How much to borrow
- Thread starter Owen_IHB
- Start date
NEW -> Contingent Buyer Assistance Program
Oops I hit return too quickly.
So I am trying to figure out the math of how much to borrow on a home purchase. Hypothetical: Say I buy a $500K house and I have $500K. I am just trying to figure out if it makes sense to borrow.
One option is to pay the house in full and be done with it.
Another option is to borrow some money and invest it. Say I can borrow $100K at 5% interest (yes I know that is below market, but bear with me). I won't have to pay income taxes on the interest payments. The monthly payments would be something like $525. Most of that amount would be interest, let's say $500. Assuming I am in a 35% marginal tax bracket, that saves me 500 x 12 x .35 = $2100 in income taxes. I can take that $100K and invest it with Fidelity in a money market fund that pays 5%. Of course, I have to pay 35% of what I make in taxes. So I make about $3250 per year from this $100K I borrowed (100,000 x .05 x .65 = $3250).
So at the end of the year, I have to pay $6300 in principal and interest (525 x 12). But of that, I get the benefit of the principal payments ($300). I also save about $2100 in income taxes, and I make about $3250 in interest from the Fidelity investment, which totals about $5650. So it cost me about $500 for the year to borrow $100K.
One flaw in all of these assumptions is that I can get a loan for 5%. By the same token, assuming a 5% return on investment from Fidelity is pretty conservative. I also simplified some of the calculations. But what did I miss here?
Does it make sense to borrow if you don't have to?
So I am trying to figure out the math of how much to borrow on a home purchase. Hypothetical: Say I buy a $500K house and I have $500K. I am just trying to figure out if it makes sense to borrow.
One option is to pay the house in full and be done with it.
Another option is to borrow some money and invest it. Say I can borrow $100K at 5% interest (yes I know that is below market, but bear with me). I won't have to pay income taxes on the interest payments. The monthly payments would be something like $525. Most of that amount would be interest, let's say $500. Assuming I am in a 35% marginal tax bracket, that saves me 500 x 12 x .35 = $2100 in income taxes. I can take that $100K and invest it with Fidelity in a money market fund that pays 5%. Of course, I have to pay 35% of what I make in taxes. So I make about $3250 per year from this $100K I borrowed (100,000 x .05 x .65 = $3250).
So at the end of the year, I have to pay $6300 in principal and interest (525 x 12). But of that, I get the benefit of the principal payments ($300). I also save about $2100 in income taxes, and I make about $3250 in interest from the Fidelity investment, which totals about $5650. So it cost me about $500 for the year to borrow $100K.
One flaw in all of these assumptions is that I can get a loan for 5%. By the same token, assuming a 5% return on investment from Fidelity is pretty conservative. I also simplified some of the calculations. But what did I miss here?
Does it make sense to borrow if you don't have to?
graphrix_IHB
New member
Depending on your income/cash flow and how your tax situation works that you can deduct the 35% I would borrow what my cash flow permits. I'd double check with your acountant or tax software. That means living very comfortably where a vacation to NYC that came up this weekend for next month can be done. It also means your investment has to be at least 200 bps over your loan rate and preferably 400bps. I.E. 5% loan would mean an investment would be at 7% 200 bps or 9% 400 bps. Borrowing can be good if it is used correctly. Too bad 98% are bleeping it up.
I owe one third what my home is worth in a fire sale in this market. I am fully prepared for that to rise to 75% though.
I owe one third what my home is worth in a fire sale in this market. I am fully prepared for that to rise to 75% though.
IrvineRenter_IHB
New member
Owen,
Not paying on a mortgage is a guaranteed return on your money because you don't pay any interest. Returns on other investments have the potential to be greater, but they also have the potential to be much less. Don't get sucked in by the lure of tax savings. Spending a dollar to save 35 cents is not a good idea.
Also, don't overlook the piece-of-mind factor that comes with a house owed free and clear.
Not paying on a mortgage is a guaranteed return on your money because you don't pay any interest. Returns on other investments have the potential to be greater, but they also have the potential to be much less. Don't get sucked in by the lure of tax savings. Spending a dollar to save 35 cents is not a good idea.
Also, don't overlook the piece-of-mind factor that comes with a house owed free and clear.
momopi_IHB
New member
Owen,
I'd put up to 50% down on your primary residence, and save the cash for other investments.
For example, many people here believe the RE market will have significant drop over the next few years. You could use the $ you saved to buy additional investment properties for the future.
When I sold a condo last year, I could've paid off the place that I live in now, but felt like gambling with stocks and funds. The stock market has done very well over the past 12 months, but comes with high risk. If AAPL drops 80% this week, you'll see me cry and toss my iPhone into a blender.
I'd put up to 50% down on your primary residence, and save the cash for other investments.
For example, many people here believe the RE market will have significant drop over the next few years. You could use the $ you saved to buy additional investment properties for the future.
When I sold a condo last year, I could've paid off the place that I live in now, but felt like gambling with stocks and funds. The stock market has done very well over the past 12 months, but comes with high risk. If AAPL drops 80% this week, you'll see me cry and toss my iPhone into a blender.
Trooper_IHB
New member
Good call on AAPL momo, congrats !