Date: Mon, 16 Jul 2007 19:43:59 -0500
From: joetaxpayer 
Subject: Re: Formulating decision to take out mortgage or pay cash for home.
Newsgroups: misc.invest.financial-plan
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GJ wrote:

> Is it possible to create a formula (or is there an existing source) to 
> determine the monetary advantages of the mortgage/cash decision of 
> purchasing a home.
> I'm not interested in the emotional issues or the security issues, I would 
> like to be able to use known values and assumed variables to project each of 
> the options over time.
> 
> Thanks
> JW 

No emotion. First, you want a downpayment large enough to avoid PMI, 
which is expensive compared to the money down which will avoid it.
If you can put 30% down instead of 20%, the question quickly turns to 
what other assets you have available, you don't want to deplete all 
liquidity. Consider that a mortgage is likely the cheapest money you 
will ever come across, so before using cash to increase the downpayment 
(or alternately, paying down the mortgage faster than the term), I'd 
choose to; pay any/all other debt, credit cards, car loan, etc. Fund the 
Roth account for you and the spouse, fund the 401(k) past matching if 
the expenses are reasonable. Then, look at your after tax cost of the 
loan. In the 28% bracket, a 6% mortgage costs you 4.32%. At 15% cap gain 
rate, you need a return of 5.08% to break even.
So long as you are working, and already in itemized deduction land (for 
some people, much of their mortgage interest goes to first helping to 
cover the standard deduction, so it's not really 100% deductible.) this 
last equation should help that decision.
The known values are your interest rate, and current tax bracket, 
assumed variable would be the market return in your chosen investment.
The larger unknown is the tax structure any year but 2007. The cap gain 
rate may go away, so my equation may go out the window, and 6% may 
become the break-even.

JOE