Personal Finance (Not Investing) • Paying cash for a house?

This is getting all kinds of mixed up. In the end we have:

$1.5M in retirement savings
$400k cash savings
$100k emergency fund
$500k home equity

Comparing two scenarios:
1. Buy home for cash, have no mortgage and be left with $1.5M retirement, $100k eFund, $300k cash to figure out how to invest
2. Take 20% mortgage for $480k @ ~6.5% and be left with $1.5M retirement, $100k eFund, $780k cash to figure out how to invest

Don't have much other room (or desire) to be "riskier" at this point.

There is a third scenario if you do not want to change the risk you are taking which would be to put the $500K in home equity you have now into the the new house and have a relatively small mortgage on the new house.

Actually measuring risk is tricky but one way to look at your risk is to look at how much your investments would decline if the if there was a bear market and stocks decline by some percentage. You also need to adjust for the mortgage payment.

For your scenarios above with a 20% market decline and a $3,000 monthly mortgage payment, $36K a year, which could be invested if you do not have a mortgage you would have these situation if there was a one year bear market decline of 20%

1) No mortgage, $300K invested down 20% or $60K but you would have $36K in freed up mortgage payments you could invest added to your investments it so combined you would only be down $24K (60-36)

2) Mortgage, $780K invested down 20% or $156K.

With a mortgage your investment loss would be over six times as much as without a mortgage.

If the portfolio was up 20% instead you would have

1) No mortgage, up $60K plus and additional $36K invested is $96K

2) Mortgage up $156K which is less than double the 1st scenersio.

An additional advantage of being able to invest $3,000 a month is that you would get the advantages of dollar cost averaging.

You can crunch the numbers all sorts of ways and make elaborate models and try to adjust for taxes but in a down market using leverage can be brutal because you will be paying interest while your investments are going down.

Since the 2008 financial crisis there have been a few market dips but they did not last long. That is very unusual younger investors may not even have experienced a bad bear market but they are regular events which should be expected.

Statistics: Posted by Watty — Wed Mar 13, 2024 7:44 am — Replies 37 — Views 2887

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