Negatives of paying all-cash for primary residence

The tax deduction and the investment opportunity cost are closely linked. The tax deduction lowers the effective cost of borrowing, which in turn lowers the yield you have to achieve with an alternative investment to surpass the cost of borrowing.

Another negative to paying cash is that there's nobody to mail your keys to if the property falls way underwater. The value of that option is a very individual thing, and hinges in part on the laws of your state.

"over the lifetime of the loan, you end up paying more then 2x the value of the house in interest. Is this really worth the tax deduction "

Over the lifetime of a 30 year investment, if you only double your money, you're doing it wrong.

It's nice to be able to walk away if you need to, and escape to some other country. You can't be arrested for defaulting on a mortgage.

I don't understand your comment Tech Guy. Bugel is saying that with a MORTGAGE, he would pay 2x the cost of the home. Without it, he can invest the other 50% of his net worth in some other investment.

Lets look at a basic example (ignoring tax isues as I don't know Bugel's tax rate):

Let's assume Bugel's net worth is $400.

Example A

Bugel buys a house for $200. He pays cash. At the end of 30 years, he has paid 0 in interest. He has invested $200 and assunming an annual return of about 8% (which used to make sense but who knows now ...) would leave him with about $600. SO he owns the home and he now has $600 in networth.

Example B

Bugel buys a house for $200, but he borrows $150 to pay for it and invests his remaining $350. At the end of 30 years, he has now paid $400 for the house. But his $350 is now worth $1,050. So, again he owns the house but his networth is $1,050.

If you exclude the value of the house when/if he sells, it appears that a mort is a better opportunity. Unless the market keeps going down like it has and then you pay 6% on a loan while you lose 40% of your money in the market.

Even if you take a mortgage, banks today want at least 20% down so either way you cannot walk away, unless you are willing to lose your 20% downpayment. THe days of 100% financing are GONE. LONG GONE.

My suggestion is to put 50% down. If you have the money, you can always pay off your mortgage early. Just make sure there is no prepayment penalty. Plus, it is nice to have some money in the bank for a rainy day or to make upgrades.

Considering the large volume of all-cash purchases that are made in NYC, it seems many people prefer to have peace of mind to the (sometimes negligible) benefits of carrying a mortgage, especially if the cash purchase is more than half your net worth.

^^^sorry, I meant to say especially if the cash purchase is NOT more than half your net worth.

"I don't understand your comment Tech Guy"

It was snarky, but you do understand (you just don't realize you do). I was saying the same thing you do - you pay 2x the value in interest, which sounds bad, until you realize you can earn even more than that elsewhere.

How about input from folks who have paid off their primary residences?
Do you feel much different when you had a mortgage vs now? Less stress?, financially more flexible? happier?

There is an assumption here that renders the math a bit too simplistic for all situations. One is that the investment return exceeds the mortgage rate. Maybe so at 5% interest, but jumbo mortgages are at 7% or more. Also the investment income is taxable, while some or all of the mortgage payment may or may not be deductible, and the tax rates may not be the same. As a general matter, if you can in your mind assume that, over the life of the loan, the post tax return on invesment will exceed the post tax interest rate, then perhaps you have concluded that the mortgage is better than a cash purchase. However, even then, the comparison cannot take into consideration that few if any actually remain in a house for the length of the 30 year loan, and the happenstance of where asset values are at that moment in time leaves the question with no right answer.

However, in this market, if you are looking at a mortgage over the $1.1 million interest deduction threshhold, a 7 % jumbo mortgage interest rate, and very uncertain investment market, in my mind the math would favor a cash purchase, or at least enough cash to get a conforming loan and get under the deduction threshhold. You can always borrow or borrow more later.

I agree with nyc sport. take out a loan to the conforming loan limit and then pay the rest in cash.

Talk to the margin desk at your broker about how much it would cost to pull out 1/2 your balance in cash while leaving you fully invested. You might be surprised at the rate they will give you and it is deductible against investment gain. This is just another alternative to consider; nobody here knows enough about your personal circumstances to actually make a reccomendation.

"Over the lifetime of a 30 year investment, if you only double your money, you're doing it wrong."

Assumptions that investment returns are going to necessarily perform better than avoiding a mortgage is blinding basing future performance on our most recent past (i.e., the 80s and 90s secular bull market). There aren't enough examples of long-term secular bear and bull markets to make a statistically significant estimation on just how long this one will last, but here's the three of the 20th century in the US:

DOW annual return in secular bear markets
1906-1921 16 years 1.58%
1929-1949 21 years 1.69%
1966-1982 17 years 1.59%

Want a better example of what happens after a credit bubble pops? Japan's Nikkei was 38,915 in 1990, now its 8,836 - a stunning 80% drop in 19 years. With ZIRP (with Government becoming the lender of only resort), fixed income hasn't done that well either. Will that happen here? That's for another discussion, but to say you are "doing something wrong" if your opportunity costs don't outperform is naive.