I've bought two houses by saving up until I could pay cash for them. I'm hardly rich; good looking in a mature sort of way, maybe, but not rich. My parents live in one house and my spouse and I live in the other. Obviously I had to have the patience to wait until I could pay "100% down," but this was really the way to go for me.

Your example of a 7% mortgage being the same as a guaranteed 7% interest return risk free actually understates the advantage of paying cash. The 7% return is untaxed; for me, avoiding a 7% mortgage is more like a guaranteed, risk-free 11% interest before federal, state and local income taxes. That's a stock market return risk free!

Also by paying cash, I avoided many fees and charges, such as escrow accounts that pay 1%, mortgage application fees, mortgage origination fees, mortgage "points," appraisal fees, credit report fees, lender's title insurance fees, and such dubious charges as the underwriting fees, document preparation fees, loan-review fees, warehousing fees, etc.

The "tax advantage" of a mortgage is highly overstated. I don't itemize and any deduaction for mortgage interest has to exceed the standard deduction to be worth anything to me.

Many people I know have also told me of the "mistakes" in how their mortgage costs are calculated, errors which seem to always favor the lenders. :(

If you want to refinance to get a lower mortgage rate, there are more fees for that, too.

Those up-front fees total thousands of dollars saved by paying cash. On the last house I bought, I saved well over $3000 by not paying mortgage fees to get a $200,000 house.

In addition to the interest part of your mortgage, there's the principle you pay, only a little at first but more as the years pass. That's extra money I have available to spend or invest each month.

Leverage is a two-edged sword. It's a gamble, a risk that might or might not pay off. I'll stick with the guaranteed risk free high return, thousands saved in fees and extra monthly free cash flow. And I love the "no paperwork" and not dealing with banks, mortgage companies, credit agencies, etc.

Debt, it's the spirit killer!

If I could afford to pay cash for a house then a definately would. The stress you go through managing a mortgage can be incredible.
To remove that stress completely so you NEVER have to think about your mortgage repayments would be amazing! So I definately would do it.
I still live at home with my parents and will probably move out next year and rent for a little bit while I save up to buy a house.

Also on that note I think it is better to buy a house with a loan so you can pay off the loan rather than paying rent to someone else and helping pay off their mortgage. Rent money is dead money

I agree with paying cash if you can, however, regarding the mortgage fees

You should get an appraisal regardless
You still need to purchase owners title insurance, which is about 90% of the title insurance costs

If you are considering a mortgage from a reputable broker, the fees saved are much less than $3,000 cited above.

The actual costs saved are closer to only $500-$800, for credit report and underwriting charges.

The other mortgage charges, such as flood certification, appraisal you should get regardless for your own protection.

Additionally, other charges, such as closing fees from the title company and recording fees are charged regardless of how you pay for the home.

One other point. Refinancing a home, when less than 70% of the value, is the same interest rate as purchasing.

Interesting post. Would you be interested in syndicating your content on the home page of my site? It's an online community of finance professionals ( http://www.wallstreetoasis.com ). I could add an RSS feed that will allow me to promote your blog posts to my home page (when i think it will lead to a good discussion and/or is appropriate), but I wanted to make sure you were comfortable syndicating first. The syndicated post would have a link back to your original post. Thanks, Patrick (you can reach me at wallstreetoasis@wallstreetoasis.com if you have any questions).

Also, if you are willing to provide a link to wallstreetoasis.com that would be much appreciated.

I have purchased my two bedroom apartment in Istanbul Turkey with cash in 2004 when the market was down. At the time, it cost around 71,000 USD (92,500 TL) and now similar apartments are sold at 200,000 USD (240,000 TL). The investment proved to be a wise one but I value the peace of mind more. Interest rates are high in Turkey when compared to US and a long term mortgage would have made me a nervous wreck. A friend of mine told me to get a Euro mortgage and I refused to do it. At the time 1 Euro was 1.6 TL and nowadays it is around 1.93. I took the risk because my job at the time was pretty secure and I had some emergency money I could rely on for at least 6 months. Now, I am debt free and can save 40-45% of my income for the future. I hope to have the "Walk-away-money" in ten years so can start consulting and training on my own terms rather than stay as a part of the rat race.

The "tax advantage" of a mortgage has been WAY oversold.

If you do the math, you always end up sending more money to the bank than you would have sent to the government.

For example, consider a mortgage where your annual interest payment to the bank is $10,000. In this scenario you could take a $10,000 tax deduction -- on the surface that sounds like a good deal. However, if you did not have a mortgage and you are in the 30% tax bracket (plug in your own percentage), the taxes you would pay on $10,000 are $3,000. So, with the mortgage "tax advantage" you are paying the bank $10,000 to save from paying the government $3000. In other words, with a mortgage you are trading $10000 for $3000 -- this is not a good deal.

In fact, if you want the same "tax advantage" as a mortgage, you can give money to your favorite charities (and not to a bank!!). The tax deduction for donating to a charity is exactly same as mortgage interest.

We own our house, but were renters for most of our lives, even after our children were born. I think there are times when renting is not a bad option, especially when you're young and single and have a world of opportunities ahead of you. Buying a house ties you down, so isn't it better to wait until you're really ready to settle down before you take the plunge?

True, money spent on rent is money gone, but the hidden costs of home ownership are huge, not to mention the time and responsibility. And it's not always so simple to just sell your house if you want to move, which is not uncommon when you're still trying to figure things out.

We love being home owners, and are grateful to have a yard and community (that we love) for your kids, but had we owned our home from the get go, we might not have had the flexibility to explore the world and figure out our lives before deciding where to settle down. 

Great and informative article, BTW.

I agree with most of what was said in the summary.

I didn't buy my home for cash, but I did pay off the mortgage balance in full from a "windfall" - the gains from the sale of my previous home that I was renting out from late 90s till early 2000s. At the time the option seemed attractive: my rate was 7%, the feeling of not owing anything to anyone - all the things people mentioned. It was also psychological - at the height of internet boom, a friend suggested that I sell about half of my stocks and pay off my mortgage. I was greedy. I told that I am getting a better rate on my stocks. Then the bubble burst. I hadn't owned any of the companies that went under, but I did own a lot of tech stocks and most of them lost a third or more of their value. Obviously when this happened I thought - it would've been better to pay off my mortgage then to lose the money. So when I got the money I paid off the mortgage.

In hindsight I am not sure if refinancing at 4.5% which was available at the time would've made more sense. Even though I save a higher percentage of my income now and still have more money "for fun", I am not sure if investing the money would've made more sense.

For people who say that deductibility isn't such an advantage: it depends on the individual situation. It is just something that you factor in when you compare mortgage interest to the rate you get on your investments. I live in NY State, and both income and property taxes here are so high that I can itemize even without the mortgage, so deductibility is a big deal to me.

Another thing to consider is expected inflation that can potentially reduce your mortgage payments to nothing. Imagine you borrowed at 9% around early 70s. Then you got double-digit inflation. Around 1983 when I just started working I got 13% rate on a regular bank CD. Wouldn't you want to be in a position of paying 9% while earning 13% (assuming you deduct mortgage and pay taxes on investments)? If you believe that inflation will go up, it makes sense to take a mortgage. I have a pretty affluent friends who just bought a vacation home. They could've paid cash for it but they choose to take a mortgage because they believe the inflation rate will go higher.

Another factor is age. If you are thinking of retiring soon it certainly makes more sense to be mortgage-free.

My wife and I would love to buy a house with cash, but unfortunately we don't have a big pile of it sitting around at the moment! Still, it is a stretch goal for us. 

Any tax advantages missed could be made up by simply making a deductible gift to charity--the net effect is the same.

We bought an invesment property last December in cash. This month we are closing two more deals - both also paid in cash. The amount involved were significant but we were able to lower the purchase price way below the market value of the property.

Any information you have on the subject would be much appreciated. I've recently been browsing the foreclosure listings on various websites and am looking to pay cash for a bank-owned/REO home in foreclosure. I wonder, does the process work the same as paying cash for a non-foreclosure property? (I'm aware of the risks involved such as the need for repairs and renovations). What I'm wondering is whether the process is otherwise hassle-free? I mean, as long as I have the cash, can I purchase the house from the bank? No special condition, no credit checks, etc?

I was not in a position to pay cash 15 years ago. Now by selling some stock that is not paying anything near what the investment people(selling investments would have your believe).

If some one can show me a guaranteed 540.00 a month cash flow after I have bougt back a remaining debt of 93,655.00 for 70,377.00 and have a paid off asset worth over 150,000.00 I will snap it up.

The 540.00 cash flow coming in my planned retirement years, amounts to over 9% of my current income and will be close to 20 percent of estimated retirement income.

I will have about half of this money left as disposable after paying the taxes on my asset.

It will keep me from piece meal selling of stock as I need income in my remaining years. I know exactly what I will get in this down market where waiting is likely higher but not for sure.

If I continue on the mortgage the 93,655.00 is 13,655.00 more than the original loan even though I have paid it down over 15 years.

As I see it....

27,000.00 roughly in interest savings over 15 years.
540.00 per month cash flow
150,000.00 asset instead of about a 75,000.00 or so equity with a 540.00 payment from taxable funds.

No loss of any tax advantage since I do not Itemize.

The payoff money will come in a down market now, with the possibility of it going lower as well as going up in the next 15 years. The money will be from sell off of IRA and some other poor performing stocks. I will pay 15% tax on cash in IRA, I will pay that tax anyway if I wait and take it at the required withdrawel rate. I will have a small tax offset with sale of other net loss stocks.

Am I dreaming.

Zime

Sara- I bought my house cash- it was one of the smaller ones- and all real estate people will tell you- location location location. If you like your neighborhood, gold star, if you have the smallest house- gold star- and if you can pay cash and have other savings for needed cash expenses... you will be free in your mind from dealing with mortgages. Good luck!

Jane,

I'm married and 25 years old and want to pay cash for a house. Can you kind of give me some advice on how you saved up? How much were you putting aside each month? Did you make investments? What kind of savings account?

Thanks if you have time!

Jane,

I found your experience to be way more informative than the article itself. I'm seriously considering paying in cash for a house in Puerto Rico that I'd use as a vacation home (asking price $52,000). Thanks for sharing your experience.

D. L. Blanco

Why pay a mortgage if you have the money to buy the house with 100%. You always need a place to live and if you have a family, then you need it more. A mortgage have to be paid on time, otherwise you will be charged with fine or even foreclosure. In a free and clear home, no body have any say on your home. Pay property taxes on time, that's it. What if you die suddenly and leave a family behind. The banks will come to your family and take the house for non-payment of mortgage. A free and clear house is a great gift to your children. Some homes are used for generations under the same family names. What if you lose your job... who pays the mortgage then? If I had the money to buy a house with cash, I would do it. Paying mortgage, which I am doing now, is a great uncertainty for 30 years. A huge portion of human life goes on into paying mortgages. I wish I were free from this stress. Haven't you hear that a family living for 20 years in a mortgaged home was kicked out by the bank for non-payment of the mortgage on the 21st year? We all will grow old and after 20 years, no body will hire us as fast as 20 years ago. And that's when mortgage payment becomes difficult when you really need your home. I have seen people lose their home when they dearly needed it. If you have the money, don't get into the mortgage mess. Make it your own Home sweet Home..., not bank's.

Nice thread Xin.

As someone said, taking a mortgage is also a bet on inflation (especially today) as if inflation kicks in (as expected) your principal will be reduced.

Now this bet makes sense if you think about the end of the 70s and beginning of the 80s where inflation helped our parents pay their mortgage but WAIT! [sorry for the caps ;)]

What people seem to forget is inflation doesn't kill your debt if what you make is not indexed on inflation!

The 70s were very different than today because today the concurrence of countries like China / India / Brazil etc (BRIC) will "moderate" any indexation of wages on inflation contrary to the 70s were this lower wages pressure was not felt.

The last 10 years we've seen the effect of that pressure: we've lost purchasing power because wages do not follow inflation anymore :(

So if inflation kicks in and of wages don't follow (as we can expect) the bet on inflation reducing the mortgage principal might be moot and you might even be caught between a rock and a hard place (your available income become less to pay the mortgage and you might end underwater...)