Getting a mortgage when you could buy the house outright

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As you know, Foxy Lady, the two little cubs, and I relocated from Los Angeles to North Carolina.  Obviously there were a ton of changes for us, including selling our house in LA and buying a new one in Greensboro.  As I mentioned before, property values in LA are absurd, so we were able to cash out of our old house and had more than enough money to buy our new Greensboro house outright.  Yet that’s not what we did.  We ended up taking out a 5-year adjustable rate mortgage with an interest rate of 2.25% on our new house.  Let me tell you why:

 

Super low rates

Right now interest rates are at historic lows.  A 30-year US bond has an interest rate of about 3% and a 1-year bond returns about 0.5%.  Because interest rates are so low, that seeps into other areas like mortgages.  Today you can get a 30-year fixed mortgage for about 4%.

Just to put that in perspective, when I bought my first condo in Chicago in 2007 mortgage rates were 6% and everyone was saying how crazy low they were then.  Uncle Fox (UF for short) was telling me that when he bought his first house in the 1970s his mortgage rate of 9-10%.  That’s crazy high.  Just 1% can mean hundreds of dollars per month in savings on interest (obviously depending on the size of your mortgage).

You know how financial nerds reminisce about the heady stock market days of the 1980s and 1990s, or tell cautionary tales about the crazy interest rates and inflation of the 1970s (okay, maybe you aren’t a finance nerd, but I am)?  I think 20 or 30 years from now we’ll be old folks who will be waxing on to the youngsters about when mortgages were so cheap, maybe the way your grandparents talk about a gallon of milk costing a quarter and a movie costing a dime.

We even doubled-down on this by getting a 5-year adjustable mortgage.  We could have gone with a vanilla 30-year fixed with an interest rate of 4%.  Instead we went with an ARM and that pushed down the rate to about 3%.  That 1% decrease translated to about $350 in savings per month.  Of course, we run the risk that after five years interest rates will rise, but remember that we have the money to pay off the mortgage, so if things start to go haywire we can just kill the mortgage and be no worse for wear.

 

Good time to be an investor

Seriously, I think now rates are so low that you’d almost be silly not to take out a loan.  Of course, if you borrow the money and then just stuff it in a mattress you’re not really helping yourself.  We are taking the money we’re getting from our California house that we could have used to buy our Greensboro house outright and investing it in the stock market.

Sure there’s a chance that the stock market could go down, but remember that mortgages have 30-year time horizons.  Right now is a pretty crazy time for the stock market, but history tells me that over a long period of time, the stock market does really well.  So if I can borrow money at 2-3% and invest it at 6-8% over 30 years, that’s a sweet little score for the ole nestegg.

Of course, nothing in life is guaranteed, but Foxy Lady and I are willing to play the odds on this one.

 

Company relocation

Not everyone will be so lucky, but for us we were able to take advantage of a pretty awesome benefit from Foxy Lady’s job that her company gave as part of her relocation.  When they moved us out from LA to Greensboro part of the package was to “buy two points” for our mortgage.

Basically that means that they would pay 2% of our mortgage (about $8000) and get us a lower rate.  That allowed us to get our 5-year ARM which normally would have been about 3% interest, and we got it for 2.25%.  That 0.75% lower rate translates to another $300 or so a month in savings.  That’s a lot of money over time, yet if we didn’t take a mortgage and just bought the house outright, we would have foregone that pretty sweet benefit.

 

That’s our story.  As we were going through this process, the decision to get a mortgage or just go mortgage-free was something Foxy Lady and I discussed for hours.  Paying off your mortgage “seems” like a good thing and a goal we should be shooting for.  I totally get it.  When you start a mortgage it’s like starting a marathon, and after years of hard work you cross the finish line and pay that sucker off.

Because we were really lucky with our LA home we had the chance to achieve that dream early.  It seems like a good thing to do.  But as is so often the case with investing, your head and your heart don’t always agree, and if you can stomach it, it’s usually better to go with your head.  Interest rates are so low right now, plus we were very fortunate to have a bit of a turbo boost with Foxy’s new company buying points for us, that the “cost” of the mortgage was just crazy low.

Many years from now we’ll know the answer.  Did we do better investing that money in the stock market, or should we have just paid off our house?  Who knows, but my head always tells me to bet on the stock market.

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