I've now paid cash for a home twice: once for a fixer in 2019 and again for a fully remodeled home in 2023. In this post, I'd like to share some of the psychology of paying cash for a home.
I know some of you think paying cash for a home is a poor financial decision to build more wealth. You could be right. It stands to reason that if you believe paying cash for a home is suboptimal, you also think paying off a mortgage early is also suboptimal. Perhaps.
Meanwhile, some of you might also think that paying cash for a home is a great idea. Without a mortgage, life is both cheaper and easier. However, you may not have the sufficient funds to do so at the moment. Hopefully you will get to have the option one day as your savings and investments continue to grow.
Financial Situation Changes As We Grow Older
When I was in my 20s and 30s, I couldn't pay cash for a home because I didn't have enough money. In addition, I wanted to take on as much leverage as comfortably possible to potentially supercharge my net worth growth rate.
Today, in my mid-40s, I no longer have the desire to maximize my returns because I am more satisfied with what we have. I also can't afford to lose as much given I lack the desire and ability to grind as hard anymore. Growing our net worth by 5% – 10% a year is good enough.
At the end of the day, the decision to pay cash for a home is a personal decision that involves financial analysis, knowing what you want out of your money, and understanding where you are on your financial journey.
Let's talk about some basics first and then we'll talk about the psychology of paying cash for a home.
Two Levels Of All Cash Homebuyers
To start, there are two levels of homebuyers who can pay all cash for a home.
1) True Cash Buyers (<10% of all buyers)
The first level is the homebuyer who has cash sitting in a money market fund, savings account, or Treasury bills, and doesn't need to sell any assets to pay cash. Their cash balance is also a minority percentage of their net worth, typically less than 30%. These people are true cash buyers and are often considered ultra-rich.
For example, someone with a $100 million net worth can easily plop down $10 million for a home in San Francisco because they have $20 million sitting in a money market fund.
Alternatively, they might be someone with a $5 million net worth who can plop down $800,000 cash for a home in Memphis because $1.5 million of their net worth is in rolling 3-month Treasury bonds.
2) Hybrid Cash Buyers (>90% of all buyers)
The second level of homebuyer who pays all cash is one who has to sell assets like stocks or bonds to come up with enough cash to buy a home. They do not have enough money sitting in a money market fund or short-term Treasury bonds to pay all cash.
The hybrid cash buyer needs to rebalance one risk asset for another. Most home cash buyers fall into this camp, including myself. As a result, there is more psychology that goes into making an all-cash home purchase when you have to sell other assets.
Hybrid cash buyers must constantly consider what they might give up in future profits by selling such assets to raise cash to buy a house. As a result, this article will largely by focused on the psychology of hybrid cash buyers, who have more to worry about.
Paying Cash For A Home Is Quite Common
You might think that with the high cost of homes, paying cash would be rare. However, at the end of 2023, roughly 34% of all home purchases were made with cash. The percentage of cash buyers has fluctuated from 20% in 2020 to 37% in 2012.
In 2024, the percentage of homebuyers paying cash is likely even higher. According to Redfin, 46.8% of luxury homes (priced in the top 10%) were bought entirely with cash in the three months ending February 29, 2024. This is the highest share of all-cash luxury home purchases in at least a decade, up from 44.1% a year earlier.
The Psychology Behind Paying Cash For A Home
Now that we got some basics out of the way, let's now talk about the psychology behind paying cash for a home. These thoughts are based off my own experience as well as the experience of other cash buyers I've spoken to.
1) You always want the best deal possible
No matter how much money you have, you will always appreciate a good deal. Sales attract more buyers for a reason. Eating freshly baked cookies and drinking champagne at open houses is hard to resist even though you know you shouldn't.
If you can offer to pay cash for a home, you could easily save between 1% and 10% off the purchase price. Add in no-financing and no-inspection contingencies as well as a short close, and your offer will be hard for a seller to resist.
Having the power to pay all cash is like having a secret weapon to beat out your competitors, most of which need a mortgage. In battle, you have no qualms regarding using everything at your disposal to get ahead.
In my case, paying all cash for my house in 2019 saved me at least 5% off the market price. Five years later, I know this to be true based on comparable homes sold.
In addition, the San Francisco Assessor's Office emailed me the next year and put me through the wringer, asking me to prove how I was able to pay the price that I did. This might be a topic for a new post, but it makes me mad just thinking about it.
2) You don't want to waste time and spend unnecessary fees
When you have the cash, you want what you want, and you want it now.
You don't want to spend time finding a mortgage broker and negotiating a rate. In the past, you might have leveraged relationship pricing by moving assets from one bank to another to get a lower mortgage rate. However, now that you have cash, you can save yourself the hassle.
The worst part about getting pre-approved for a mortgage is the two to three months spent sending in financial documents and having all your finances scrutinized. Given that time is money, paying cash will literally save you from this financial lobotomy.
Finally, paying cash saves you from paying thousands in mortgage fees. You also avoid paying thousands of dollars for lender's title insurance. And if you don't want to pay for home insurance, you may be allowed to skip it (check with your state) if you buy a home without a mortgage.
Unfortunately, if you need to sell many risk assets to raise cash, you will face capital gains taxes. However, you might be able to offset some of the gains by selling some losers. Additionally, you may have some capital losses from past investments that can now be harvested.
3) You won't miss the money, instead, you'll feel better it's being utilized
If you pay for a house entirely with cash from a money market fund, you won't miss the cash. Instead, you'll feel great knowing that your money has finally been put to good use.
There is a certain emptiness that comes with having a large amount of unused cash. You start asking yourself what's the point of having so much liquidity if you never spend it. While it's nice to have liquidity, having too much can make you question the purpose of continuing to accumulate more money every month, especially if you're still working.
For hybrid cash buyers, the feeling is similar, but potentially even more satisfying to put cash to use. Hybrid cash buyers are often diligently saving and investing for a specific goal. It can be unsettling to have your down payment invested in assets that could fluctuate by +/- 20% in any given year. Hence, once gains are locked in and a new house is purchased, there can be a tremendous sense of relief.
Real estate is tricky because there is usually only a 1-4 year window of opportunity to buy a home at a discount before prices resume their upward trend. If you miss this window, you might be priced out of your dream home forever, as prices can quickly reset to new all-time highs in a bidding war.
4) You'll eventually stop lamenting on the money you could have earned
The opportunity cost of paying cash for a house is the return you could have made by keeping your money in another asset class. However, given a home provides utility, you'll be too busy enjoying your new home to miss the potential gains from investing elsewhere.
When I brought our daughter back to our remodeled fixer-upper in December 2019, I felt a great sense of satisfaction. My Provider's Clock was ticking loudly. We purchased the house in April 2019 and then I spent seven grueling months remodeling the kitchen, floors, and three bathrooms. When COVID hit in March 2020, the larger house became even more valuable. It felt priceless no landlord or bank could kick us out.
Missing out on potentially 10% – 20% annual gains by not keeping the money in the S&P 500 is acceptable. After you start missing out on about 20% in gains a year, that's when you might start feeling some regret about paying cash. However, the historical return of the S&P 500 is about 10% since 1926.
Thankfully, if it's a bull market in stocks, it's generally also a bull market in real estate. As a result, for the true cash buyer in a bull market, their wealth grows faster as real estate tends to outperform cash. For the hybrid cash buyer, their net worth is likely also increasing. But the rate of growth will depend on what assets were sold to pay for the house.
Six months to reconcile with my missed gains
When I sold stocks in July 2023, I initially felt good because the S&P 500 proceeded to correct by about 10%. Then, of course, stocks took off after bottoming in October. My emotions were mixed because on the one hand, I had landed my realistic dream home. On the other hand, I could have made more money if I had just held on.
However, after doing my taxes in April 2024, I realized only about 62% of my house purchase capital came from selling stocks, 30% came from selling Treasury or letting them mature, and 8% came from cash. I was thinking the percentage was more like 80% from selling stocks.
Therefore, I didn't miss out on as much upside as I thought. Although 62% of my capital underperformed the S&P 500, 38% of my capital outperformed Treasury bonds and cash.
With the way bidding wars have returned, I might not be too far behind after all, if at all. I'm pretty certain that with the Fed embarking on a multi-year interest rate cut cycle, demand for real estate will increase strongly again.
5) You're less worried about how the economy performs, which provides relief
If the economy booms after you pay cash for your house, you're happy because your house and other risk assets are likely appreciating in value. There's nothing better than making money on an asset that you can also enjoy and use to take care of your family.
If the economy goes into a recession after you pay cash for a house, you're fine because at least you're enjoying your money. If you had kept your growth stocks instead of buying the house, you might have seen their valuations get cut in half during the bear market.
Meanwhile, there's often a flight to safety during bear markets, which drives down bond yields and mortgage rates. As a result, the demand for real estate tends to pick up during times of uncertainty. Think about the surge in real estate demand during 2020. As stocks were getting hammered, the demand for homes shot up as everyone spent more time at home.
In this regard, paying cash for a house can be the ultimate “heads I win, tails I still win” scenario. But you can only feel this win-win situation if you pay cash and have at least a 5% cash buffer left after purchasing the house. Without this buffer, you may feel cash poor, which may be stressful until you regain your liquidity.
6) You feel invigorated to make more money once your cash is locked in your home
Because you've been accustomed to having a lot of cash or liquid securities, the liquidity hit will take some time to get used to. The more liquidity you use to buy the house with cash, the more motivated you'll be to make back that money.
Even though you've converted your cash or risk assets into a house you use, it can feel like you've lost 100% of that money. As a result, you'll naturally want to replenish your liquidity to the amount you sunk into your house. This might include making new investments, finding new work, or developing new business partnerships.
What I've done is create a three-year plan until the end of 2027 to regain my financial independence. This challenge has given me a renewed sense of excitement and purpose. I feel the same way as I did when I was a 23-year-old college graduate, ready to take on the world.
7) You don't care what anybody thinks after paying cash for your home
When you can pay all cash for a house, you feel secure. Therefore, you don't care about any negative opinions people may have about you not taking out a mortgage to buy the house. You already have enough money to feel satisfied and tell people to bugger off, if so desired.
There's an ongoing debate about whether to pay off your mortgage early or not. My belief is that you should aim to pay off your mortgage by the time you no longer can or want to work. Timing this properly is tricky, which is why it's good to stay flexible. Pay down extra principal when you have extra liquidity and pause during a negative real mortgage rate environment.
By paying cash, you transcend the mortgage payoff debate. It's similar to no longer opening new credit cards for rewards points or transferring balances to a 0% APR credit card. Instead, you simply pay your credit card balance in full each month and focus on making money in more lucrative ways.
Being mortgage-free also gives you the confidence to take more risks. This could mean anything from changing careers to going back to school to having another child. Imagine some of the things you would do if you didn't have a mortgage.
8) You take for granted not having to pay a mortgage
Once you pay cash for a house, you can't help but think about the risk-free money market or Treasury bond income you could be earning instead. Consequently, you add the missed risk-free income to your property taxes and maintenance expenses to calculate your ongoing cost of owning your home.
Interestingly, what doesn't come to mind is the monthly cash flow you're saving by not having a mortgage at prevailing rates. Perhaps the reason is that once you pay cash, you no longer consider the possibility of getting another mortgage in the future. That part of your financial life is over, and you adapt to your current financial situation.
Take cars, for example. Since 25, I haven’t contemplate borrowing money to purchase a depreciating asset because doing so would further increase the cost. If I can't pay cash for a car, I won't buy it. Once I do buy the car with cash, I don't think about how great it is to save on monthly car payments.
9) You're happy to have a place to park some money and keep an eye on it
The more money you have, the more you need to figure out what to do with it. It's the “more money, more problems” situation Biggie rapped about.
Some people invest their cash in fine art and jewelry. I've been in homes where the value of the art inside is five times the price of the home! At a basic level, some people prefer to invest their cash in their primary residence because they can keep a close eye on it every day they live in it.
Wealthy foreigners frequently park their cash in U.S. and Canadian real estate, even though they don't live in these houses most of the time. Sure, they may be laundering money, but that's a topic for another time.
I recommend spending no more than 30% of your net worth on your forever home. So if you end up paying for it in cash, that seems like a reasonable allocation. Just make sure to get your house insured.
10) You feel comfortable because you have optionality
Finally, if you pay cash for a house, it's not as if your cash is permanently tied up in your home. You can always do a cash-out refinance or take out a Home Equity Line Of Credit if the need arises. Although you probably won't need to, it's reassuring to know that you have the option.
And if, for any reason, you decide you no longer want to own your home, you can always sell it. With real estate commissions gradually decreasing after the National Association Of Realtors price fixing settlement, selling a home is becoming more affordable than before. Perhaps one day, with the assistance of technology, selling real estate could be as straightforward and inexpensive as selling a stock.
Having options provides a great sense of comfort. It's akin to having 61-year-old Michael Jordan as your shooting guard in the over-40 YMCA recreational basketball league—still dominating the game. Similarly, having the option to access cash is as comforting as a loving mother who will always support you regardless of your performance.
11) You can always do a cash-out refinance after paying cash for a home
Finally, even if you’ve paid cash for your home, the money isn’t locked in forever. You always have the option to do a cash-out refinance, especially if mortgage rates become attractive.
That said, I don’t recommend homeowners pursue a cash-out refinance. If you’ve paid off your home, you’ve already won a significant part of the financial independence game. Don’t jeopardize that success by putting your home at risk and moving backward financially.
A cash-out refinance comes with costs, including fees and renewed mortgage interest. However, it’s comforting to know that the option to tap into your home equity is there if you truly need it.
Go Ahead And Pay Cash For A House If You Want
Yes, there are downsides to paying cash for a house as we’ve discussed. However, if you're contemplating paying cash for a house, I believe it's a solid idea if you have the means. Over one-third of the home-buying population does.
Even if you simply let the cash remain invested in your home, over time, the house's value as a percentage of your overall net worth will diminish as you accumulate more wealth. Eventually, its proportion will become so negligible that you won't miss the cash at all.
When it's finally time for you to say goodbye, you can always pass on your mortgage-free house to your children. What another lovely option to have.
Just like how I don’t regret paying off a couple of my mortgages early, I don’t regret paying cash for a couple of my houses either. My end goal is to live a peaceful, debt-free life. Paying cash for a home helps fulfill this mission.
Invest In Real Estate Without Debt
You can invest in real estate without taking on a mortgage by investing in private real estate funds. Take a look at Fundrise, a leading private real estate investment firm, manages over $3.3 billion in assets with a minimum investment of just $10. It focuses on residential and industrial real estate in the Sunbelt region, known for its lower valuations and higher yields.
Personally, I've allocated $954,000 to private real estate funds, predominantly targeting properties in the Sunbelt. With remote work becoming more prevalent, there's a growing trend towards lower-cost areas of the country.
Fundrise is a sponsor of Financial Samurai, and Financial Samurai is a six-figure investor in Fundrise.
Paying cash for a home brings peace of mind and the freedom from monthly debt obligations, allowing you to build wealth without financial stress. It’s a timeless strategy for creating a legacy and financial stability for future generations.
1/3 of people pay for homes in cash, but many people make a lot of questionable financial decisions. At Financial Samurai, we are here to optimize and maximize financial decisions which in turn contributes to happiness. If buying a house with cash or paying off one’s low interest mortgage is encouraged at Financial Samurai because it makes one happy while acknowledging that is a sub-optimal financial decision, then one could use happiness to justify any financial decision, e.g., buying that Ferrari instead of saving for college or retirement, or $15/day Starbucks habit bringing joy.
If you are able to get a low-interest mortgage, paying in cash is one of the dumbest financial decisions you can make. If you want to be the most competitive buyer, then write an all cash non-contingent offer (which I have done many times to win the bid) but still get a loan on the asset. I suspect a large part of your calculus for going all cash on this transaction is that mortgage rates are around 7%. That makes some sense–you have to consider whether you get beat a 7% return over the long-term. However, as soon as the rate drops below 6%, I’m refinancing.
I’ve called you out in the past when you paid off your mortgage (which were all < 3% as I recall), and I will continue to do so. If I had followed your pay-off-your-mortgage-peace-of-mind strategy, I would never have amassed my real estate empire or made the returns that I've made in the past decade. It has been the difference between FIRE and FatFIRE.
I also find it interesting that your new found contentment sans mortgage also has spurred you to return to the work force and earn extra money. Your articles vacillate between being content with what you've amassed (no longer chasing the big returns) and the pressure to earn more support your growing family. I understand the push and pull of that dynamic, but my strategy is simply to keep my mortgages high, interest rates low (where possible) and not worry about getting a real job ever again.
The mortgage I paid off most recently in 2022 was 4.25%. There was less than a $50,000 balance on it and I feel great paying it off.
The other mortgage I paid off was in 2015 I took out in 2003. I have to double check what the rate was. Think it was 4.125% with $91,000 left in 2015. It also felt great to pay it off then.
I definitely don’t want to pay 6 1/2% or 7% for a mortgage rate. I think I saved about $200,000 off the house price by paying cash. Based on a recent comp, I think it’s done well since.
Remind me how long you’ve been retired and what type of net worth and/or a passive income you are talking about? If you have kids, how old are they? Raising kids is pretty darn expensive here in San Francisco. But after being a stay at home dad since 2017, I’m going to have this big void to fill once my youngest goes to school full-time in September 2024. As a result, I think it’s responsible for me to do some part-time consulting and generate some supplemental income. I’d like to join a great group of people working on exciting new technology, teaching, or working with those with disabilities.
I don’t want to write and play tennis all day every day, partly because my body can’t take it. So I think doing some part-time consulting at one of the mini exciting companies here in San Francisco is a good balance.
How are you filling your time in retirement? And when do you think you’ll let your wife stop working? I was reading some of your previous comments, and you said she has a dull job at an HMO and you are working part-time? Why not both leave work behind and pursue a passion or something?
I’ve been a reader since 2013 when I left the corporate world and sent you a thank you email. I mentioned I was starting my real estate investing journey and you said perhaps I could write a future guest post about my experience (I’m not asking for an assignment). I’m a few years older than you. I live in a VHCOL area, but I live a frugal life relative to my NW other than two private high school tuitions at $80K/year (my largest expense). I would have no problem moving to a public school or a cheaper private school (which was the original plan), but it turns out that we now have more money than we can spend. That certainly was not the case in 2013.
You and I share a lot of similarities in finances, family, frugality, upbringing, etc. Perhaps that is why I agree with 80% of what you write. But I have very different thoughts about paying off low interest mortgages, leverage, growing passive income, more bonds/lower risk positions as we age, etc. There is a lot of “conventional” FIRE advice that I disagree with. For example, I’m a much bigger believer in capital appreciation and minimizing passive income to control taxes. Yes, I am a FIRE heretic. That is why you are a “Samurai” and I’m a mere “Ronin.” I would love to have a deeper discussion with you about our different approaches.
The boredom during the early years of retirement were tough because my wife and kids continued with their work and school. I couldn’t just take off and have fun. My wife would not retire regardless of how much I grew our NW (BTW, 5x since 2013).
So I kept busy with real estate and being a Dad. Even with professional property management firm, I spend 5 to 10 hours per week on property-related issues and another 5 hours per week on general financial hygiene. My hope is that my wife will be willing to retire in 3 years when our kids are off to college, but I’m not holding my breath. When she does, I’ll take a step back from real estate. I’m already working on a exit plan that involves donating a property to offset the capital gains from selling other properties.
My wife and I do not have any grand passion projects so she is is afraid to leave her job and identity. I’m fine with traveling the world or taking it easy. I’m also optimistic that in doing so, my wife and I will discover a new passion that we could pursue together, but she is unwilling to take that leap of faith.
I’ve always admired your gusto to take on new challenges, keeping yourself busy, exploring new ideas. I also admire you courage to share your insights and experiences on the Internet–a thankless endeavor at times. However, the desire to pursue new opportunities should not be driven by your decision to pay off a mortgage, and vice versa. The decision to pay off a mortgage should be viewed as a financial decision weighing the risk, rewards, opportunity costs, like any other decision. However, when it comes to one’s home vs an investment property or any other investment, the rules get thrown out. You are certainly not alone. I have a very wealthy apartment mortgage broker friend who strongly encourages everyone to maximize their cash out refi on rental properties every 5 years and reinvest the proceeds (on anything–not necessarily more real estate). Most apartment loans have 5 year ARMs. It has been a winning strategy. He does it for his own portfolio; I did it. However, for his personal residence, which has a lower fixed interest rate and 30 year term, he just pays it down like everybody else.
I’m sure he’ll feel great once the mortgage is paid off but that doesn’t mean it was the optimal financial decision. You have rules about how much car you should buy and you generally talk yourself out of buying the nicer vehicle. But if buying that nicer car made you “feel good,” would you advise discarding your previous guidance?
With regard to the mortgage numbers, you’ve posted, any rate 6%, I would pay it off. But without question, if I had the guts to borrow a 30 year mortgage at even 7% and invest in the S&P 500, that would have been winning move over the last 30 years. $50K to $90K mortgages might be a “nuisance” to you because of the small loan amounts, but I’ve obtained and dragged out car loans for those amounts just because they offered a loan interest rate when I could have paid in cash. If someone had a $90K car loan at 3%, would you advise them to pay it off instead of investing their money in the S&P 500? A tax-deductible mortgage at 4+% is roughly equivalent to a 3% car loan.
If you are working, minimizing passive income, maximizing capital appreciation makes sense due to the taxes. But when you finally give up your W-2 income, I think you’ll change your tune because the investment income is what’s needed to pay the bills.
What I fear your wife will feel when she finally does retire is regret she didn’t retire sooner bc she will appreciate the freedom so much. And then she may wonder what was the point of it all, Giving up her time to work when she didn’t need the money.
Congrats on 5X in your net worth. How much is enough? $10 million? $15, million? 20+ million dollars? It’s something I struggle with myself. But in a very high cost of living, having more than $10 million in investable assets is enough in my opinion.
Personally, there is no amount of money I would be willing to earn if it hits my health at this point. My health and vitality is only declining with age.
On the mortgage payoff debate, please understand mortgage rates and the 10 year bond yield were much lower when I paid them off. I am not paying down a 4% or lower mortgage in today’s environment. Sure, I could have made more money investing the money. But it wouldn’t have improved my lifestyle because I was already free.
You may enjoy this relevant post: Your Financial Independence Number Is Not Real If Nothing Changes
I do miss the days of the Financial Samurai forum where we could dive deeper into certain topics, but here goes:
A typical early retirement session goes as follows. How much will you spend in your retirement? Guesstimate $100K to $150K per year. What sources of passive income will you have? 401K, Pension, Social Security, etc. People, however, are notoriously bad at estimating income and expenses, and people who actually plan for retirement are notoriously conservative (including me) because they are always worried they won’t have enough. So they overestimate their spend (e.g., what if I have unexpected medical expenses?) and they underestimate their income sources (e.g., let’s assume Social Security will be bankrupt…just in case). That gap causes a lot of anxiety and compels people to shoot for a higher passive income number with the assumption that more is better, and not enough is disastrous. Predicting the future is hard.
My goal for passive income is to shoot for “barely enough”. Let’s say I will need spend $100K to $200K per year in retirement. Most years I only need $100K, but you never know, I might need a new roof (or down payment on a McLaren). I will for plan for $100K of unavoidable/stable passive income from to dividends, RMDs, social security, pension, rental income, etc. Why plan for and pay taxes on anything more than $100K of income if I don’t need it year after year? Should I have extraordinary spend in any particular year, I can withdraw from a Roth IRA on a tax free basis, or sell an equity position that has minimal capital gains. I’m pretty good at making bad investments so I might even sell something at a loss.
Most people don’t plan this way which is what happened to my-mother-in law, a retired public school administrator. She had a rental property, a pension, IRAs and social security to fund her retirement. In her late 70s she started to pay more taxes than anytime in her life. The depreciation deduction on her rental ran out. She started receiving RMDs. Her financial advisor filled her portfolio with dividend paying positions because that’s just what you do for retirees. It’s a mess that I’m trying to untangle–not easy. Predicting the future is hard.
As for my wife, I do fear that she will regret her decision not to retire sooner. She is the type of person that complains I plan too many vacations, but when on vacation wishes we had an extra day or two. Everybody has a different perception of time. I view time as extremely precious and limited, and I think decades ahead. You never know much time we will have with good health. Predicting the future is hard.
Given what I know about SF and your family situation, I agree $10M NW is enough. Guessing Financial Samurai’s NW is a great source of entertainment. Whatever that number is, I’m surprised you haven’t reached “enough” status yet given the amount of time in the market. I suppose some of that anxiety may stem from your ownership of the Financial Samurai site and brand. One day you may sell but the valuation is unknown. Predicting the future is hard.(Perhaps you should have a private offering for your readers to invest in Financial Samurai.)
As for mortgages, you made a decision to pay it down given the conditions at that point in time. I made the opposite decision at that point in time. I locked in a 2.625% rate for the next 30 years at $1M because that was the maximum mortgage interest I could tax deduct. (I should have borrowed more even though it wouldn’t be tax deductible). Not only that, the first 10 years are I/O so I could maximize my mortgage interest deduction and have more funds to invest elsewhere. I made a bet that these low rates would not be around forever, but predicting the future is hard.
I’m not trying to make you feel bad about paying cash for your house. I’m genuinely happy for you as I’ve commented in the past. You bought when prices were low. You got a discount for being a cash buyer. You’ve upgraded your quality of life. You can refi at a later time when rates come down (the buy now/refi later is a strategy I’ve contemplated) You’re going to be just fine.
What concerns me is that you have many readers still on their way to FIRE. If they prioritize paying off their low interest rate mortgage instead of investing that extra cash in something with greater returns, they will be jeopardizing their FIRE journey. Too many people contemplate paying off their mortgages early. I don’t have your reach, but everybody that I’ve talked to about hanging on to their mortgages and investing the proceeds have thanked me. Let’s revisit this in 25 years. If the stock market returns less than 2% annually over that time, I’ll have a lot of haters, but I’ll be too senile to remember any of this.
No need to be concerned. I have what I call the FS DAIR ratio for investing and paying off debt depending on the interest rate environment.
I didn’t realize my writing is encouraging people to pay off a low mortgage interest rate like 2% in a high inflation environment. So I’ll do some course correcting. Thanks for the feedback.
You and your readers may also like this: Don’t Pay Off Your Negative Real Mortgage Rate
Please encourage your wife to take it easy.
@FinanceRonin, not all Samurai readers are FATFire bros looking to “amass a real estate empire”. We appreciate that Sam takes human factors into account when making decisions instead of just narrowly chasing the bottom line. If you’re looking for strictly financial advice about how to maximizely lever home loans, go visit one of the billion YouTube videos or Reddit threads on this subject.
Also any serious real estate investor knows managing properties is *not* passive income, far from it. It’s a lot of work, and just because you’re not on the clock, doesn’t mean you’re retired, it just means you’re self-employed.
When I first started reading Financial Samurai at 2013, I was not FatFIRE, I was CanIFIRE? (Answer-probably not). I learned a lot of from this site. I agree with 80% of the advice given.
Sometimes I’m neutral, but this advice of paying off a low interest mortgage is life-changing and not for the better.
Had I made paying off my mortgage a goal back in 2013, I wouldn’t be where I am financially. Whether I invested my extra money in real estate (not passive) or an S&P 500 ETF (passive) is irrelevant. Either way, I would have left a heap of money on the table. That’s a high price to feel good.
Like your debate. Here in Vegas I can’t wait to pay off my 2.75 note and have piece of mind. We built a casita, and when that is rented, soon I hope, that will give us enough to live free in our dream home. I think the people who pay in cash are great, but they may be down sizing and keeping $$ in the market like we do KD
I’ve used margin loans to make all cash offers. It gives me the flexibility to make a strong offer without the need to sell stocks and pay taxes. Then I can either pay off the margin loan quickly or refinance if I like the rates.
There is no reason to take a mortgage when you end up paying (at the min.) 3x the money you borrow! Paying cash is the way to go, particularly when the $$$ amount is a small part of your portfolio (1% or less). We paid cash for our home and plan to do the same thing if/when we move.
How many ppl live in a home that is 1% or less of their portfolio? I can’t imagine this.
We do. Dual income w/o kids in oil industry + Spent 10 years on foreign assignments in Africa + SAVED SAVED SAVED.
To put the financial benefits in Africa in prospective…
1 year full employment in Africa per person = 4 years full employment in the US per person.
Hey Sam,
Article resonated with me. I have paid cash for last 2 houses in the Bay Area, been lucky in tech industry. But the last house we paid cash our realtor published in the local paper the house we bought and said all cash buyer I guess to make the market look hotter not totally sure. Obviously he didn’t mention us but since we moved in the same town every one of our friends knew it was us and a few asked about paying all cash etc.. which was awkward in social settings. But personally I fit into your scenario of wanting to feel like I was getting some tangible value for all the cash /tbills sitting around plus with the salt tax changes there is no incentive for paying interest.
Ah, that would make for awkwardness if friends saw it in the paper. It must’ve been a big amount!
I told our agent not to publish anything about our purchase, and she obliged. She can verbally speak to agents she was the listing agent and buyer’s agent (we went dual agency), but nothing in the paper or online.
Thanks for the reminder of SALT tax changes making mortgage interest less valuable / more expensive.
I’ll take the bait.
I have had the means to buy cash and not have a mortgage – and I bought my last house in 2021 with a 10Y I/O which I am extremely y happy with. I have also tapped my LAL for fixed rate term loans in 2019 and 2020 specifically as an inflation hedge and to earn positive carry on some investments that I am very happy about. I am not debt adverse and have used leverage conservatively and have valued having maximum liquidity and optionality.
I’m not saying what you did wrong but it’s not the only way. I think you would agree that every has their own situation and psychological priorities.
I definitely don’t think paying cash is the only way. When you can borrow at a rate lower than inflation, that’s highly attractive. And that’s what I did in 2020 when I bought my previous house with a 2.125% interest rate.
Now that I’m older, I’m OK with not leveraging up. How old are you?
I am middle aged with 3 kids – all HS and college aged
I live a simple debt free life. It’s a great life. Great goal.
I like your stuff but… this one felt like a lot of cope for making the wrong financial decision especially in 2019.
You could be right. We are all biased about the decisions we make.
Did real estate prices do poorly in your area after 2019?
Paying all cash for my house in 2019 saved me at least 10% off the market price. Five years later, I know this to be true based on comparable homes sold.
For my records, as I’ll forget, a smaller comp just sold for $1,332/sqft on May 29, 2024 vs. my purchase price of $692/sqft.
It was more of a buyers market in my area back then so I did not have to use all cash when negotiating. I was think more along the lines of interest rates. Locked in 30yr fixed of 3.25% and now I am collecting 4.5% interest in my savings account. Even more, my income has doubled in that time so I am paying the mortgage back with cheaper dollars. Good tech stock bets didn’t hurt either.
Sounds good to me. Did you have the ability to pay cash? I have observed that the people who are against other people paying cash are often unable to pay cash themselves for whatever reason.
Oh, I read one of your old comments and you said you bought the house for $150,000? Is that correct? Or a typo? If not a typo, I’m not sure the fees and time are worth it to borrow that amount.
Why do you think me paying cash in 2019 was bad? Thanks.
2013 House 1: $150K / 2019 House 2: $280K. I couldn’t afford cash at the time but I could today if I liquidated a portion of my stocks. It would also be a bigger tax hit than the fees hit if I chose to do that as well.
Gotcha. Amazing prices! And good timing in 2013. I’m assuming it’s worth a lot more now. How have prices done in your area, and where are you buying these homes?
Greater St. Louis Area. I still own both. Worth $280K and $400K now. I have about 50% combined equity now. Rental is pretty nice. Mortgage $1K vs Rent $2.2K with LT renter.
Thanks for sharing. Congrats on your gains. Can you elaborate why you think I made a mistake paying cash in 2019? I’m always looking to learn different perspectives. Don’t be shy to share some details as to why. You can respond to a previous comment of mine. Thanks
Nothing beats the FU feeling of a paid off forever home. The job becomes just a way of increasing retirement income…Being frugal has benefits and leads to a lot more optionality for me and mine.
Hi Nathan, why do you think paying cash for a house in 2019 is the wrong financial decision? Prices are up over 40% nationwide since and if Sam got 5% off fair market price due to buying with cash, saved on mortgage fees and interest expense since then, that seems pretty good.
What am I missing? The $150,000 you paid for your place is the cost of landscaping a 3,000 sqft yard in LA.
If using cash to get a better deal and snag a property that would have been lost in a competitive situation, I say the purchase was a good one.
I’m guess you’re still young and still far from financial independence, which is why you’re focused on using as much debt as possible.
The older and wealthy are you, God, the less you’ll find a need to leverage up.
Nothing beats a paid off home. We don’t exist to prop up the banks and chase useless mortgage interest deductions. I’ve never heard of someone regretting paying off their home.
Agree with this remark 100%!
I have always thought of homeownership as an expense management exercise rather than a wealth building tool.
If/when gains are realized – its a nice bonus!
I know too many people in their mid 60’s & mid 70’s who are burned out in their careers, or just plain tires but still have significant mortgages, insignificant liquidity, who are slaves to their mortgages.
I think you made a very wise decisions – especially if you are loving your forever home!
Yeah, once it’s paid off, you kinda forget about the money and just move on to build more wealth in new ways.
Any gain is really a bonus. And simply due to inflation, you can wake up 10 years later and surprise yourself with how much the home’s value has appreciated.
Having no mortgages makes you more free, which is aligned withe FIRE.
I laugh when people boast about their 3% mortgage like that’s some sort of status symbol. I haven’t had a mortgage in 5 years. THAT’S cool.
It might be an age and wealth thing. I was trying to convey in my post that financial situations and desires change as we get older.
I would feel proud if I got a 3% mortgage in my 20s or 30s, with mortgage rates more than double today.
But in my mid-40s, even my 2.125% mortgage I got in 2020 (previous home) is not something exciting to have anymore. I just see the debt amount. Just holding on for more price gains to then sell.
Congrats on the cash purchase! If I had way more means I would have considered it before I bought my home. But it wasn’t in my cards. Nevertheless I’m plunking away at my mortgage and should have it paid off in a couple more years.
Even though buying all cash may be less common in the US than financing, paying cash is normal in many other parts of the world. Sometimes it’s due to culture, difficulty to get mortgages, or very high interest rates. Mexico, Brazil, and the Middle East come to mind but correct me if I’m wrong.