Purchasing a Home – (Q & A)

Jan 2017


Dear Rick:
My wife and I are in the process of buying a new home and we have a question about financing it. The cost of our new home is $500,000. Our original game plan was to put $100,000 down and finance the rest. However, we recently received an inheritance of about $250,000. What I was thinking is that if I take the $250,000 along with the cash I saved for the down payment and the proceeds from the sale of our existing home, I would have enough to pay cash for the house. That would be my preferred route as I don’t like having a mortgage payment. On the other hand, my wife thinks that we should leave the money in the bank and get a mortgage because rates are still very low. She also mentioned that we would lose the tax break that you get when you have a mortgage. I want to pay cash for the house but I need some help in convincing her. My question to you is what argument do you think I can use to convince her to pay cash for the house. You should know that I’m in my early 60s and plan to work for probably another five years. At that point in time, Social Security and my pension would cover all our expenses if we did not have the mortgage. If we had the mortgage, I would have to take distributions from my IRA to cover my expenses.


Dear Mort:
First, I want to state that I have no problem paying cash for a home. Yes, the tax breaks are nice; however, you should never let the tax tail wag the dog. In other words, you should not do anything for tax reasons and tax reasons alone.

The way I would approach your wife is first from a purely financial standpoint. If we assume that your mortgage is four percent, by paying cash for the home you are getting a guaranteed four percent return on your money. In today’s world, four percent is a very nice rate of return on a guaranteed basis. After all, when you look at the return that you’re getting at the bank or even a U.S. treasury, it is below one percent. Therefore, even if you factor that the interest on your mortgage is tax deductible, you are still receiving a much greater rate of return on your money than if you left it in the bank.

I would also stress to your wife that getting a mortgage is not inexpensive. After all, with a $400,000 mortgage it will probably cost you $8,000 to $10,000 in closing costs. You would not have to incur these costs if you paid cash. All too often, when people look at paying cash versus a mortgage, they never look at what the closing costs are. In today’s world, closing costs are substantial. I should also mention that the mortgage process itself can be stressful. You avoid this stress by paying cash.

The other issue I would discuss with your wife is the fact of comfort. For many people, it is comforting to know that they are debt free. You can’t quantify this in dollars and cents; however, let’s never forget that what makes you sleep at night is extremely important. The fact that you would feel more comfortable with your financial affairs is invaluable. We all know that life is full of all sorts of pressure and whatever you can do to lower that pressure is no doubt good for you. After all, isn’t that what having money and resources is supposed to do, bring you a higher quality of life? Therefore, I would also stress to your wife the health aspect of paying cash.

We all know that life is full of enough pressures and stress. That is why in life where you can find ways to reduce pressure and stress, why not? In the case at hand, not only would paying cash for the home as opposed to getting a mortgage, reduce stress, but in addition, it also makes sense financially. Therefore, it’s win-win situation.

Good luck!