My wife and I have close to $600,000 in our investment portfolio. Should we buy a house outright or take out a mortgage?


Dear MarketWatch,

My wife and I are Americans living in London. We are currently renting, mainly because real estate in London is extremely expensive, but also because we know that London is not our long-term future. In the coming year, we plan to return to the United States, where we will buy a house and start to settle down a bit.

My wife and I are in our mid-thirties. We have no children and no desire to have a family, and are currently sitting on approximately $580,000 in our investment portfolio. This amount does not include our retirement savings.

We think we know where and how much we want to spend on a house (about $400,000), but we don’t know How? ‘Or’ What we should buy this house. Is it better to take out a mortgage and have the earnings from our investments pay off the mortgage over time? Or should we just buy the house outright? We’re obviously glad to even be in a position where that’s even a consideration, but we just haven’t found a solid advice for which is best.

Sincerely,

Back in America

“The Big Move” is a MarketWatch column examining the ins and outs of real estate, from navigating the hunt 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 Jacob Passy at [email protected]

Dear ghost,

I must commend you for being so proactive in planning such an important financial milestone. I often hear from MarketWatch readers who seem to be rushing into home ownership. Maybe they’re trying to keep up with the Joneses, or maybe they’re worried that house prices are getting too high for their wallets. Be that as it may, you and your wife are certainly in an enviable and comfortable position, and the fact that you are not running headlong into buying a home suggests to me that whatever decision you make in the end, it will be well thought out and appropriate. for your financial situation.

For those who can buy a home outright, it can be a tough decision, especially in today’s market. The low supply of homes for sale across the country has created a situation where listings are attracting multiple offers. As a result, many potential buyers choose to make all-cash offers to win.

Buying a home without a mortgage can give you a leg up on the competition. This allows for a much more flexible and streamlined closing process, without the headaches of using a lender for financing. Sometimes sellers are so enamored with the idea of ​​such a simple deal that they will even accept an offer at a lower price if the buyer in question pays it all in cash.

Not to mention that avoiding a lender means avoiding fees and closing costs that can add up quickly, as well as loan interest. So it’s easy to see how buying outright could create savings. For many people, there is also a psychological benefit to not having a mortgage. You won’t feel the weight of significant debt on your shoulders, and it may be easier to manage your cash flow on an ongoing basis without this burden.

But there are downsides to buying a home outright, of course. Topping the list is the potential opportunity cost involved: if you cash in around two-thirds of your investment portfolio to buy a home, you’re missing out on the money those investments could earn you. The average annual return of the S&P 500 has historically been around 10% – and those profits add up over time. With interest rates still below 3% these days, it’s easy to see how the benefits of maintaining a larger portfolio can more than offset the costs.

Compare the average S&P 500 yield with average mortgage interest rates to see which might be the best route.

There is also the risk that the house is a bad investment. Yes, house prices are rising and have been for some time. But what if the house is flooded or your particular market is experiencing a downturn? Then suddenly you will have invested most of your non-retirement savings in a single asset, rather than having a more diversified investment portfolio.

Even setting aside potential income and portfolio diversity, going this route would mean significantly reducing the amount of liquid funds available to you (unless you have other resources that you haven’t mentioned). You would only have $180,000 left in your investment portfolio. – so how would you pay for furnishings, renovations and ongoing upkeep – not to mention any other non-home-related luxuries you might want to spend money on?

Dennis Nolte, financial adviser at Seacoast Investment Services in Winter Park, Fla., sums it up succinctly: “You can’t eat your house.” What good is being mortgage free when it means draining so many of your resources?

In reality, I think your situation is less black and white than you claim. Many financial advisers I have interviewed have suggested buying the home, but then asking for a cash refinance. It would be the best of both worlds: you could make an attractive offer that would appeal to buyers and benefit from a simplified closing to begin with. But later, you could cash in some of the equity in the home to reinvest or use for anything you want, from lavish furniture to a newly remodeled kitchen.

There are many other options you could consider. Since you have the funds to purchase the home, you can waive financing and appraisal contingencies on any offer you make. This means that you will cover any gaps caused by issues with your chosen mortgage lender.

You could also put down more than 20%, which would reduce the amount of the loan and the amount you would spend on interest, without completely emptying your investment accounts.

In the meantime, you may want to reconsider your investment strategy if you are relying entirely on these funds for a down payment or more.

“The value they’ve accumulated in their investment portfolio is very much at risk right now if it’s primarily stocks,” said George Gagliardi, founder of Coromandel Wealth Management in Lexington, Mass. His advice: consider de-risking your portfolio and moving some of the money into safer investments such as higher-quality short-term bonds to ensure that any potential market downturn doesn’t jeopardize your opportunity. of home ownership.

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