What’s the smartest way to buy a house financially?
Quick House Sale
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April 26th, 2010 at 11:49 pm
Getting a mortgage when you can pay for something with outright cash is stupid. The math doesn’t work.
“The big reason that people say not to pay off your home is that you’ll lose your tax deduction. If you have a $200,000 loan at 5% interest, you’d pay about $10,000 a year in taxes, which would give you a $10,000 deduction. If you make $70,000 a year, that deduction is saving you $2,500 in taxes if you’re in a 25% tax bracket. You are sending Countrywide Mortgage $10,000 to keep from sending the government $2,500. That’s stupid. You are better off being debt-free and giving your church $10,000. You’ll save on taxes and do some good with the money.”
I also agree with Kevin K’s answer, but I want to know where he is getting a rate of return higher than 5% right now?
April 27th, 2010 at 11:49 am
yes, put 20% down.
April 29th, 2010 at 12:50 am
Pay in full with cash (or cashier’s check) if you really have it.
If it is invested in stocks or mutual funds returning a higher rate than your mortgage %, keep your money where it is and have the fund pay your house payment. You are making more money that way. When the performance of your investments drops below the mortgage %, sell them and pay off the house.
When getting a mortgage, be careful of penalties for early and extra payments. Demand a mortgage that you can pay off in full whenever you want before the last calculated payment is due.
April 29th, 2010 at 1:17 pm
It depends on lots of factors
size of mortgage at 80% of selling price
mortgage interest rate
amount of interest to deduct.
Size of your income
amount of other installment debt–cars, cards, etc
resultant debt-to income ratio
credit rating
etc.
Some of these will affect the maximum you can borrow, or your interest rate–and they’ve now jumped nearly a full % point and are hovering around 6%, which is no special bargain. Banks ARE reluctant to lend money–they can gouge their own customers with fees and take no risks at all. New regs are forcing them to set very stringent limits, and they are adhering to them to the absolute letter. And do NOT deplete your cash reserves in this very soft market–if something
happens to you, you might be “house poor,” with a fully-owned house you can’t get any money out of, and no income to pay the bills or feed or insure yourself. Listen to this–it took us over TWO MONTHS to do a wraparound equity loan with OUR OWN BANK. We had enough cash to cover the loan, would have 60% equity in the house remaining, have a credit rating of 763, have only $2800 in short-term debt, and our new payment would be $12/month LESS than the old one. And at closing the dumb b****rds tried to reduce the amount of the loan without telling us beforehand. THAT is the lending climate you’ll be dealing with.
Equally important, be sure 1. how much in total deductions you would have and for 2. how much projected taxable income. The standard deductions and personal exemptions have gone up so much )and are mandated to go even higher) that many people have found that they will not have a large enough mortgage to justify the savings in interest. Remember that a deduction is not an outright savings dollar-for-dollar, as a tax credit would be. Mortgage interest actually reduces your taxable income only by the part of it that exceeds your standard deduction, and you save only a percentage of the excess, according to your tax bracket. Run the numbers, even my modest hypotheticals, and you will be shocked at the myth of the savings of home ownership.
Let’s say that you borrow a mere $150,000 at 6%, and you pay a whopping $9000/year in interest; your overall tax bracket is 20%. In fact you would be deducting only $3000 in interest, since your standard deduction is $6000 whether you own a home or not. That $3000 excess is not all savings. It reduces your taxable income by that amount, NOT your taxes; your ACTUAL MONETARY SAVINGS WILL BE $3000 at 20%, or ONLY $1200. You have thrown away $6000 you didn’t have to pay in the fist place, plus $2800 of “deduction” that didn’t save you a dime. If you want to pay me $9000 I will be glad to sing praises to the sky about your savings, hand you a miserable $1200, and I can live on the difference quite well if I can find 9 other people willing to do the same thing–not to mention that I have a contract that says you have to do this for 30 YEARS!! Better yet, YOU would be “investing” ALL the money and taking ALL risk. You would pay me $9000 a year up front which I could invest at interest for 12 months, then pay you out of my earnings; my net cost would be about $900, so I’d earn nearly $8000 a year without risking a penny of my own, while you put $7800 of your own cash in and got nothing for it. And who gets such a deal? The banks, that’s who. You don’t even want to see the figures of the Foreclosure/Equity/Interest/Risk Illusion, which wouldn’t make you feel any better anyway.
But, you say, the TAXES are “deductible,” too. That works the same way. Let’s say you pay $3000/year in taxes on the house and land. But you pay it on the THEORETICAL “value” of a house; you actually own only 20-40% of the house; the bank actually owns 60-80% of your house that YOU are paying taxes on. And the banks cry crocodile tears–you’re paying $2100/yr. FOR THEM on something that isn’t all yours. But it’s worth paying money for the savings you wouldn’t have if you didn’t own a house, right? You pay $3000 for an actual monetary savings of only $600 (Mr. Tax Bracket again). You could save the whole $3000 if you hadn’t bought a house in the first place.
Insurance? Same deal. Pay $2000/yr. and you’re paying $600 for you own and $1400 for what the bank owns. Not a bad deal for THEM, eh?
Improvements” HAH. Do you know that only a whole room addition will pay you more than you paid for it, and only when the house sells? You will have missed all the interest on what you paid. Stuff like windows, bathrooms, and a pool pay back only 60-75% of their cost. And then there’s grounds maintenance and upkeep and home maintenance like painting and roof replacement. All that is straight out-of pocket expenses that return nothing–all you’re doing is preventing depreciation and disaster if you DON’T do them. Renters don’t pay for that stuff at all.
So here are the figures:
SAVINGS:
INTEREST deduction________________1200.00
TAX deduction______________________ 600
April 30th, 2010 at 12:27 pm
Buy a cheap house so you can put the most money down.
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