jerryrice
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Have looked at lots of calculators and cant really find the answer I want on buying a house. IF I can get a mortgage for $500K at 6% for 30 years, and if I also have $500K in cash that I could buy the house outright (forgtting any other issues of needing money, taxes, etc.) am I better off paying for the house with the 500K and thats it, or putting the 500K in a fixed investment of 5% for 30 years, and using the interest plus drawing down on the principle to pay the monthly mortgage. i.e. at the end of 30 years would I have the house plus additional money vs just paying cash for the house, is it a wash, or would I have to pay additional.
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Sun Feb 25, 2007 5:37 pm |
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efflandt
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Location: Elgin, IL USA
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It is somewhat complicated because you would need to figure out the difference between net interest paid after considering deductions above standard deduction (if any), and after tax rate of return if that money was invested. Extra income may be taxed more or less depending upon type of investment and whether short or long term gain. It also depends whether that return is compounded, or used to pay down the loan. Are you an experienced investor or did you just inherit the money and have no clue?
Basically you would need to get a better return after taxes then you would pay after interest paid. And that is not a simple formula since there are many variables and assumptions (like what will your income and tax rates and rate of return be over the next 30 years?). One thing that can hit people is suddenly becoming subject to AMT (alternative minimum tax) and losing deductions.
Other considerations are whether you have an emergency fund or are maximizing any tax deferred retirement plan. For example are you contributing the maximum to a 401(k) which reduces current taxable income, and if not eligible for a Roth IRA, are you packing non-deductable contributions into an IRA for conversion to a Roth in 2010 (when anyone can convert and spread tax on gains over 3 yrs)? So if that is all the cash you have, you may want to keep some of it in reserve, if you can avoid spending it on non-essentials.
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Sun Feb 25, 2007 6:43 pm |
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oldguy
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Jerry, a more common approach is to invest the $500k in a long-term product at 12%. That is where the power of compounding works really well, it would grow to about $15,000,000 in 30 years. You would pay a total of $1,080,000 for the $500,000 house, ie $580,000 in interest. I've done this with my rental houses over the past 30 years, it has worked well. As the others have stated, you can't make money by putting the $500k in a 5% savings product, you would have to invest it.
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Sun Feb 25, 2007 8:41 pm |
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jerryrice
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Thanks guys, I understand all the implications, in the real world of taxes, compund interest, stocks, etc, but this was a purely math problem in disregarding the real world of calculating if a fixed rate of 1 percent below a fixed mortgage rate for a fixed period of 30 years of 500K would result in making money (how much) , a wash, or losing money (how much) if monthly interest dollars plus extracting principal = monthly mortgage payment for a 6% 30 year loan. Still trying to find the non theoretical answer vs a heuristic answer, Cant seem to find it.
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Sun Feb 25, 2007 9:09 pm |
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