Wow, I haven't posted in quite awhile!
Lots of Ideas - I noticed your comment below in Petunia100's last post and I'm wondering if would elaborate? I'm going to need to get a mortgage at some point in the near future and am curious about the two scenarios you described. Thanks!
As far as financing, if the bank won’t finance such a small amount, you could reserve the cash, borrow a larger amount, then use the reserve to pay it down. You would earn interest on the reserve and because the mortgage would be in ‘future’ dollars which will most likely be worth less than ‘current’ dollars, you might save money.
And I know it is counter intuitive, but taking a long mortgage to lower payments - the bank doesn’t care how old you are - can leverage the ‘future dollar’ strategy so it is worth playing with the numbers.
The advantage to this is you would start with a substantial emergency fund.
May 14th, 2023 at 08:32 pm 1684096379
Suppose you saved $50,000 for a down payment, but the house you wanted was $70,000.
The bank says $20,000 is too small to mortgage. The minimum is $50,000.
So you use $20,000 for your down payment. You finance $50,000 at 6% for 15 years.
You invest the $30,000 in taxfree Treasury bills, currently paying 5%. You can also use CDs which might pay higher, but taxes might lower your rate of return - but at a low enough income, not by much.
You were planning to pay interest on $20,000, so the difference on the $30,000 you reserved is the difference between the mortgage interest rate and the investment interest rate - in this example 1%.
But you are assuming 3% cost of living increase every year. The dollars you use in 2023 buy more than the same dollar will buy each year in the next 15/30 years.
Each year, you will use some of the $30,000 to pay your mortgage, but for most of that time, the money can serve as an emergency fund. It will be more liquid than your house, and you can structure the investment so it matures at the rate you need it.
Sometimes interest rates on 15 year mortgages are significantly lower than on 30 year, but the payment is higher. So depending on your circumstances, a lower payment at a higher rate might be better for you. Your goal is not ‘pay off the mortgage’, it is ‘set your living expenses to match your fixed income.’
A valid retirement strategy is to have no mortgage in retirement, but a valid strategy is also to have a sum invested that sustains your housing expense in retirement. The mortgage pay off can be ‘safer’ because a house is worth a house, where interest rates and stocks go up and down. But ‘a house’ can tie you to a geographic area and is still open to the vagaries of real estate tax, insurance costs, the neighborhood, and of course market conditions. It’s all about what you are comfortable with.
I hope that helps.
Running numbers on a spreadsheet can illustrate it better than words.
May 15th, 2023 at 04:43 pm 1684169018
May 16th, 2023 at 04:33 pm 1684254800
May 16th, 2023 at 08:05 pm 1684267500