Should I use the profits from my home sale to purchase a new home outright, or use a mortgage to leverage my debt for the long-term?
I'm selling my home and will clear around $375,000 after closing. My new home will cost $200,000 and I need to put down 35 percent to start the build. Should I mortgage the rest on a 15-year loan, or pay off the rest of the home with what is left from the sale of my original home? If I paid the rest off, I would be out of all debt: car, consumer and so forth.
Of course this decision cannot be made in isolation. Consider your other financial circumstances: family obligations, your age, health, job security, retirement savings, etc. In general, I think you have a good idea with leveraging because mortgage money is the cheapest money you can get. Investing the proceeds from your current home, for the long term, may well result in returns that exceed the cost of funds, i.e., mortgage interest. Also, you need to consider that paying cash for the house has its own cost as well, that being the lost opportunity cost. Money tied up in home equity is money that cannot be invested and you thereby forego potential investment returns. In addition, I prefer to see people keep their options open. More liquidity provides more options for dealing with life's unexpected events. Also, consider a 30-year mortgage so as to not burden youself with the higher payment of the 15-year. Again, keeping your options open, you can make extra principal payments as often as you like, and effectively pay it off in 15 years, but fall back to the lower payment as needed. The difference in interest rates may not be that great if you are in good overall financial condition with an excellent credit score.
If I understand your question correctly, I would recommend paying cash for the new home. Being debt free allows you to either cut your cash flow needs in retirement or, if you're still working, it allows you to save and invest a larger amount each month to take advantage of dollar-cost-averaging. Be sure to pay off any non-mortgage debt first (cars, credit cards, student loans, etc.), but it sounds like you don't have any of those to still deal with.
Enjoy debt-free life! Thanks for your question.
This sounds like more of an emotional decision (which housing mostly is). Financially, using someone else's money at a low rate (Mortgage Company) and investing for a higher rate makes the most sense. However, you seem to take great pride and comfort being debt free. Either way, you won't be hurt, so go with the choice that let's you sleep the best.
It really is a personal preference. I personally usually recommend a mortgage to free up those additional funds. Interest rates will not be this low again for a long time so locking in a mortgage at these rates makes sense.
Depending on your credit, you can get a rate in the 4-4.5%. You could take that money you didn't put down on the house into a Conservative/Moderate Conservative investment account which could provide more earnings than your mortgage rate...meaning you would still have access to your principal.
Congratulations on the sale and new purchase. It seems like your finances are in good order.
In general a mortgage is one of the better debts to have. Interest rates are still very low on a historical basis and also will remain low on a relative basis to other debts such as student loans or credit cards. Additionally, there is a tax incentive in writing off the interest for income taxes.
With that being said, debt is debt and you always want to consider a worst case scenario and how you will be able to make your payments for a few years should the things go against you. If you can reasonably feel comfortable in that scenario, then having the mortgage frees up a lot of possibilities to invest the money and earn a higher rate of return then what you are paying in interest and really pursue your long term financial goals.