortgage rates are probably somewhat different as a result.

No, I live in the german part of Switzerland. Sure the location matters a lot, but the main reason why it's so expensive here, is because it just costs that much to build a house around here.

 

[say1988]

Or, the market could crash on you, you bought high and now have a $100k mortgage on a house worth $50k... Now you are paying, over 30 years, $200k on a house that is worth $5ok... expected to mature at a rate of 5% per year... you got hosed.

And you have teh recourse of default if the drop is too big.
If you save for 5 years and buy the house for $125,000 right before the drop to $50,000 you are simply out $75,000.
Any investment entails risk, and a mortgage also has a mechanism to reduce some of the risk.

And the average house will trend upwards over a period of time, each case is different and you as an investor must make the decision.

True, but rent is typically lower, you aren't STUCK there for 30 years, etc. You also don't have to pay insurance (sometimes) and real estate taxes...

You can always pay it off early or transfer the mortgage to a new property. There are costs to these things, but you can get out of the 30 year term (or you could get a shorter term).
And rent vs mortgage payments will vary on a case by case basis, but they will often be similar and rent could be higher. Of courses there are taxes and maintenance costs so you have to look into each individual case.

The real estate market, when not in a bubble, is generally a 5% growth in value per year... if you can't outperform that in your investment, you don't deserve a house... And, you can also wait to buy low, get a short sale with cash, etc...

If I have the $20,000 (a 20% down payment) and can earn 10% while adding $5,000 per year it would take me 13 years to get enough to buy a $100,000 home at a 5% growth rate. That is a considerable period of time.

Please explain this better... it is confusing.

If you have the cash, you could use it to invest in other things, while you pay a mortgage, and outperform the value added in your housing investment, I think that is what you mean. This is true, but also risky... stock market crashes are way more frequent than housing market crashes. But, still, you should do better over time.
I'd personally like the security of not having a home payment to make, then you've no monthly massive bill, so you can invest with the extra cash on hand...

If I can get a mortgage for 6%, with a 8% investment return and a 5% growth in property values I am come out well ahead of buying the home outright. Of course there is risk, as I said, every investment carries risk and it is the investor's job to balance risk and rewards. But this scenario has the added benefit of diversifying. Whereas you buying your house outright are entire crippled id the housing market collapses, I could have investments in various industries through stocks and/or bonds or other investment vehicles that each face their own risk, but any individual drop is of far less consequence to me than the housing market to you.

I am not saying you should go out and get the maximum mortgage, but that it sometimes is a good idea to get a large mortgage. You have to assess you needs and options in each case just like any other investment. I have in the past argued both sides of this issue (and of renting vs buying) when somebody came in and asserted an absolute because there are no absolutes.

 

[Zelig]

it does, but it is measured in decades at least.

Nah, it's pretty continuous.

Basically buildings depreciate without maintenance, or hold their value with maintenance, with maintenance costs being temporarily lower on new buildings.

And the average house will trend upwards over a period of time, each case is different and you as an investor must make the decision.

The average empty lot will trend upwards somewhere between inflation and GDP growth. The average house will only hold its value while you pour maintenance dollars into it.

 

[Borachio]

But land values go up and up. No one is making any more new land, apart from the Dutch maybe.

~30%* of the typical house in the UK is the land value.

* a blind guess. I've really no idea what the figure is.

 

[kochman]

[q]Or, the market could crash on you, you bought high and now have a $100k mortgage on a house worth $50k... Now you are paying, over 30 years, $200k on a house that is worth $5ok... expected to mature at a rate of 5% per year... you got hosed.[/q]
And you have teh recourse of default if the drop is too big.
If you save for 5 years and buy the house for $125,000 right before the drop to $50,000 you are simply out $75,000.

Yeah... and your BS credit rating takes a 400 point loss when you get foreclosed on, so from now on you will HAVE to pay cash.

And the average house will trend upwards over a period of time, each case is different and you as an investor must make the decision.

A 5% annual return at best, yes. Now, if you paid cash, you aren't waiting for that 5% to overtake the extra 100+% you paid for the mortgage.

[q]True, but rent is typically lower, you aren't STUCK there for 30 years, etc. You also don't have to pay insurance (sometimes) and real estate taxes...[/q]
You can always pay it off early or transfer the mortgage to a new property. There are costs to these things, but you can get out of the 30 year term (or you could get a shorter term).
And rent vs mortgage payments will vary on a case by case basis, but they will often be similar and rent could be higher. Of courses there are taxes and maintenance costs so you have to look into each individual case.

Yes, there is no blanket answer, in most cases.

[q]The real estate market, when not in a bubble, is generally a 5% growth in value per year... if you can't outperform that in your investment, you don't deserve a house... And, you can also wait to buy low, get a short sale with cash, etc...[/q]
If I have the $20,000 (a 20% down payment) and can earn 10% while adding $5,000 per year it would take me 13 years to get enough to buy a $100,000 home at a 5% growth rate. That is a considerable period of time.

No rush... financially speaking, you are better off... if you want a home NOW to call your own, then obviously do the mortgage. Banks smile when they see mortgages coming their way. They are in it for the long haul so it really benefits them.


I don't mean to blow off the rest, but I am really falling behind at work.
There are times when mortgages are the answer. I just encourage people to really consider it, as you clearly have, and I clearly have.

 

[Zelig]

But land values go up and up. No one is making any more new land, apart from the Dutch maybe.

~30%* of the typical house in the UK is the land value.

* a blind guess. I've really no idea what the figure is.

Yes, I took this into account in my edit.

Though we can keep land values in check by continuously raising property taxes.

Yeah... and your BS credit rating takes a 400 point loss when you get foreclosed on, so from now on you will HAVE to pay cash.

Since a house is the only thing I'd consider buying on credit, not being allowed to buy more stuff on credit if I default on my house isn't really much of an issue.

 

[hobbsyoyo]

what good is 'credit score'? My bank automatically settles my credit card bill at the end of the month (so I don't really use it as a credit card).

Credit score is a system in place in the US that ranks how creditworthy a person is. It is important because having a good score means the difference between getting a great interest rate, getting a lousy interest rate and getting no credit (for credit cards, mortgages, car loans, etc.) at all.

 

[say1988]

Yeah... and your BS credit rating takes a 400 point loss when you get foreclosed on, so from now on you will HAVE to pay cash.

And you are going to take a decade or two to have enough cash to buy a house. The point is that you can reduce your risk with a mortgage because your only risk is your investment, the bank is on the hook for the rest (of course the degree of risk shifts to you over time as you pay more into the house).

A 5% annual return at best, yes. Now, if you paid cash, you aren't waiting for that 5% to overtake the extra 100+% you paid for the mortgage.

But after spending 13 years waiting to buy the house, you just spent $180,000 on it. or if you can buy it now, you can earn a return on the $80,000.

No rush... financially speaking, you are better off... if you want a home NOW to call your own, then obviously do the mortgage. Banks smile when they see mortgages coming their way. They are in it for the long haul so it really benefits them.

Banks love mortgages because either a) it is guaranteed long term cash flow with collateral or b) can be sold immediately to someone wanting guaranteed long term cash flow with collateral. It doesn't mean that you can't profit from a mortgage.

It can even make sense to take out a mortgage on property you already own outright if you have good investment options available.

 

[kochman]

But after spending 13 years waiting to buy the house, you just spent $180,000 on it. or if you can buy it now, you can earn a return on the $80,000.

You'd obviously not be buying the same house... you'd be paying for a $100k house. You're saying it would be less nice, basically. I say, banks want you to think you need the bigger house. You don't.

 

[Borachio]

It can even make sense to take out a mortgage on property you already own outright if you have good investment options available.

It can indeed. And if you're running a business this is probably the easiest and cheapest way to fund it.

This isn't the same as financing consumption, in any way, which is what people normally remortgage their property to do.