From: O10037@waccvm.corp.mot.com (Ray Hoff)
Subject: Re: Mortgage or retirement
Organization: Motorola
Date: 11 Jan 1993 12:28:25 MST

duanej@hpfcso.FC.HP.COM (Duane Jacobson) writes:
>
>>Difficult question, and the answer is probably how important is it to you
>>to have the money now vs later.  If anyone else wants to work out the
>>numbers I'd be very interested, since this question is more complicated
>>than it looks.

>Ditto, it can be an extremely complicated exercise.  There are a lot of
>unknowns involved in evaluating tax-deferred investments.

>First I'll give my personal bottom line answer.  If you are investing
>for the long term, >10 years, primarily for retirement, then I would
>say you should make maximum use of the 403(b).  If this means going with
>the 30-year mortgage, then do it.  However, I'm not suggesting that you
>sacrifice a margin of safety in order to contribute to the 403(b).  You
>should first build an emergency supply of liquid investments and cash,
>and get yourself into a position where you could sell your house without
>bringing any cash to closing.

>Now, what are the unknown variables that make this comparison so tricky?

  [good reasoning stuff deleted]

>Now, if you're still here, here's an example to show that you can come
>out ahead in your 403(b) even with a very conservative investment.

>In all cases the tax rate is 30%.

>Case #1.  Get a $100,000 mortgage at 8% for 15 years.  Payments are
>     $955.65.  Pay off your home in 15 years, invest the tax
>     refunds you receive due to interest payments at 8% (these
>     gains are taxable).  Then for 15 years, invest the $955.56
>     (that's $1365.21 in pre-tax dollars) in a tax- deferred
>     retirement account at 8%.

>     Results:

>     Retirement account (pre-tax) =   $ 472,416

>     Retirement account (after-tax) = $ 330,691
>     Tax refund account             = $  86,096
>     ------------------------------------------
>     Total                            $ 416,787

>Case #2.  Get a $100,000 mortgage at 8.5% for 30 years.  Payments are
>;  $768.91.  Pay off your home in 30 years, invest the tax
>;  refunds you receive due to interest payments at 8% (these
>;  gains are taxable).  Also, invest the mortgage payment savings
>     of $186.74 (that's $266.77 in pre-tax dollars) in a tax-deferred
>     retirement account at 8%.

>     Results:

>     Retirement account (pre-tax) =   $ 397,585

>     Retirement account (after-tax) = $ 278,309
>     Tax refund account             = $ 159,531
>     ------------------------------------------
>     Total                            $ 437,840

>of course, the numbers only get better if your return in the retirement
>account is increased.

Just a few thoughts, questions, and ideas of my own:

    1) What does it mean to get into a position so that one doesn't have
       to "bring any cash to closing" when selling a house?

    2) I agree that one needs a emergency supply of liquid cash and or
       investments.  This is what I need to work on, but doing so this
       year will be hard.

    3) When I was purchasing a home recently, a 15 year mortgage was out
       of the question due to qualifying considerations.  I just recently
       graduated from college with a BS and found myself with a great
       job.  Thus, I investigated renting for the next 5 or so years vs.
       buying a house.  I was lucky enough to be able to "obtain" the
       down payment and closing costs from my parents thus allowing
       me the opportunity to buy a house while the interest rates were
       down.  I had to go with an ARM at 6% that can rise to 11%, but I
       had figured out that if I sell my home in six or seven years it
       works out to be about the same as a 8.5% fixed rate.  The ARM
       allowed me to qualify for a little nicer home than I would have
       been able to with a fixed rate.

    4) With all this discussion of 15 vs 30 year mortgage everyone seems
       to overlook the fact that generally you can pay off a 30 year
       mortgage in 15 years anyway if you find yourself in a cash
       position to do so.  This is out of the question for me because I
       plan on selling in six or so years.

    6) With the interest deductions allowed to me,  a Mortgage Credit
       Certificate issued to me that entitles me to a tax credit of 20%
       of my mortgage interest, and by adjusting my witholding allow-
       ances. I am able to contribute 15% of my salary into my 401k and
       still save a little each pay period without lowering my net pay
       much ($20) than before without my house and only contributing 6%
       to my 401k.

If my situation improves in the future which it should as far as salary
increases I will be able to invest money in mutual funds, etc.  This of
course will occur after I have at least 6 mo.s of living expenses saved
in a very liquid format.

Thus, as you can see there is much more to the question of Retirement
vs. buying a house.  I feel that I am able to do both without really
having to way towards one or the other.

Any thoughts, suggestions, etc. are very much appreciated.