Cash buy vs mortgage and invest

Submitted by LoveThisUsername t3_122tf1p in personalfinance

We have enough cash/investments to pay cash although it would mean selling off all our non-retirement investments. So option one is to put down a 30% down payment and have a 5.85 30 year loan, which would not require selling anything. Option two is to sell everything and pay cash. What should we be considering as the pros and cons. If we expect 7-10% growth in market over time, what is the mortgage rate (considering the ability to deduct the interest) at which it is more advantageous to have a mortgage and invest the difference?

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iranisculpable t1_jdrp1ru wrote

5.85 percent tax free vs 7 percent before tax.

Depending on the taxes you would owe liquidating investments, paying cash seems better to me.

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jcastro777 t1_jdrui4e wrote

At 5.85% you could go either way, but personally I’d take a mortgage. The 7% number you hear is inflation adjusted, the actual historical returns of the S&P500 have been 10.8% so that’s the number you’d want to compare. Mortgage interest is also tax deductible

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rocket_beer t1_jdryg7w wrote

The mortgage interest only applies if it is larger than the standard deduction.

These days, the only people mathematically eligible have an ultra jumbo loan (+$1M)

I’m taking a wild guess that OP does not fall into that category.

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123456478965413846 t1_jdsgm82 wrote

>the only people mathematically eligible have an ultra jumbo loan (+$1M)

Well that's verifiably false since the limit on the deduction is the first $750k in home purchase.

Here's some actual numbers:

The median home price is currently $428,700 in the US.

Standard deduction for a single person is $12,950 for 2023. If your mortgage rate is 5% you would need to borrow at least $259k to hit $12,950 in interest. But if you are itemizing you also get to add in other stuff like state and local taxes. So an average home bought today would be enough for a single person to come out ahead itemizing simply due to interest rates no longer being like 3%.

For a married couple the standard deduction is doubled so a 5% mortgage would need to be over $518k to clear that hurdle. But again a cheaper house would qualify after taking into account the other itemizable deductions. So a slightly above average house purchase would probably make itemizing the correct choice for a married couple.

Also, 5% is a low rate right now, lots of people are getting 6 or 7 or more making the home loan needed to come out ahead itemizing much lower.

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rocket_beer t1_jdsiiid wrote

You are not utilizing the framework of what qualifies answering OP’s question.

They are asking about all cash or 30% down.

In either of these, the mortgage deduction wouldn’t apply since it would not reach that threshold.

Again, it just doesn’t apply mathematically.

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123456478965413846 t1_jdst9xl wrote

>You are not utilizing the framework of what qualifies answering OP’s question.

I see nothing in my comment that conflicts when OP's initial question. Yes I used 5% instead of 5.85% but that actually shifts the bar lower for how big a mortgage has to be to be able to benefit from the interest deduction on your taxes.

>They are asking about all cash or 30% down.

Correct.

>In either of these, the mortgage deduction wouldn’t apply since it would not reach that threshold.

>Again, it just doesn’t apply mathematically.

OP's initial post included a hypothetical interest rate of 5.85%. At that interest rate a single person would clear the standard deduction with a mortgage amount above $221,367 and a married couple would clear the standard deduction with a mortgage amount in excess of $442,735. Assuming a 30% down payment that means a house price of 287k if single or 575k is married. And that is with no other itemizable expenses. When you buy a house you always have additional itemizable expenses like property taxes and assuming you work or spend money you are paying state/local taxes. So an average priced house with OP's interest rate and down payment would be large enough to benefit from the standard deduction if OP is single and a slightly above average priced house would qualify for mortgage interest deductions if OP is married.

If you disagree with my assessment please let me know where my math is incorrect. When interest rates were lower and houses were cheaper way back in 2020 the vast majority of people couldn't benefit from mortgage deductions. But with higher house prices and higher interest rates, lots of people buying today can.

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LoveThisUsername OP t1_jdv626w wrote

Thank you for this math, we would be getting a pretty big loan (jumbo). Also where we are we will definitely have at least 10K in property taxes which I think also counts towards itemizing.

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rocket_beer t1_jdsvx78 wrote

And on a 30 year mortgage, after putting down 30%, how much would their interest actually be on a 5.85%?

Have fun

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123456478965413846 t1_jdswtc6 wrote

At 5.85% for 30 years you will pay $1.12 in interest over the course of the loan for every $1 borrowed. Of course that is only one of the numbers needed figure out if you should pay cash or not. The other numbers needed include the amount of any tax savings and the amount of any interest or investment income earned on the money over the same time period if you don't pay cash as well as the cost of any additional taxes on the earnings. It is far from a simple math problem when the numbers are close like they are with OP's situation. It is a no brainer with a 3% mortgage to take the loan and with a 10% mortgage to pay cash, OP is near the break even point so their exact personal financial situation could tip it either way.

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rocket_beer t1_jdsywry wrote

Nope, try again.

There are actual amortization mortgage calculators that show you every single payment.

I’m just waiting for you to have actual numbers to prove your point. This will be lovely.

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123456478965413846 t1_jdt1xzg wrote

The numbers I gave you were from an online amortization calculator, I used the one at bankrate.

Here is how I came up with $1.12 for every $1 financed over 30 years at 5.85%:

Put in $100,000 for home price, $0 for down payment, 30 year for loan term, and 5.85% for interest rate. That gives you a loan amount of $100,000, total interest paid of $112,959, and total cost of loan of $212,959. Move the decimal over 5 places to get the cost per dollar of $1.12959 in interest per $1.00 initially financed. I guess I could have rounded to $1.13 instead of truncating to $1.12 to be slightly more accurate?

If you believe they are correct feel free to provide what you believe to be the correct numbers. I have provided actual numbers and my source and showed all my work. You're going to need to do more than just say I'm wrong.

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rocket_beer t1_jdt3iel wrote

That isn’t at all how amortization works.

The borrower pays interest-heavy at the beginning and principal heavy at the end.

There is an inverse relationship between these 2 where every consecutive payment, you pay less interest than the previous.

So again, explain how OP would be able to use the itemized deduction? How would it mathematically break the standard deduction threshold?

I’ll wait

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123456478965413846 t1_jdt4m9z wrote

Stop moving the goal post, tell me what is wrong with my numbers. Once you have done that I will explain amortization to you. Also the link I provided provides a complete amortization table including a break down of each payment for the full 30 years.

I'll wait for you to provide "correct" numbers.

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rocket_beer t1_jdt5gzu wrote

The burden of proof lies in your hands.

That’s literally how this works.

You don’t arrest someone and then the prosecutor says, “well fine, you prove to me who the real murderer is then”

You don’t “average out” the interest in amortizing.

Taxes are done yearly. After year 1, how would it be mathematically possible that he would be able to use itemized deduction?

It’s simple algebra. There is an exact amount of interest a homeowner would have to pay in order for that threshold to be broken.

How is it even possible to eclipse that number? Just for paying interest?

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123456478965413846 t1_jdt5ui2 wrote

I provided you that number further up this chain. I told you the mortgage amount that would be needed for both a single and a married person to hit the itemization threshold with just interest. I have provided every number you have asked for already as well as a link to an amortization calculator. If you believe they are wrong give me the correct number.

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rocket_beer t1_jdt7t3q wrote

How much interest would a tax payer/home owner have to pay in interest in order for them to choose itemized deduction because of their mortgage interest in a year?

Think about that. You are suggesting to other adults to do something that isn’t mathematically possible…

Please stop drinking. You’re embarrassing yourself.

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123456478965413846 t1_jdt8fua wrote

The standard deduction for 2022 was $12,950 for single people and $25,900 for married couples. Your total itemized deductions would need to be more than those numbers. The information is available on the irs.gov

Instead of calling people names, perhaps provide some numbers or evidence to show that this is mathematically impossible would be helpful. I have provided the math and links to websites that will do it for you.

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rocket_beer t1_jdt9msc wrote

You are saying, that after OP puts down 30%, that his mortgage interest would eclipse $25,900 in one year?

🤦🏻‍♂️🤦‍♂️🤦🏽‍♂️

I just………

How big are you suggesting that his mortgage is? Over a million dollars?

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123456478965413846 t1_jdt9xe9 wrote

OP's initial post included a hypothetical interest rate of 5.85%. At that interest rate a single person would clear the standard deduction with a mortgage amount above $221,367 and a married couple would clear the standard deduction with a mortgage amount in excess of $442,735. Assuming a 30% down payment that means a house price of 287k if single or 575k is married. And that is with no other itemizable expenses. When you buy a house you always have additional itemizable expenses like property taxes and assuming you work or spend money you are paying state/local taxes. So an average priced house with OP's interest rate and down payment would be large enough to benefit from the standard deduction if OP is single and a slightly above average priced house would qualify for mortgage interest deductions if OP is married.

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LoveThisUsername OP t1_jdv5ntj wrote

Correct that it’s not ultra jumbo, but it would be a big loan

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rocket_beer t1_jdv603e wrote

Yeah, don’t listen to that guy.

Your best bet is the 30%, and invest the liquid in the market.

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gokarrt t1_jds2dgr wrote

> Mortgage interest is also tax deductible

not for your primary residence, afaik?

edit: my bad, am canadian and wasn't paying attention to what subreddit i was in.

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123456478965413846 t1_jdsfejg wrote

It is deductible for the first 750k of home value loan amount. But with the larger standard deductions and low interest rates most people haven't been able to take advantage of the tax savings the last few years. With interest rates rising more people are getting some tax savings.

Basically the standard deduction is just shy of $13k for a single person or $26k for a married couple. In order to get any savings you need to itemize which only makes sense if your itemized deductions are more than the standard deduction.

edit: mixed up home value and loan amount

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Helpful-Bar9097 t1_jds8ni9 wrote

Take the house out of the equation. Would you borrow money at a 5.85 rate to make ~7-10% returns?

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luffagus t1_jdsi8gh wrote

I don't know how much gains you have, but you're potentially looking at a big tax hit if you sell everything. I personally like cash on hand for emergencies or future home renos, so I'd keep a lot of the investments. A third option would be to pay extra through time (like double or triple the mortgage; or an extra $25k a year or something). That would give you more flexibility and split the difference.

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LoveThisUsername OP t1_jdvalno wrote

Yes I need to figure out what the tax burden would be if we sold thank you

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