Hi I am new to the forums, but I read JD's blogs all the time. I am two months away from being totally debt free, and my wife and I paid off about 40K in about a year and 3 months. At the present, I rent a one bedroom apartment to keep costs down.

Question: I have two scenarios here which do you think is better, and can you give me your reasoning? Opportunity cost is the just of the question.

Scenario 1: I am 28 years old, and I am thinking about saving to pay for my home in full which will be around 150k to 200K. I am guessing it will take me around 4 to 5 years to save for this amount in a good money market account plus CDs, and while saving, I will be contributing to my 401K up to the match. Now, since I have my house paid for, I will be able to invest probably around 60% of my income per year. I will be 33 years of age.

Scenario 2: In a year, I am 29 years old, and I take on a mortgage for a $200,000 home which monthly payments will be around $1320 (assuming 20% down and a 15 year fixed @ 5.6%) not counting escrow and all the cost associated with owning a home. With this scenario, I am guessing I will be only able to invest 20% of my income while taking on my mortgage payment. I will still be able to max my 401k and roth IRA with this scenario.

While its admirable to want to buy a home outright, interest rates are still really low. The effective real interest rate is about 2.5% (rate minus inflation). Why not get the home? Saving aggressive is admirable, but I personally think that saving up to buy the whole house isn't needed.

How does owning a home fit in with your non-financial goals? How likely are you to move in the next few years? Have kids? Change jobs?

I don't plan on moving, but kids will be in the equation hopefully soon.

The future value of 160K for 15years @ 2.5% compounded monthly is like 232k! 72K is the difference which is the bank's profit. That is why I was considering paying for a home out right.

First of all, congratulations on attacking your debt!

Generally, it's not a bad idea to take out low-interest debt if you can invest at a higher interest rate. Mortgage rates have fallen to under 6%, and the interest is tax-deductible. You can do a lot better than that investing in stocks (although the return is not guaranteed, and your earnings are taxable).

There are good reasons to pay cash for a home, but the opportunity cost generally is not one of them.

What is your monthly rent? If you wait to buy a house for cash you have to consider what you are speding each month on rent as opposed to paying on the mortgage by buying sooner. And there are more than 2 options. You can buy when you have 30% to put down, or 40%, or 50% ect, it doesn't have to be 20% or 100% down.

There are a lot of different factors to consider such as: How do you feel renting? Would you prefer to feel more settled? Are you in a position to buy the size house you think you will need for the next 10 years etc. Financial considerations do not cover all aspects of a house buying decision.

I agree w/ Kate. I would save up enough to have enough of a down payment that your monthly payment will be very manageable. You mentioned kids in your future. Do either or your wife want to stay home with the kids? If so, put enough down so that you will be able to manage the payment on one income when the kids come. Then, I would pay extra on your principal every month, so you can own your home a lot sooner, and not pay so much interest!

There are several other factors to consider in terms of children. If you and your wife both anticipate working after you have children, find out how much child care costs in your area and factor that into teh equation.

Also, it may be helpful to have a mortgage low enough that your family can survive on one income even if you are both working. You never know what may happen. My dh had to go on sabbatical for 6 months when our younger dd had medical treatments. Beign able to continue our life on my salary was extremely helpful. (She is fine now.)

Good luck with your decision.

I would go for Option 2 but get a 30 year instead of a 15. Then you can still pay it as a 15 year but this will give you more flexibility if you do decide to have kids or whatever. If something happens and you have to scale back on your expenses this would be an easy way to do it without having to majorly change your lifestyle.

Borrowing money at a low rate for what (over the long term) is usually an appreciating asset is not a bad idea.

you also have to consider the maintenance and unexpected costs with a house. My water heater and furnace broke within a week of each other, luckily i rent so it cost me nothing. but if i had to fix both....

I think that both your options are good ones and in the end they would both be advantageous. [in either scenario your really young when you start investing.] So the question should really be what do you want to do?

That's what an emergency fund is for though. A lot of the issue with renting depends on the landlord too. If you own, and your heater goes out, you can be selective about what you replace it with with an eye towards long-term costs. A landlord is likely to install the cheapest furnace they can get, especially if you're paying to run it. There are tradeoffs with both.

I would figure out what you can afford and go backwards from there. When I go to buy a house I am going to try to make my payment as close to my current rent as possible. Mainly because it is a comfortable monthly payment for my wife and I, and because I know I can make that payment on one income as jenolyman and HollyP mentioned.

Then when I get the deductions that will be a bonus, probably put towards the property taxes.

Great advice everyone. You've have made some issues aware to me that I have not thought of. Keep the advice coming I have two months.