Read Estate: Never pay off land?

[jamazon]

Hi,

I am going to buy a house in the next year or so but do not know what my down payment % should be. Isn't it common sense to pay as much as you can afford so you can pay off the house as soon as possible? I am currently thinking 40-50%. However, after running across this thread, a user called Loci recommends "never pay off land" and went to explain about refinancing a 100k property into 40k property tax free, which I don't understand. Can someone simplify this concept? In addition, is "never pay off land" the same thing as "never pay off house?" In my country, we consider land/house the same thing and there's no property tax and "refinancing for tax free," which is the reason why I cannot grasp the concept.

Thank you for reading [img]/images/graemlins/laugh.gif[/img]

[snowbank]

Isn't it common sense to pay as much as you can afford so you can pay off the house as soon as possible?

I think that is the opposite of common sense. But a lot of people still do it.

[LondonBroil]

Most people believe that they can get a higher rate of return by investing the money they would have spent paying down a 5-6% loan on their house. These people are correct.

Of course, there is a non-tangible good feeling people get when they can live in a house that is paid off and they don't have to worry about mortgage payments.

[ElaineMonster]

About your down payment, you want to make it 5-20%. 5% says you're serious about buying and will help you get a better (lower interest) loan. 20% will get you a loan without PMI (insurance). Pyaing PMI is throwing your money away and makes your monthly mortgage payment higher, meaning you can affod less house. But there is not much reason to pay more than 20% down unless your want to build your own home or you have a strong need to be debt-free.

**These are just my opinions. I'm not a realtor, lawyer, accountant...**

[ISF]

I think it is rare that you wouldnt be best off putting down as little as possible. It depends on your tax bracket I guess but as the govt is effectively subsudising your loan you are usually best off keeping as much of your debt as possible in your house and investing the rest elsewhere.

[ErnestGoesToWSOP]

Hi Jamazon,


I think I can explain the refinancing concept to you. I'll use my current situation with land I bought and a home I am building on the land. I have considered moving into the home myself and selling it as well. Whichever option I choose will have major tax implications.

I bought the land for 200k and I project to build the home for 300k and in my current market I could sell the home for 675k-750k. My profit would be about175k if I sold it right away with a 35% tax hit of 61k. So I would take home about 114k.

I could also sell my old house and move into the new home.
I would refinance and pay off my construction loan and land loan of 500k. I would be making payments on the 500k loan but my house would be worth 675-750k. I could then open up a home equity line of credit on the value of the home and could have access to about 200k of equity in my home to reinvest in more projects. I wouldn't be taxed on this money, I would only have to pay interest on the equity i used. I also believe that the interest on a HELOC is tax deductible.

As far as putting a down payment on your home, I would highly recommend doing 100% financing via an 80-20 loan.
When I bought my first home, I considered putting 10% because I thought you HAD to put a DP on a house. Not true.
My mortgage broker did some calculations and my mortgage payment was almost exactly the same if I had two loans(80%-20% loan) or if I put 10% down and financed the remaining 90%. The reason the payments were the same because I eliminted Private Mortgage Insurance since they viewed my 20% 2nd loan as a down payment.

Now if you lack discipline and feel the money is better locked up in your home, then go ahead and put a big down payment, but most investors can get better than 6-8% return.
For me the money is better used doing more projects, buying more homes, and playing in the stock market. I hope I helped.

-Ernest

[ElaineMonster]

[ QUOTE ]
Now if you lack discipline and feel the money is better locked up in your home, then go ahead and put a big down payment, but most investors can get better than 6-8% return.


[/ QUOTE ]

That's a little unfair. Traditional wisdom is to pay off your home ASAP. And plenty of wise people still recommend it. It is your home, afterall, and shouldn't be treated purely as an investment. A decision to pay down your mortgage shouldn't be called a "lack of discipline."

I know before that I told the OP to only put down 20% or less but I'm rethinking that. I came up with a list of considerations. If these apply, you might want to put more down on the house:
- You have a low tolerance for risk
- You have a high interest loan (7% or higher)
- If tax benefits outweigh potential investment returns
- If your investor takes a big cut (1% or more)
- You have a low fixed income and need to reduce all monthly expenses
- You enjoy debt-free living; you receive psychological benefit from owning things free and clear

If these apply, you might want to put less down on the house:
- Your income varies drastically and you need liquid assets to cover the low income months AND your loan interest rate is low
- Your house is in a flood zone :/
- You're afraid the IRS will seize your home (They can only get the equity you have in your home, so the less equity, the less appealing it is to them. Though, this won't protect the money you invest, just that you can probably still keep your home).
- If tax benefits to invest outweigh tax benefits to pay down mortgage (think retirement accounts)

[ErnestGoesToWSOP]

ElaineMonster,

I didn't mean to sound harsh with "lack of discipline". Many sophisticated home owners know they can make more if they invested their extra mortgage payment instead of paying down their homes, but they don't because they realize they might end up spending the money instead of socking it away in a mutual fund or other investment vehicle. They know they "lack the discipline" to put the money away and fear they might spend it so they put it in their home since they can't touch it and withdraw the money.
These people they are better off doing this. If you have the discipline you shouldn't be paying off your home quickly. Just my opinion.

-Ernest

[Misfire]

The problem with borrowing on your home at ~6% to invest at a higher rate (say 12%) is that you're taking on the risk of a 12% investment for the return of a 6% investment. It's not just about your tolerance for risk, it's your tolerance for risk at a given return.

[ QUOTE ]
- You're afraid the IRS will seize your home (They can only get the equity you have in your home, so the less equity, the less appealing it is to them. Though, this won't protect the money you invest, just that you can probably still keep your home).


[/ QUOTE ]

If the IRS is after you, you're probably not in a good position to be buying real estate in the first place.

[Biloxi]

Dont u end up paying much more cash , the longer you have to pay for your home?
I realize for some rentals it may be best to get a low mortgage payment to max out current income, but for non-investment properties im thinking the faster the better. But I dont know much