By Aarthi Swaminathan
‘Our agent thinks it would be best if we just put a down payment on the new house and invest the money’
Dear Big Move,
My husband and I are downsizing our house where we raised our family. We found a house we really like and are contemplating buying it.
Our agent, who used to be a financial adviser, thinks it would be best if we just put a down payment on the new house and, when our old house sells, invest the money in one of the accounts with our broker, and slowly pay off the loan. The interest rate would be 4.9%.
Would that be wiser than just taking the proceeds and paying off the new house? I think the house would be a good investment, so when we pass away, it should be worth more than it is now.
Our agent/adviser thinks that, for people in our age group, “cash is king.” Our house is completely paid off, so most of that money would be put in our investments.
Can you offer any insight?
Empty Nesters
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage. Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Empty,
Let’s just take a second to digest what you’re about to do. Selling the family home is a huge undertaking emotionally and financially. You’re closing a big chapter in your life.
Now, let’s consider your two options:
Option 1: Buy a smaller home with cash and own it free and clear. Option 2: Put down 20% so you can avoid paying mortgage insurance and take on a mortgage so you can invest the rest into a financial product that would earn you a bigger return.
Your decision hinges on a few factors: Whether you want to take on debt, what your income stream will look like to support debt repayment, and your appetite for risk.
Paying for the house in full avoids you taking on unnecessary debt. You’ll avoid paying for interest, for closing costs, and other expenses associated with a mortgage. Particularly in a high interest-rate environment, where the 30-year and the 15-year mortgage rates are 6% or more.
Paying for the house in full avoids you taking on unnecessary debt. You’ll avoid paying for interest, for closing costs, and other expenses associated with a mortgage.
You’ll also own your house free and clear, which some people find a source of pride. A quarter of existing homes sold in August were paid for with cash, according to the National Association of Realtors. The bottom line is this: It is one fewer bill to worry about paying at the end of the day.
Paying for a house in full also avoids a potential need for you to balance income and expenses. If you pay for it in one go with the proceeds from the sale of your previous house, the house is all yours.
If you invest the extra money in the market, can you still make the monthly mortgage payments? Do you have enough of a buffer? Or will you still be working for the time being to make those payments?
Debt in retirement
Once people enter retirement, having debt hits differently, said Ryan Zabrowski, a certified financial planner at Krilogy.
The downside of paying for the house in cash is losing out on a potentially bigger return on the market. That’s something you need to decide – without your agent/adviser pushing his preferred products on you. Do you get a higher rate of return through your investment portfolio? What’s the expected cost of your mortgage?
The textbook math is as such, Zabrowski said: “If I can get a higher rate of return having a mortgage versus having an investment portfolio, the textbook would say, you know, you should consider carrying a mortgage.”
And investing in the stock market comes with an element of risk. Sure, all investments can be risky, including in real estate, but this property is not only an asset, it’s your home.
Seek expertise of an independent financial adviser, so that they can consider your decision without standing to benefit from you deciding one way. The broker has an incentive to encourage you to invest the money in one of his accounts, when you might be better off paying off the house in full.
A real-estate agent might advise you to pay a house in full, for instance, because all-cash deals typically go faster than when the buyer has to finance the house with a mortgage. You also avoid paying closing costs, and that 4.9% interest.
So you need to first seek advice from someone who does not have a financial interest in both your real-estate and your investment decision.
All things considered, buying this property outright seems like a very tempting option.
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-Aarthi Swaminathan
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09-23-24 0623ET
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