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Re: [LandCafe] Better to pay for a house up front, or take a Mortgage?

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  • Fred Foldvary
    ... There is no one single answer. It depends on what else you would do with the up-front funds. If it is invested such as in the stock market, what is the
    Message 1 of 1 , Sep 6, 2010
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      --- On Sun, 9/5/10, Scott on the Spot <ssbaker305@...> wrote:

      > Is it better to pay for a house up front, or to pay off a mortgage over time? <

      There is no one single answer.
      It depends on what else you would do with the up-front funds.
      If it is invested such as in the stock market, what is the expected net return (after taxes)? Compare that with the net return from putting it into the house payment, including the tax deduction for mortgage interest.

      > Subquestion: does the length of the mortgage - 15, 30 years, matter?

      It depends on whether it is a fixed rate or variable rate.
      And it depends on the relative interest rates for fixed-rate loan terms.
      If the interest is the same, it is better to have 30 years.
      But usually, interest rates are lower for a 15-year loan. It is less risky for the lender.
      But for 30 years, you lock in the rate, which can result in a lower effective rate if inflation rises.
      So it depends on the rates and expected inflation.
      Personally, I would do a 30-year fixed rate, which protects me from inflation and frees up funds for more liquid or tax-advantaged financial investments.

      > that it is better to pay the whole thing.

      > A. Contrary to what bankers tell us, the interest rate is really >50% in the first few years, especially for a 30 year mortgage, so you are building little or no equity in those first few years.<

      But you get a bigger tax deduction. So it depends on your marginal tax rate.

      > The 7% ROI on the stock market, historically, is misleading. For example, we just had a lost decade on the stock market. <

      The 7% is for very long runs, such as 30 years.
      Also, a balanced portfolio that includes bonds would have had a better return, especially with periodic re-balancing.

      > if you want to "beat the market"

      Do this best with periodic re-balancing of a diversified portfolio.
      Not with stock picking or market timing, which is a job best left for talented professionals.

      FredF
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