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Real Estate Investing: Why Paying Cash (or Putting Too Much Down) Could be a 6-figure Mistake

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Most buyers who just won the lottery, received a large inheritance, or are fortunate enough to have enough cash decide that they want to pay cash for their home for the convenience of not having a monthly mortgage payment. However that convenience is costing those buyers nearly $5000 per month -- over $200,000 over 20 years! Here is an explanation.

Let's say you have $250,000 in cash, and you have a choice of putting 10% down and carrying a 90% mortgage, or simply paying cash for a $250,000 home.

If you pay cash:
$0 monthly payments. Yeah!
No diversification in stock market.
0 profits per month.

If you take out a loan:
At 6%, monthly payments are about $1350 for a $225,000 mortgage, but after taking the tax break into account, they are really $904. (This assumes a 28% federal income tax rate, and a 5% State tax rate.)

You are able to invest $225,000 in the stock market. Even if you are only able to get 7% returns per year, that works out to be $1312.50 in income per month!

After paying your $904 mortgage payment from your $1312.50 stock profits, you are left with $408.50 in profits per month! That's $4902 per year!

If the above scenario isn't a strong enough argument for not paying cash, think about this: Your home won't be worth a penny more in 20 years if you pay cash than if you take out a loan, so it doesn't really matter how much the market appreciates. However, if you took out a mortgage insteady of paying cash and invest in the stock market in addition to your home, your stock market returns compound annually and amount to over $200,000 in additional profits!

By paying cash for your home, you tie up that money in an asset that will grow at the same rate whether you paid cash for it or not, and you lose the opportunity to diversify and invest that money elsewhere.

The same principle even applies if you don't have cash to pay for your entire home. If you are thinking about taking money from your existing stock portfolio simply to lower your monthly payment on your mortgage payment, you may want to think twice about what you are doing.

If you'd like to experiment with different mortgage payments for different loan amounts, visit this useful mortgage calculator.

?expert=Joel_McDonald

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