From: Randy 
Newsgroups: misc.consumers.house
Subject: Re: Pay house in cash or do a mortgage?
Date: Fri, 02 Jul 2004 20:00:00 -0500

Iluv wrote:
> I need someone to clear up something for me. I've been recommended to
> pay a house in full(cash) by a friend to avoid all the interest over
> the years. It comes out to saving over 170k for 30 yrs(mortgage). 
...

If you buy the house with cash, you get good and bad:

1) All your money will be tied up in a single investment.

2) You will immediately get a return of about 6% on your investment, because you 
*don't* have to pay 6% in mortgage interest.  This is another way of looking at 
the $170K that you save in interest.

3) You will NOT get a tax break on the interest that you would have paid. 
That'd be about 30% of your initial monthly house payment.

4) You pay no taxes on the appreciation in the value of your house (your only 
investment) until you sell.  Unless you invest in muni bonds, you'll pay taxes 
on almost any alternative investments (if you do get a mortgage).

Of course, capital appreciation happens regardless of whether you pay off the 
mortgage, but if you buy an even more expensive house, you'll get a higher 
capital appreciation.  You invest more money; you get more return.

Will the $170K saved and the 6% saved in the cash deal outweigh the lost tax 
break and the risk of putting all your investment eggs in one basket?  It's hard 
to say.  Historically, real estate has been a pretty competitive investment when 
compared to the stock market, especially when you get an automatic 6% ROI.  But 
housing values have risen so high in some areas in the past 15 years that it 
just can't continue, or nobody from the next generation will be able to afford 
to buy your house from *you*.

     Randy