A Guy With $500,000 Wonders If It's Worth Buying A House With Cash To Be Debt-Free: 'Friends And Family Are Telling Me That It's A Bad Idea'
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Should you buy a house with cash or take out a mortgage? Not everyone has that option, but it is a fascinating question for people who have enough cash.
A single guy recently posted this question in the HENRY finance community. HENRY stands for "High Earner Not Rich Yet," and it attracts many people who take their finances seriously. The original poster has $500,000 in cash and is wondering if it makes sense to pay for a new house in cash.
"Friends and family are telling me that it's a bad idea," he stated.
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It's important to note that he doesn't only have $500,000 in cash. The young man also has a $330,000 condo that he's going to sell. He also has a $1.2 million brokerage account and earns $15,000 per month at his job. Furthermore, his franchise investments generate $5,000 per month.
These are some of the important points commenters brought up when debating if it makes sense to buy a house with cash or take out a mortgage.
Mortgage rates are a critical part of the conversation. If you could go back in time and get a mortgage rate of 2% or 3%, then it doesn't make much sense to buy a house with cash. It's easy to generate a return that's higher than 3% without taking excessive risk.
However, current mortgage rates hover closer to 7%. Higher rates justify making a cash offer on a house or bumping up your down payment. The only way to justify taking out a mortgage instead of paying with cash is if you can generate a higher return than the interest rate. It's more difficult to consistently deliver annual returns above 7%, so a cash offer may make more sense.
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One commenter also paid for the entire house in cash but stated that there are more expenses associated with being a homeowner. Having to keep up with property taxes, home maintenance, insurance, and other home expenses has made the commenter feel like they don't really own the place.
The same commenter proceeded to say that owning a house is still a cash drag, even after skipping a mortgage. Now, the individual is considering downsizing so they can put more money into the stock market. The individual has made it clear that they regret paying off the mortgage instead of using the funds elsewhere.
Running the numbers can help you gauge if it makes more sense to take out a mortgage or make a cash offer. If you compare the mortgage rate to the stock market's recent returns, then it often makes more sense to use a mortgage instead of paying in cash.
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For instance, the Vanguard S&P 500 ETF (NYSE:VOO), a fund that uses the S&P 500 as a benchmark, has delivered an annualized 12.8% return over the past decade. That's a higher return than the mortgage rate, and it's also likely to outperform your home equity's growth rate.
Most real estate properties don't grow like the stock market. You typically have to be near or in a big city to have the chance of seeing double-digit appreciation each year with your real estate holdings. Meanwhile, you can easily generate that return with the S&P 500.
If you're willing to take some more risk with the Invesco QQQ Trust ETF (NASDAQ:QQQ), you would have ended up with an annualized 17.5% return over the past decade. This index follows the Nasdaq 100 and has delivered enticing long-term returns for investors. It's easier to justify taking out a mortgage when you think about how your extra cash could grow in a fund like VOO or QQQ instead of sitting in your property as home equity.
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This article A Guy With $500,000 Wonders If It's Worth Buying A House With Cash To Be Debt-Free: 'Friends And Family Are Telling Me That It's A Bad Idea' originally appeared on Benzinga.com
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