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Comment by lotsofpulp | Hacker News Reader

Why only cash buyers? Even if I am borrowing money to pay for something, I would rather pay less than more.

Because you would theoretically be paying the same amount, just paying it as interest instead of principal. It's not practically that big of a deal, but it does mean you would have less equity. If you had to sell it, you would get much less back, and you might have more taxable gain if you don't qualify for §121 exclusion.

> If you had to sell it, you would get much less back, and you might have more taxable gain if you don't qualify for §121 exclusion.

This is a separate calculation of how much one can sell their house for relative to purchase price, unrelated to preferring low interest rate/high purchase price or high interest rate/low purchase price.

But based on decades of interest rate history, it would seem prudent to bet the Fed will lower rates again in a few years and you can refinance to a lower interest rate.

If you buy a $225,000 house at 7%, you pay $45,000 down and $1,200/month. If things stay like that and you move after five years, you'll have about $169,500 left on your mortgage and thus get about $55,500 back out, $10,500 more than your down payment.

If you buy a $410,000 house at 2%, you pay $82,000 down and $1,200/month. If things stay like that and you move after five years, you'll have about $286,000 left on your mortgage and thus get about $124,000 back out, $42,000 more than your down payment.

You would have to account for the difference in down payment and opportunity cost of investing the $37k difference in down payments for the same period.

So in the 7% scenario, you have $37k + investment return + $10.5k.

In the 2% scenario, you have $42k.

I guess that's true. Assuming you yourself also get 7% interest, that would be another $15,000 you'd get, making you only lose $16,500 more.

This is correct, you will pay more to service the loan but only until you can refinance it. If you pay more in a low interest rate regime you have no way to improve your situation, and no way to sell if you need to.

Yes, I would rather pay usurious rates with a commensurately low price. Even though it would be terrible basically having the vast majority of my monthly payment going purely to interest for a long time, it's possible to:

- refi at a lower rate in the future

- sell the house without having to take a huge loss compared to low-% bagholders

You can win like a cash buyer if you pay a 2nd payment every year. If you plan on paying the minimum though, you definitely lose at 7% vs 3%. You are correct. As long as someone drops that extra payment monthly or yearly, depending on the amount and if you ensure it all applies to the principal with your lender.

> If you plan on paying the minimum though, you definitely lose at 7% vs 3%.

I do not agree with this, because the lower downpayment needed for lower purchase price means more of your money can be invested.

The option is not pay a low price for home and get 3% mortgage. The option is pay a high price for home (and high downpayment) and get 3%, or pay a lower price for the house, and get 7%, and I would bet you can then refinance this 7% to something lower in the coming years.

The refi is an unknown and incurs closing costs again. That's a big gamble, and if it were guaranteed to work out, everyone would get an ARM. I view those statements as a "put your money where your mouth is, get an ARM", but few do.

I agree with you if the lower downpayment is proportional to the cost difference incurred between 7 and 3%. It hasn't been so far, not even close. I've run the numbers for my own purchase and 7% over 30 years is completely insane compared to 3. I highly doubt at 7% with minimum down you can beat the interest payment by investing in the market. Even if not, there's risk that you won't gain off whichever investment is chosen. While paying off a home early (no matter the interest rate) is guaranteed to pay off financially. From both the reduced interest payments and freeing up your income sooner.

> It hasn't been so far, not even close.

Yes, it will take a little time for the supply and demand curves to adjust. And, of course, popular/richer areas may not adjust down as much as less popular/poorer areas.

> Even if not, there's risk that you won't gain off whichever investment is chosen.

This is political, but if the US government lets its stock market indices fall/stagnate over the long term (5 to 10 years), we probably have bigger problems to worry about.

> Even if not, there's risk that you won't gain off whichever investment is chosen. While paying off a home early (no matter the interest rate) is guaranteed to pay off financially.

FDIC guaranteed savings accounts are offering 2.5% to 3% these days. I presume a higher mortgage rate means higher guaranteed savings account rates.

Here's a little math. Let's assume a $400,000 home pre-high interest rate regime. Assume, and this is the critical assumption as you say: six to twelve months from now that price drops 10%, to $360,000.

You, the buyer, put 10% down. Pre-regime: $40,000 + $360,000 @ a 3% interest rate = $1,518/mo. In the future: $36,000 + $324,000 @ 7% interest = $2,156/mo (+$638/mo)

Imagine the pre-regime buyer invests the difference. $0 upfront + over 30 years, at a conservative rate of 4% APY, that's: $442,000.

Assume, again, interest rates stabilize and drop to, say, 4% five years from now. The person holding the 3% mortgage does not refinance, because why would they?

The post-regime buyer invests the amount saved up-front, and refinances in five years. Their returns on that initial down payment investment, same 4% APY over 30y: ~$13,000. Their new monthly after that point would be $1458 (amortization schedule + reduced interest rate). They, also, invest the difference in their monthlies (+$698/mo @ 4% APY over 25 years); added on to the down payment savings returns: $371,000.

Two interesting points which extend out of this math:

1) The hypothetical home price reductions over the next months/years don't have to go far above 10% before the benefit flips in favor of the person who waited. I haven't ran the math, but I'd estimate somewhere around 15%.

2) This doesn't take into account, say, investing the down payment for the person who waited, over the past two years.

3) As interest rates recover, housing prices likely follow. But they're recovering from the bottom, not the top where many bought. Imagine, say, in ten years, this home is valued at $450,000. All else already described being equal, the person who waited can add even more to their gains beyond the person who bought early; closing the gap further (the exact amount of calculable, but I'm too lazy to figure out the amortization schedules).

None of this asserts that it was a "mistake" or something to buy early. Just that its not all doom and gloom "your financial future is fucked" for people buying now. Its really surprisingly close once you run the math; the people saying "I feel like I won the lottery with 3%" may retire, decades from now, ahead half a years salary.

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