Advice on buying a million dolloar house, please

[CA renter]

[quote=bob2007]I would agree with the 20% down. As taxes go up, you will need to reduce your taxable income as much as possible. Also, many lenders will allow you to reamitorize once (I did), so if you later decide to pay down a large part of the loan and reduce payments if your investments aren’t doing as good. I did this when I got nervous before the large drop in stocks a few years back. House has gone down a bit too, but not as much as the investments would have, plus I’m not worried about the payment anymore.[/quote]

I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?

SDR made some excellent points with respect to timing of your purchase and what’s going on in the bond market, and greater economy, at that time.

SK in CV also gave good advice regarding your assumed ROI on investments vs. the “guaranteed” return if you use cash and avoid the mortgage origination and interests costs. IMHO, if you’re getting 7%, there’s a good chance you’re taking some substantial risks (if you doubt this, just as the people who manage those pesky pension funds). Consider your risk tolerance at different stages of your life, and make a very conservative estimate for future returns at the time of purchase.

[SK in CV]

[quote=CA renter]

I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?

[/quote]

No, you’re not. You’ve identified something that should be obvious, yet I don’t know how many times I’ve had new clients come to see me, with huge mortgages, and they tell me that their prior CPA told them to buy the most expensive house they could and borrow as much as possible to save taxes. Friggen morons.

It’s simple. If the question is to put another $100K down, or borrow another $100K, if the taxable return on investing the $ is the same as the interest rate on the loan, taxes will be almost exactly the same. (there are some exceptions to this, but those exceptions would certainly not apply in a case where the purchase is a $1M home.) Nobody EVER needs a tax deduction in the form of home mortgage interest. Mortgage interest costs REAL money. It NEVER pays to buy a dollar for dollar deduction. If it did, no one would ever complain about my fees, since they’d be essentially free after taxes.

If someone is fortunate enough to have the flexibility like the OP does, it’s a pure investment decision. Taxes are a variable like they are for all investments. They are usually not the driver. Net return is.

[SK in CV]

[quote=CA renter]

I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?

[/quote]

No, you’re not. You’ve identified something that should be obvious, yet I don’t know how many times I’ve had new clients come to see me, with huge mortgages, and they tell me that their prior CPA told them to buy the most expensive house they could and borrow as much as possible to save taxes. Friggen morons.

It’s simple. If the question is to put another $100K down, or borrow another $100K, if the taxable return on investing the $ is the same as the interest rate on the loan, taxes will be almost exactly the same. (there are some exceptions to this, but those exceptions would certainly not apply in a case where the purchase is a $1M home.) Nobody EVER needs a tax deduction in the form of home mortgage interest. Mortgage interest costs REAL money. It NEVER pays to buy a dollar for dollar deduction. If it did, no one would ever complain about my fees, since they’d be essentially free after taxes.

If someone is fortunate enough to have the flexibility like the OP does, it’s a pure investment decision. Taxes are a variable like they are for all investments. They are usually not the driver. Net return is.

[SK in CV]

[quote=CA renter]

I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?

[/quote]

No, you’re not. You’ve identified something that should be obvious, yet I don’t know how many times I’ve had new clients come to see me, with huge mortgages, and they tell me that their prior CPA told them to buy the most expensive house they could and borrow as much as possible to save taxes. Friggen morons.

It’s simple. If the question is to put another $100K down, or borrow another $100K, if the taxable return on investing the $ is the same as the interest rate on the loan, taxes will be almost exactly the same. (there are some exceptions to this, but those exceptions would certainly not apply in a case where the purchase is a $1M home.) Nobody EVER needs a tax deduction in the form of home mortgage interest. Mortgage interest costs REAL money. It NEVER pays to buy a dollar for dollar deduction. If it did, no one would ever complain about my fees, since they’d be essentially free after taxes.

If someone is fortunate enough to have the flexibility like the OP does, it’s a pure investment decision. Taxes are a variable like they are for all investments. They are usually not the driver. Net return is.

[SK in CV]

[quote=CA renter]

I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?

[/quote]

No, you’re not. You’ve identified something that should be obvious, yet I don’t know how many times I’ve had new clients come to see me, with huge mortgages, and they tell me that their prior CPA told them to buy the most expensive house they could and borrow as much as possible to save taxes. Friggen morons.

It’s simple. If the question is to put another $100K down, or borrow another $100K, if the taxable return on investing the $ is the same as the interest rate on the loan, taxes will be almost exactly the same. (there are some exceptions to this, but those exceptions would certainly not apply in a case where the purchase is a $1M home.) Nobody EVER needs a tax deduction in the form of home mortgage interest. Mortgage interest costs REAL money. It NEVER pays to buy a dollar for dollar deduction. If it did, no one would ever complain about my fees, since they’d be essentially free after taxes.

If someone is fortunate enough to have the flexibility like the OP does, it’s a pure investment decision. Taxes are a variable like they are for all investments. They are usually not the driver. Net return is.

[SK in CV]

[quote=CA renter]

I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?

[/quote]

No, you’re not. You’ve identified something that should be obvious, yet I don’t know how many times I’ve had new clients come to see me, with huge mortgages, and they tell me that their prior CPA told them to buy the most expensive house they could and borrow as much as possible to save taxes. Friggen morons.

It’s simple. If the question is to put another $100K down, or borrow another $100K, if the taxable return on investing the $ is the same as the interest rate on the loan, taxes will be almost exactly the same. (there are some exceptions to this, but those exceptions would certainly not apply in a case where the purchase is a $1M home.) Nobody EVER needs a tax deduction in the form of home mortgage interest. Mortgage interest costs REAL money. It NEVER pays to buy a dollar for dollar deduction. If it did, no one would ever complain about my fees, since they’d be essentially free after taxes.

If someone is fortunate enough to have the flexibility like the OP does, it’s a pure investment decision. Taxes are a variable like they are for all investments. They are usually not the driver. Net return is.

[(former)FormerSanDiegan]

[quote=CA renter]
I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?
[/quote]

The answer to your question is yes, you are missing something in that statement. You are missing the alternatives for comparison.

Obviously in a vacuum it makes no sense to pay $1 to save 30-40 cents in taxes.

It’s not as simple as comparing paying a dollar to get 30-40 cents back versus not paying that dollar.

If you compare

A. paying $1 and saving 30-40cents in taxes (by having a mortgage)
to
B. paying 75 cents and saving zero in taxes (by renting)
it might make sense, depending on other deductions relative to the standard deduction.

You can also compare the use of cash for other inverstments versus buying a place for cash as others have above.

Of course, I know that you know these things. It’s just that the wisdom (or lack therof) of paying a dollar to get 30-40 cents back, depends on the alternatives.

[(former)FormerSanDiegan]

[quote=CA renter]
I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?
[/quote]

The answer to your question is yes, you are missing something in that statement. You are missing the alternatives for comparison.

Obviously in a vacuum it makes no sense to pay $1 to save 30-40 cents in taxes.

It’s not as simple as comparing paying a dollar to get 30-40 cents back versus not paying that dollar.

If you compare

A. paying $1 and saving 30-40cents in taxes (by having a mortgage)
to
B. paying 75 cents and saving zero in taxes (by renting)
it might make sense, depending on other deductions relative to the standard deduction.

You can also compare the use of cash for other inverstments versus buying a place for cash as others have above.

Of course, I know that you know these things. It’s just that the wisdom (or lack therof) of paying a dollar to get 30-40 cents back, depends on the alternatives.

[(former)FormerSanDiegan]

[quote=CA renter]
I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?
[/quote]

The answer to your question is yes, you are missing something in that statement. You are missing the alternatives for comparison.

Obviously in a vacuum it makes no sense to pay $1 to save 30-40 cents in taxes.

It’s not as simple as comparing paying a dollar to get 30-40 cents back versus not paying that dollar.

If you compare

A. paying $1 and saving 30-40cents in taxes (by having a mortgage)
to
B. paying 75 cents and saving zero in taxes (by renting)
it might make sense, depending on other deductions relative to the standard deduction.

You can also compare the use of cash for other inverstments versus buying a place for cash as others have above.

Of course, I know that you know these things. It’s just that the wisdom (or lack therof) of paying a dollar to get 30-40 cents back, depends on the alternatives.

[(former)FormerSanDiegan]

[quote=CA renter]
I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?
[/quote]

The answer to your question is yes, you are missing something in that statement. You are missing the alternatives for comparison.

Obviously in a vacuum it makes no sense to pay $1 to save 30-40 cents in taxes.

It’s not as simple as comparing paying a dollar to get 30-40 cents back versus not paying that dollar.

If you compare

A. paying $1 and saving 30-40cents in taxes (by having a mortgage)
to
B. paying 75 cents and saving zero in taxes (by renting)
it might make sense, depending on other deductions relative to the standard deduction.

You can also compare the use of cash for other inverstments versus buying a place for cash as others have above.

Of course, I know that you know these things. It’s just that the wisdom (or lack therof) of paying a dollar to get 30-40 cents back, depends on the alternatives.

[(former)FormerSanDiegan]

[quote=CA renter]
I’ve often questioned the wisdom of paying a dollar in interest in order to save 30-40 cents in taxes.

Am I missing something?
[/quote]

The answer to your question is yes, you are missing something in that statement. You are missing the alternatives for comparison.

Obviously in a vacuum it makes no sense to pay $1 to save 30-40 cents in taxes.

It’s not as simple as comparing paying a dollar to get 30-40 cents back versus not paying that dollar.

If you compare

A. paying $1 and saving 30-40cents in taxes (by having a mortgage)
to
B. paying 75 cents and saving zero in taxes (by renting)
it might make sense, depending on other deductions relative to the standard deduction.

You can also compare the use of cash for other inverstments versus buying a place for cash as others have above.

Of course, I know that you know these things. It’s just that the wisdom (or lack therof) of paying a dollar to get 30-40 cents back, depends on the alternatives.

[sdcellar]

masayako– I have to say I’m having a hard time fully understanding what question you’re looking to answer. I understand the original post, which is how much to put down and what type of loan to get, but further along, you say that you’re on track to have 50% down in 3 years time.

This introduces the factor of when you’d actually be pulling the trigger. On first glance, one might conclude that you plan on purchasing three years from now and are simply wondering how you might approach it when you get there. Thinking about it a bit more deeply, it seems you could be considering a number of other alternatives.

Perhaps you have 20% today, so if that’s a good idea, you would buy today (assuming there’s something you like).

Perhaps you really are three years out, but you want to think about how you might lock up your money. That is, you decide you like half down, so you need to be fully liquid to the tune of $500K in three years.

And, I could go on and on.

I guess what strikes me is your’re asking the question today (well, the other day, really). If you’re three years out, then I’d say save as much as you can, invest it wisely (easier said than done, as someone said, more reward indicates higher risk) and continue to noodle on how much to put down and what vehicle you might use to finance it. It doesn’t do you any good to ponder 4.25% interest rates offered today because who knows where that will be three years from now. Same thing with your million dollar house. Not many meeting your criteria today and who knows what it will look like in three years. Could be a lot more (and cheaper). Or not.

So I guess the short version is “What is your time horizon?”

(and, yes, “between 0 and 3 years” is a fair answer)

Just trying to fully understand the question.

[sdcellar]

masayako– I have to say I’m having a hard time fully understanding what question you’re looking to answer. I understand the original post, which is how much to put down and what type of loan to get, but further along, you say that you’re on track to have 50% down in 3 years time.

This introduces the factor of when you’d actually be pulling the trigger. On first glance, one might conclude that you plan on purchasing three years from now and are simply wondering how you might approach it when you get there. Thinking about it a bit more deeply, it seems you could be considering a number of other alternatives.

Perhaps you have 20% today, so if that’s a good idea, you would buy today (assuming there’s something you like).

Perhaps you really are three years out, but you want to think about how you might lock up your money. That is, you decide you like half down, so you need to be fully liquid to the tune of $500K in three years.

And, I could go on and on.

I guess what strikes me is your’re asking the question today (well, the other day, really). If you’re three years out, then I’d say save as much as you can, invest it wisely (easier said than done, as someone said, more reward indicates higher risk) and continue to noodle on how much to put down and what vehicle you might use to finance it. It doesn’t do you any good to ponder 4.25% interest rates offered today because who knows where that will be three years from now. Same thing with your million dollar house. Not many meeting your criteria today and who knows what it will look like in three years. Could be a lot more (and cheaper). Or not.

So I guess the short version is “What is your time horizon?”

(and, yes, “between 0 and 3 years” is a fair answer)

Just trying to fully understand the question.

[sdcellar]

masayako– I have to say I’m having a hard time fully understanding what question you’re looking to answer. I understand the original post, which is how much to put down and what type of loan to get, but further along, you say that you’re on track to have 50% down in 3 years time.

This introduces the factor of when you’d actually be pulling the trigger. On first glance, one might conclude that you plan on purchasing three years from now and are simply wondering how you might approach it when you get there. Thinking about it a bit more deeply, it seems you could be considering a number of other alternatives.

Perhaps you have 20% today, so if that’s a good idea, you would buy today (assuming there’s something you like).

Perhaps you really are three years out, but you want to think about how you might lock up your money. That is, you decide you like half down, so you need to be fully liquid to the tune of $500K in three years.

And, I could go on and on.

I guess what strikes me is your’re asking the question today (well, the other day, really). If you’re three years out, then I’d say save as much as you can, invest it wisely (easier said than done, as someone said, more reward indicates higher risk) and continue to noodle on how much to put down and what vehicle you might use to finance it. It doesn’t do you any good to ponder 4.25% interest rates offered today because who knows where that will be three years from now. Same thing with your million dollar house. Not many meeting your criteria today and who knows what it will look like in three years. Could be a lot more (and cheaper). Or not.

So I guess the short version is “What is your time horizon?”

(and, yes, “between 0 and 3 years” is a fair answer)

Just trying to fully understand the question.

[sdcellar]

masayako– I have to say I’m having a hard time fully understanding what question you’re looking to answer. I understand the original post, which is how much to put down and what type of loan to get, but further along, you say that you’re on track to have 50% down in 3 years time.

This introduces the factor of when you’d actually be pulling the trigger. On first glance, one might conclude that you plan on purchasing three years from now and are simply wondering how you might approach it when you get there. Thinking about it a bit more deeply, it seems you could be considering a number of other alternatives.

Perhaps you have 20% today, so if that’s a good idea, you would buy today (assuming there’s something you like).

Perhaps you really are three years out, but you want to think about how you might lock up your money. That is, you decide you like half down, so you need to be fully liquid to the tune of $500K in three years.

And, I could go on and on.

I guess what strikes me is your’re asking the question today (well, the other day, really). If you’re three years out, then I’d say save as much as you can, invest it wisely (easier said than done, as someone said, more reward indicates higher risk) and continue to noodle on how much to put down and what vehicle you might use to finance it. It doesn’t do you any good to ponder 4.25% interest rates offered today because who knows where that will be three years from now. Same thing with your million dollar house. Not many meeting your criteria today and who knows what it will look like in three years. Could be a lot more (and cheaper). Or not.

So I guess the short version is “What is your time horizon?”

(and, yes, “between 0 and 3 years” is a fair answer)

Just trying to fully understand the question.

[Author]

Posts