100% Down Plan

[littleroc02us]

Why are you deducting the cashflow?

On day 1, 100% cash guy writes a check for $200k to the owner of the house. Mortgage guy takes out a mortgage, and writes a check for $200k to his investment account.

The mortgage guy would have put 20% down so that would leave 160k to invest.

[jpg7n16]

You just did error #1 again. Do people with mortgages not qualify for a Roth? You only get that amazing account if you buy homes with cash??

Just because I hold all my investments separately, doesn't mean I can't move $10k/year to a Roth, just like your cash investor.

I'll redo the math based on a $160k mortgage - but it won't matter. A person earning 8% on investments, while paying 5% on a mortgage of an identical amount - will earn more than a person starting with $0, and investing at 8% - on the same cashflows.

2nd post with updated math to come shortly.


I get that you want to pay 100% cash - I don't get why you manipulate the math to make your option more beneficial than it actually is.

[littleroc02us]

You just did error #1 again. Do people with mortgages not qualify for a Roth? You only get that amazing account if you buy homes with cash??

As stated above, I was basing the numbers off of Safari's idea. And yes you could move it each year into a Roth IRA.



I'll redo the math based on a $160k mortgage - but it won't matter. A person earning 8% on investments, while paying 5% on a mortgage of an identical amount - will earn more than a person starting with $0, and investing at 8% - on the same cashflows.

2nd post with updated math to come shortly.


I get that you want to pay 100% cash - I don't get why you manipulate the math to make your option more beneficial than it actually is.

Your not getting the point, I was basing my numbers off of Safari's point. He stated again for the second time in his scenario that the investment would be invested once and never again.

[jpg7n16]

Without the Roth accounts: (assuming 25% tax rate at retirement)

Mortgage Investor: invests $160k@8% for 30 years = $1,749,716.75 (basis = 160k, gain = 1,589,716.75) after tax value = $1,352,287.56

Cash Investor: invests $858.91/month for 30 years = $1,280,091.48 (basis = $309,207.60, gain = 970,883.88) after tax value = $1,037,370.51

Mortgage investor comes out $314,917.05 ahead.

-----------------------------------------------------------------------

With Roth accounts.

Mortgage investor: Invests $150k in brokerage, and 10k in Roths; will also transfer $10k from the brokerage account on the 1st of each year to Roth accounts. Will also pay the taxes from the brokerage account, and commissions for the transfer. Let's say the basis is distributed over the 30 years - so $5000 of each $10k withdraw is basis and $5k is gains. Meaning the mortgage investor would pay $1250 taxes each year to transfer. ($5k * 25%). So each year, he removes $11,250 from his brokerage account to fund his Roth and to pay taxes on the transfer.

Brokerage account - begins at $150,000, removes $11,250/year, ends at $304,891.10 (no remaining basis, all gain) = $228,668.33 after tax value
Roth IRA - begins at $10k, $10k added at the start of each year = ending value of 1,296,440.27 (no tax due)
Total after tax value = $1,525,108.60

Cash investor: invests $833.33 each month to his Roth, and 25.58/month to his brokerage account

Brokerage: begins at $0, ends at $38,125.28 (basis = 9,209.25, gain = 28,916.02) after tax value = 30,896.27
Roth IRA: begins at $0, ends at 1,241,966.21 (no tax due)
Total after tax value = 1,272,862.48


Mortgage investor comes out ahead by $252,246.12

----------------------------------------------------------------------

And please note, I'm still not even giving the mortgage investor his tax break on his mortgage.

So I ran the numbers on the tax advantage. Assuming that the mortgage investor is not able to invest his tax refund until the following year, and assuming that all the interest paid is itemizable, here's what happens:

Pays 10,306.98/year towards his mortgage (858.91 * 12), in year 1, $7,946.39 of that is interst, with 2,360.58 going to principal. Tax break of 7,946.39*.25 = 1,986.60 (beginning balance period 2). Invested at 8% compounded monthly (like all other investments have been). Add year 2's tax break to the beginning balance of year 3, etc.

Do these calculations for 29 years. (year 1 = $0, cause no tax refund received yet)

Ending value: $188,497.73 (basis = 37,233.86 worth of tax refunds invested, gain = 151,263.87) after tax value = $150,681.76 extra that the mortgage investor can have added to each scenario.


Accounting for the tax break on mortgage interest, the mortgage investor would come out ahead by the following:

without Roth: $465,598.81
with Roth: $402,927.88

These are not insignificant amounts by any means.

[jpg7n16]

Your not getting the point, I was basing my numbers off of Safari's point. He stated again for the second time in his scenario that the investment would be invested once and never again.

You don't have to invest again.

You only move from the brokerage to the Roth IRA. That's not a new investment - it's a transfer.

There is no new money added, therefore no new investments are made. So the scenario remains true to Safari's point.

[jpg7n16]

The point of the discussion wasn't, 'does consistent investing in a Roth outperform a one-time investment in a taxable brokerage account?'

It was - 'even if the OP is able to pay 100% cash for a home, should he do it?'

Your scenario is evaluating Roth vs brokerage, while not considering the reality that an investor can transfer money from the brokerage to the Roth.

The rest of us are trying to evaluate the scenario itself by keeping all other factors equal.

[littleroc02us]

You don't have to invest again.

You only move from the brokerage to the Roth IRA. That's not a new investment - it's a transfer.

There is no new money added, therefore no new investments are made. So the scenario remains true to Safari's point.

I understand that, but at this point whatever you come up with won't change my mind because as has been stated before you can't possibly account for an exact Risk, because you don't know what can happen to the market,etc, so the point is mute because I'm not one to take such high risks when I would rather have 1.25 million tax free at retirement and a paid for house, then to leverage so heavily if I had 200k to spend. Just remember that a paid for house is a gauranteed 5% and an investment in Roth IRA's isn't.

[jpg7n16]

I understand that, but at this point whatever you come up with won't change my mind because as has been stated before you can't possibly account for an exact Risk, because you don't know what can happen to the market,etc, so the point is mute because I'm not one to take such high risks when I would rather have 1.25 million tax free at retirement and a paid for house, then to leverage so heavily if I had 200k to spend. Just remember that a paid for house is a gauranteed 5% and an investment in Roth IRA's isn't.

I'm not really trying to change your mind, cause even I don't think you personally should try this.

I am trying to make sure that the argument in favor of the mortgage (which I support) is properly evaluated. And the proper evalution shows that, if the 8% is acheived, a mortgage investor will come out ahead by a good deal (which is why I'm in favor of it).

So I don't want viewers to read wrong evidence when making their decision. Nor do I want viewers to feel that it is a guaranteed advantage. There is always the risk that you won't make 8% on investments. You could make less, you could make more - the future of the stock market is unknown.

But yes, there is risk in taking the loan and hoping for an interest rate arbitrage as described above. Primarily, the risk that investment returns do not out perform the rate on the loan.

That is why the above strategy of keep the mortgage, and invest the difference is only appropriate for someone with a higher risk tolerance. littleroc02us should definitely not attempt this strategy - your risk profile wouldn't allow you to sleep at night if you did.

[littleroc02us]

With Roth accounts.

Mortgage investor: Invests $150k in brokerage, and 10k in Roths; will also transfer $10k from the brokerage account on the 1st of each year to Roth accounts. Will also pay the taxes from the brokerage account, and commissions for the transfer. Let's say the basis is distributed over the 30 years - so $5000 of each $10k withdraw is basis and $5k is gains. Meaning the mortgage investor would pay $1250 taxes each year to transfer. ($5k * 25%). So each year, he removes $11,250 from his brokerage account to fund his Roth and to pay taxes on the transfer.

Brokerage account - begins at $150,000, removes $11,250/year, ends at $304,891.10 (no remaining basis, all gain) = $228,668.33 after tax value
Roth IRA - begins at $10k, $10k added at the start of each year = ending value of 1,296,440.27 (no tax due)
Total after tax value = $1,525,108.60

Cash investor: invests $833.33 each month to his Roth, and 25.58/month to his brokerage account

Brokerage: begins at $0, ends at $38,125.28 (basis = 9,209.25, gain = 28,916.02) after tax value = 30,896.27
Roth IRA: begins at $0, ends at 1,241,966.21 (no tax due)
Total after tax value = 1,272,862.48


Mortgage investor comes out ahead by $252,246.12

Agreed, even though that's not how I was calculating it.

----------------------------------------------------------------------

And please note, I'm still not even giving the mortgage investor his tax break on his mortgage.

So I ran the numbers on the tax advantage. Assuming that the mortgage investor is not able to invest his tax refund until the following year, and assuming that all the interest paid is itemizable, here's what happens:

Pays 10,306.98/year towards his mortgage (858.91 * 12), in year 1, $7,946.39 of that is interst, with 2,360.58 going to principal. Tax break of 7,946.39*.25 = 1,986.60 (beginning balance period 2). Invested at 8% compounded monthly (like all other investments have been). Add year 2's tax break to the beginning balance of year 3, etc.


Do these calculations for 29 years. (year 1 = $0, cause no tax refund received yet)

Ending value: $188,497.73 (basis = 37,233.86 worth of tax refunds invested, gain = 151,263.87) after tax value = $150,681.76 extra that the mortgage investor can have added to each scenario.


Accounting for the tax break on mortgage interest, the mortgage investor would come out ahead by the following:

without Roth: $465,598.81
with Roth: $402,927.88

I don't see anywhere in here where you mentioned the total amount that the person has paid in the end for the mortgage which was $369,209.25, the interest of that amount was $149,209.25, whith a tax refund of $37302.31. Somwhere in here you need to subtract the $111,906.94 from your investments, because that is what you paid in interest after you subtract the tax refund from paying interest. Not sure why that was missed unless I don't see it in your post somewhere???? Also, how is sending the bank $149,209.25 to the bank to get $37,302.31 from the IRS an advantage. I don't understand where that is an advantage. I would rather have that money to spend.

[jpg7n16]

I don't see anywhere in here where you mentioned the total amount that the person has paid in the end for the mortgage which was $369,209.25, the interest of that amount was $149,209.25, whith a tax refund of $37302.31.

This issue was previously addressed in a post above. The presence of a cashflow to the mortgage company each month accounts for all interest paid. Each mortgage payment is part interest, part principal.

So when I show that the mortgage investor invests $0 additional dollars each month and pays $858.91 to the mortgage, that accounts for all interest paid right there. 30 years of paying 858.91/month pays $309,207.60 over the 30 years. 160,000 of this accounts for principal payments and the other 149,207.60 accounts for the interest paid.

So in your calculations your reinvesting the tax refund each year for 29 years than the person who paid for their mortgage in cash would have all of the interest they saved to invest also. Not sure why that was missed????

Since the cash investor is free to invest the entire amount of the mortgage payment (principal and interest portions), the interest savings are already included in his investment balance.

So, the cash investor already is investing all the interest he saves every month when he invests $858.91.

For example, in month 1, while the mortgage investor is paying $666.67 interest (of which, come tax time, he'll receive a refund of $166.67) and 192.24 principal, the cash investor is not paying any interest or principal payments. So he is free to invest both 666.67 and 192.24 (858.91).

Why are you deducting the cashflow?

On day 1, 100% cash guy writes a check for $200k to the owner of the house. Mortgage guy takes out a mortgage, and writes a check for $200k to his investment account.

Each month, the mortgage investor would write a check for $1,156.97 to the bank, and the cash investor would write a check for $1,156.97 to the brokerage company.

The consequence to cashflow is identical.

So if you're going to deduct the cashflow from the mortgage investor, why not do the same for the 100% cash investor?

You don't have to compare the cashflow. You have to compare the ending net worth.

---------------------------------------------------------
Mortgage investor

Day 0: $200k in cash, $0k home, $0k mortgage, $0k investments
Day 1: $0k cash, $200k home, $200k mortgage, $200k investments
Income: $X, payment to mortgage $1,156.97/month, $x to taxes and insurance
30 Years later: $0k cash, $200+k home, $0k mortgage, $1,889,074 investments (after tax)

Cash investor

Day 0: $200k in cash, $0k home, $0k mortgage, $0k investments
Day 1: $0k cash, $200k home, $0k mortgage, $0k investments
Income: $X, payment to investments $1,156.97/month, $x to taxes and insurance
30 Years later: $0k cash, $200+k home, $0k mortgage, $1,528,141 investments (after tax)


The cashflow, home value, taxes and insurance all don't matter in the end - because they're all identical for each investor. In the end, the mortgage investor would be well ahead if investments average 8%.

[littleroc02us]

Pays 10,306.98/year towards his mortgage (858.91 * 12), in year 1, $7,946.39 of that is interst, with 2,360.58 going to principal. Tax break of 7,946.39*.25 = 1,986.60 (beginning balance period 2). Invested at 8% compounded monthly (like all other investments have been). Add year 2's tax break to the beginning balance of year 3, etc.

[/QUOTE]

We both agree on the Roth IRA contribution and Brokerage accounts that you came up with and I calculated for also, but one thing you said was taht your tax refund would be invested and compounded monthly, but how is that possible when you receive that amount once a year? But I'll use your number of $150,681.76 invested from the tax refund at 8% for the 29 years. What you did forget to include is the interest that the mortgage holder would pay throughout his life on the loan in the final analysis. What I mean by that is the cash buyer paid 200k + $60k in taxes for his house and the mortgage borrower paid including tax/interest and principle of $369,906.94 minus the $37,302.31 in tax deductions. In the figures below I'm going to figure that both houses increase in value over 30 years at an industry standard of 3% which comes out to $491,368.

So here is the final analysis for a 30 year timeline, this only includes the items we have discussed thus far. Obviously there could be other factors such as 401k's, assets, etc...

Mortgage payer:

Assets:

House: $491,368
Investments: $1,525,608.60
Tax refund: $150,681.76

Total = $2,167,658.36

Expenses:
Interest: $149,209.25
Taxes: $60000

Total = $209,209.25



Final Net result: $1,958,449.11
(Does not include Risk)


Cash buyer

Assets:
House: $491,368
Investments: $1,272,862.48

Total: $1,764,230.48

Expenses:
Interest: $0
Taxes: $60,000

Total: $60,000

Final Net Result: $1,704,230.48


Difference between the two scenarios.

$254,218.63 in favor of the riskier scenario of taking a mortgage.

[rj.phila]

to answer the question of the OP: i paid cash last year for a house, but it was my 3rd home and im in my mid-30's. my finances, as well as my financial planning/ethos, is more unorthodox than anyone i know(it's also panned out to be more fruitful than anyone i know, but that's another story for another day).

i wouldn't necessarily suggest a hardline approach against a mortgage PERIOD, but your general aversion to debt is, IMO, very much along right track.

i can open up more specifics, and talk through some more approaches, if you care to discuss further.

[jpg7n16]

We both agree on the Roth IRA contribution and Brokerage accounts that you came up with and I calculated for also, but one thing you said was taht your tax refund would be invested and compounded monthly, but how is that possible when you receive that amount once a year? But I'll use your number of $150,681.76 invested from the tax refund at 8% for the 29 years.

I calculated the amount of the refund from year 1, and used it as the beginning value for year 2 as I expected he wouldn't get his refund until the beginning of year 2 (year 1's refund = $1,986.60) Put it into a financial calculator with 12 periods 8%/12 interest rate, no payments, and came up with a final value (2,151.48 after 1 year). Then I made the beginning balance for year 3 equal to ending year 2 plus tax refund for year 2 (2,151.48 + 1,956.40 = 4,107.89) etc.

The refunds went like so:
Yr1: 1,986.60
Yr2: 1,956.40
Yr3: 1,924.67

The balances went like so:
Yr1: beg 0 end 0
Yr2: beg 1,986.60 end 2,151.48
Yr3: beg 4107.89 end 4448.84
Yr4: beg 6373.51 end 6902.51 etc...

I used excel for a lot of this cause I can just copy the formulas.

What you did forget to include is the interest that the mortgage holder would pay throughout his life on the loan in the final analysis. What I mean by that is the cash buyer paid 200k + $60k in taxes for his house and the mortgage borrower paid including tax/interest and principle of $369,906.94 minus the $37,302.31 in tax deductions. In the figures below I'm going to figure that both houses increase in value over 30 years at an industry standard of 3% which comes out to $491,368.

I didn't include it, because it doesn't matter. It's already been paid. It'd be like you deducting the purchase price of the home at the end. Why would you do that? You've already accounted for it. It's irrelevant.

You are double counting the interest costs. Once when the mortgage payment is made each month, and twice by deducting it from my final balance.

The interest cost is already accounted for in the cashflow for the mortgage.

Mortgage payer:

Assets:

House: $491,368
Investments: $1,525,608.60
Tax refund: $150,681.76

Total = $2,167,658.36

Expenses:
Interest: $149,209.25 <--- this is double counting the interest
Taxes: $60000

Total = $209,209.25

Your assets are essentially correct (except the investment balance is $500 too high).

Notice he has $0 cash. Where did his $858.91/month go? If he's already paid all the interest, why are you deducting it again? If he hasn't paid the interest yet, where is his cash?


Although he should have had 858.91 to invest each month, this expense was accounted for when he made his mortgage payment each month. And thus this cash asset was removed from the balance sheet.

So the $2.2 million figure is after interest, but you're correct that it's not after property taxes.



Over the course of the 30 years both investors shell out $509,209.25 worth of assets. They just go to different places.

Mortgage guy has $40k go to downpayment, $160k go to his investments, $160k go towards principal, and $149,209.25 go to interest.

Cash guy has $200k go towards his home purchase, $309,209.25 go to investments, and $0 go to principal and interest.


After all that has been accounted for, mortgage guy still has the $2.2 million remaining assets, while cash guy only has $1.7 million (using the home values you listed above). There is no need to deduct interest costs again. They've already been paid.

[humandraydel]

After all that has been accounted for, mortgage guy still has the $2.2 million remaining assets, while cash guy only has $1.7 million (using the home values you listed above). There is no need to deduct interest costs again. They've already been paid.

I must admit, you are the most tenacious (patient? stubborn?) person I've met! I gave up long ago. As you said: 8% > 5%. End of story.

[littleroc02us]

Mortgage guy has $40k go to downpayment, $160k go to his investments, $160k go towards principal, and $149,209.25 go to interest.



After all that has been accounted for, mortgage guy still has the $2.2 million remaining assets, while cash guy only has $1.7 million (using the home values you listed above). There is no need to deduct interest costs again. They've already been paid.

Agreed I messed up on adding the interest in twice.

I'll take 1.7 million and a paid for house any day, I'm just not the risk taker a lot of people are, no matter what the mathematics work out. All it takes in the mortgage payers scenario to go awry is one problem in life and the house is sold or forecloded. I try to take a more spiritual approach to money than most. Proverbs 22:7 "The borrower is slave to the lender". This may explain where my personal beliefs over take the huge risk others do. I have a mortgage like most of us do here, but plan to get rid of it asap.