Hi Rick:
I’ve read your columns and heard you speak many times and that is why I am turning to you for some advice. I am in my early 50s, divorced and financially secure. I work and my salary more than covers my living expenses. I have a 401(k) Plan that I max out every year and have enough in my trust and IRAs to more than cover my needs when I retire. I plan to work for at least another 10 to 15 years. My issue is with a new home that I am purchasing. My original game plan was to pay cash for the home. With a recent inheritance and money that I have been saving, I can pay cash for the house without touching any of the money I’ve allocated for retirement. My friend and my accountant tell me that with interest rates so low and that since I can deduct my mortgage payments, that I’d be a fool not to get a mortgage. I really don’t want a mortgage but I also don’t want to be foolish. My question to you is will I be foolish to pay cash?
Theresa

Dear Theresa:
I absolutely do not think it would be foolish to pay cash and, in fact, I would recommend that you do so. Yes, there could be some tax breaks to financing the home; however, let’s never forget that the goal of our money is to enjoy it and for it to buy us comfort and security. Saving on taxes is at best, only one small part of that goal. Particularly, for someone in your situation with their finances in order and who has saved for their retirement, what allows them to sleep at night is much more important than any tax savings. After all, it is important to keep in mind that when it comes to deducting your interest, it is not as if you get a dollar-for-dollar savings on your money. For example, if you are in a 28 percent tax bracket and had $5,000 in interest, your true savings is $1,400 ($5,000 x 28%). However, it still means that the net cost to you is $3,600 ($5,000 – $1,400). Therefore, by not having a mortgage and not having to make interest payments it means you saved $3,600. Of course, the money you would use for the purchase could be invested, however, there are different risks involved that you would not have by paying cash for the property.

I’ve always been a believer that when it comes to investing you have to be comfortable with what you’re investing in. Investors who invest outside their comfort level tend to end up buying high and selling low which is not a very good strategy. I am also not one who encourages people to incur debt. That being said, a home mortgage is the only type of debt that can make sense for people. Debt creates a strangle hold on people and they lose flexibility. Therefore, in the great majority of cases, I do encourage people to be debt free; particularly, if it allows you to sleep at night. Remember, when you pay cash for your home, you are making an investment-the investment is your home.

One last note, let’s not forget that there is also a cost to obtain a mortgage. Mortgages don’t come free and sometimes, there are hefty charges that are associated with them. Therefore, if you are just looking solely at the dollars and cents of whether or not to have a mortgage, don’t forget to take into consideration the cost to get that mortgage.

Good luck!

Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com