Loan Now or Wait for All Cash Deal?

Question

For my first home I wanted to start small so my goal was 100k for a 3 bed/2 bath home so I can live there as my primary residence and be able to rent the other two rooms and essentially live without paying for mortgage out of pocket. Small chance of positive cash flow . It's doable but in my location homes in that budget aren't as plentiful as they would be in other cities/states.

My current situation is that I'm currently living with my parents so I can save up money for my first house. I'm currently in a position where I can comfortable pay a 20% deposit on the house and take a loan out for the rest. I'm currently debating on whether or not I should take a 15 year, 30 year loan, or just wait another 3 years so I would be in a position to buy a house all in cash

General estimation of a 30 year mortgage @4% APR would mean I'd have to pay around $57,500 in interest according to a basic mortgage calculator. There would be a small positive cash flow though. .
The pro to this is that I can get a house now-ish with possible positive cash flow.
The con is ultimately the total amount to be paid for the house

While a 15 year mortgage @4% APR would equal around $26,500 in interest. No positive cash flow, if anything I may have to pay out of pocket depending on tenants and rent. <$100-200 per month=(100x12)15=$18,000-(200x12)15=$36,000 >
The pro would be that I can get a house now-ish and could have the possibility of doing a home equity line earlier then the 30 year mortgage.
The con would have to be paying out of pocket with the mortgage.

If waited and paid all cash for a house I would guarantee a positive cash flow from renting out the other two rooms.
The pro would be the positive cash flow
The con would be having to live with my parents for another few years =(

There are pros and cons to each situation and I'm not even factoring other outside influences. Actually typing this out already has me leaning towards one way but I'm interested in the opinions of others about my situation?

Let me know if the way I format is confusing. I'm kind of new at this.

P.S. I know I use the word possible/possibility a lot but only to remind myself that nothing is guaranteed and life tends to throw a wrench to even the best laid out plans. ;D

Account Closed · Answer

A rule of life in general is that delaying action very rarely works in your favor.

You have a job now and can qualify for a loan. No guarantees that you will be employed in 3 years. You can find a home in your price range now. No guarantee that prices wont shoot up. Interest rates now are at an all time low. No guarantee that they will stay that way.

The ONLY calculation that matters is the one that applies to the present. So, in short, my advice is JUST DO IT!

Dung Tran · Answer

So opt in minimum down payment <20% to avoid PMI> and go with 30 year Fixed? Since I wouldn't have to pay mortgage and use the income earned from my job for the next down payment?

Hmmm good point. I could potentially be on my 2nd or 3rd house by the time I save enough for an all cash deal.

Whelp, looks like I'm going to keep an eye out on listings then.

Jay Y. · Answer

I opted to do a 30 year fixed mortgage for my first two properties. When I first started, I was also thinking about doing all cash so I could own free and clear. The thing is, even for a $100k property, it'll take the normal person a looong time to save up for all cash. If I had gone with that approach, I would have missed the boat completely and still be trying to save. As ANISH TOLIA said, who knows what the future will hold? Interest rates are pretty low right now...

Also, after you get the first property, it should only get easier (faster) to save for the next 20%. Just rinse and repeat. I have two cash-flowing properties right now + work income. I'm anticipating (hoping) that I'll have enough saved up for #3 before the end of the year.

Dung Tran · Answer

ANISH TOLIA and Kelly N.
Ah I see. I'm actually very much leaning towards the 30 year mortgage myself since if I rent out the additional roams I technically wouldn't be paying the interest myself so cost factor wouldn't be such a big deal. It would just take a longer time for the house to officially be 100% mine.

The thing with the all cash deal would be the positive cash flow and also the fact that since I would 100% own the house I could take a home equity line <80%?> on the house for a second purchase right?

While the current housing market has taken a turn I have my doubts that the houses will go up too quickly especially since the job market still hasn't improved as much.

The fixed loan rate wouldn't effect my first real estate purchase if I go with the all cash route but I'd be hit with the higher APR for the second home though. But if I used the full home equity line as the down payment of the next purchase it has the potential on better investment returns? Or is there a wait time before I could do a home equity loan?

Hmm lots to consider and research.

Kelly N. · Answer

Hi,

Here's my 2c. Interest rates are very low right now, if you have the ability to put a down payment on a house, go for that 30 year fixed rate loan to get into your first house. You want to lock in that low rate for as long as possible, save a bit on the loan by going with the 30 yr vs 15 yr, use that money that you are saving on the loan and any income you have towards that next property.

Read up on the 50% rule, and check out Brandon's website about getting started in your 20's regardless of if this is your age bracket or not.

Best of luck to you, Kelly

Loan Now or Wait for All Cash Deal?

5 Replies