Pay Cash or Borrow?

Alex and his wife are renting. If they extend the lease to July 2014, they will have enough saved to pay cash for a house. She wants to take a 15-year mortgage. Dave presents an option they haven't thought of.

QUESTION: Alex in Colorado and his wife are renting and the lease is up in July. If they extend the lease to July 2014, they will have enough saved to pay cash for a house. He wants to do that, but she wants to apply whatever they have saved by next July toward the house and take a 15-year mortgage. Dave presents an option that Alex may not have thought of.

ANSWER: What would be wrong with buying the house and paying it off in one year? If you were to extend your lease for one year, you can pay cash for a house—a house that she’s willing to purchase. We’re in agreement about the price of the house. If that math works, what would be the difference—other than the debt, obviously—why could you not go ahead and buy the house at the end of this lease and pay it off within one year? If you could save the money to pay cash for it one more year, you could pay it off in one more year.

What we’re arguing over, hopefully, is not a 15-year mortgage. What we’re arguing over is a one-year mortgage. I think you could be disciplined if you both decided to. I don’t think there’s any question you could be disciplined. Your question is whether or not you can hold her to it once she gets in the house. That’s what’s worrying you.

There are two answers to any question on debt on a house around here. Answer #1 is Dave and Sharon Ramsey don’t borrow money, so we would be waiting until we had the cash—period. That’s what you want to do. Answer #2 is I don’t yell at people for taking out a payment that’s no more than a fourth of their take-home pay on a 15-year fixed rate mortgage. It’s the only debt I won’t yell at you for taking. Obviously, when we discuss a one-year mortgage, we’re discussing a lot less than 15.

A reasonable compromise within the guidelines of what I teach would be to take out a one-year mortgage, and even if you had a one-page agreement that you both sat down and said, “Okay, we have to do this. I’m going to budge on this and compromise, but you’re going to commit in return for my compromise we’re not doing anything until we get this house paid off, and we’re going to pay it off in one year.” She compromises by promising and even signing in blood that we’re really going to do this and not going to let the little mosquitoes eat everything up that you’re worried about. I know you’re going to stick with it.

I would still call you wise if you did the one-year mortgage. You could go to the bank and put it on a five-year payment and pay it off in one year. You’re putting a big enough down payment on a small enough house. It’s probably more like a bank loan than it is a mortgage, actually. You are going to take advantage of current prices, and the rates are not high. I would really avoid paying closing costs because you’re not going to keep this loan out. It’s a bank loan, and as big a down payment as you’re putting down—you’re putting over half down—you’re going to want to avoid closing costs in this deal.

I’m also perfectly okay with your plan. I’ll repeat that that’s the plan that we would do. We built a home a few years ago, but it was with cash. We moved up considerably in home, but we paid cash for that move. We do not buy things and go into debt. On a mortgage, I don’t yell at people, so a one-year mortgage certainly is not anything to yell at you about. It would be a reasonable compromise in this scenario for the two of you. I’m okay with you writing it down and both of you signing it and saying we’re committing to each other to do this. Otherwise, I’m not going to be willing to do it. You’ve got to really look at it that way.

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