query: Mortgage vs. Cash for U.S. home buy now

positive: "I'm in the ""big mortgage"" camp. Or, to put this another way - what would you be happier to have in 15 years? A house that is worth $300,000, or $50,000 of equity in a house and $225,000 in the bank? I would much rather have the latter; it gives me so many more options.  (the numbers are rough; you can figure it out yourself based on the current interest rate you can get on investments vs the cost of mortgage interest (which may be less if you can deduct the mortgage interest))."

positive: "If you are investing in a mortgage strictly to avoid taxes, the answer is ""pay cash now.""  A mortgage buys you flexibility, but at the cost of long term security, and in most cases, an overall decrease in wealth too.  At a very basic level, I have to ask anyone why they would pay a bank a dollar in order to avoid paying the government 28 - 36 cents depending on your tax rate. After all, one can only deduct interest- not principal. Interest is like rent, it accrues strictly to the lender, not equity. In theory the recipient should be irrelevant. If you have a need to stiff the government, go ahead. Just realize you making a banker three times as happy.  Additionally the peace of mind that comes from having a house that no banker can take away from you is, at least for me, compelling. If I have a $300,000 house with no mortgage, no payments, etc. I feel quite safe. Even if my money is tied up in equity, if a serious situation came along (say a huge doctors bill) I always have the option of a reverse mortgage later on. So, to directly counter other claims, yes, I'd rather have $300k in equity then $50k in equity and $225k in liquid assets. (Did you notice that the total net worth is $25k less? And that's even before one considers the cash flow implication of a continuing mortgage.  I have no mortgage, and I'm 41. I have a lot of net worth, but the thing that I really like is that I have a roof over my head that no on e can take away from me, and sufficient savings to weather most crises).  That said, a mortgage is not about total cost. It is about cash flow. To the extent that a mortgage makes your cash flow situation better, it provides a benefit- just not one that is quantifiable in dollars and cents. Rather, it is a risk/reward situation. By taking a mortgage even when you have the cash, you pay a premium (the interest rate) in order to have your funds available when you need it.  A very simple strategy to calculate and/or minimize this risk would be to invest the funds in another investment. If your rate of return exceeds the interest rate minus any tax preference (e.g. 4% minus say a 25% deduction = 3%), your money is better off there, obviously. And, indeed, when interest rates are only 4%, it may may be possible to find that. That said, in most instances, a CD or an inflation protected bond or so won't give you that rate of return. There, you'd need to look at stocks- slightly more risky. When interest rates are back to normal- say 5 or 6%, it gets even harder.  If you could, however, find a better return than the effective interest rate, it makes the most sense to do that investment, hold it as a hedge to pay off the mortgage (see, you get your security back if you decide not to work!), and pocket the difference. If you can't do that, your only real reason to hold the cash should be the cash flow situation."

positive: "There are a number of reasons I'm in agreement with ""A house that is worth $300,000, or $50,000 of equity in a house and $225,000 in the bank.""  So, the update to the first comment should be ""A paid off house worth $300K, or a house with $150K equity and $275K in the retirement account.""  Edit - On reflection, an interesting question, but I wonder how many actually have this choice. When a family budgets for housing, and uses a 25% target, this number isn't much different for rent vs for the mortgage cost. So how, exactly do the numbers work out for a couple trying to save the next 80% of the home cost? A normal qualifying ration allows a house that costs about 3X one's income. A pay-in-full couple might agree to be conservative and drop to 2X. Are they on an austerity plan, saving 20% of their income in addition to paying the rent? Since the money must be invested conservatively, is it keeping up with house prices? After 10 years, inflation would be pushing the house cost up 30% or so, so is this a 12-15 year plan?  I'm happy to ignore the tax considerations. But I question the math of the whole process. It would seem there's a point where the mortgage (plus expenses) add up to less than the rent. And I'd suggest that's the point to buy the house."

positive: "Buying now with a mortgage gets you: Waiting to buy with all cash gets you: These are also some of the pros or cons for the rent or buy dilemma that Paul mentioned in comments to the OP. This is a very complex, multi-faceted question, that would not respond well to being put into any equation or financial model. Most people answer the question with ""buy the home now with a mortgage"" if they can pay for the down payment. This is why the mortgage industry exists. The people who would want to finance now rather than buy with all cash later would not only be analyzing the question in terms of financial health but also in terms of general well being. They might consider the tremendous pride that comes with home ownership and living under a roof of one's own. Who can say that those people are wrong?"

positive: I wondered about this problem too, so I looked into the maths and made this app :- http://demonstrations.wolfram.com/BuyOrRentInvestmentReturnCalculator/ (It uses the free Wolfram computable-document format (CDF) Player.) If you try it out you can see what conditions favour renting vs buying.  My own conclusion was to aim to buy a property outright upon reaching retirement age, if not sooner. Example This example compares buying a £400,000 house with renting for £1,000 a month while depositing equivalent amounts (in savings) to total the same monthly outgoings as the buyer.  Mortgage rate, deposit rate, property appreciation and rent inflation can be variously specified.  The example mortgage term is 20 years.  As you can see the buyer and renter come out about even after the mortgage term, but the buyer comes off better after that, (having no more mortgage to pay).  Of course, the rent to live in a £400,000 house would probably be more than £1,000 but this case shows an equivalence point.

negative: New Mortgage Rules - Special report!  Please read in full and share this with your friends and family today!  You will now qualify for significantly less: -A family with $65,000 in income and no dept with 5% down could previously buy a home for about $525,000 -Now they can only spend about $410,000  READ FULL ARTICLE HERE: http://ownyourlife.ca/mortgages-marketing/new-mortgage-rules-special-report.html

negative: If someone owns a house that is not paid off...can someone buy it by taking another mortgage? Yes, but I'm not sure why you think the buyer would need to take another mortgage to buy it. If someone sells their home for X dollars, then the buyer needs X dollars to buy the house. How they get that money (use cash, take out a mortgage) is up to them. During the closing process, a portion of the funds generated from the sale are diverted to pay off the seller's loan and any leftover funds after closing are pocketed by the seller. What kind of offer would be most sensible? I assume that in this case the current owner of the house would want to make a profit. The amount that the house is sold for is determined by the market value of their home, not by the size of the mortgage they have left to pay off. You make the same offer whether they own their home or have a mortgage.

negative: First, as others have commented, the idea that getting a mortgage to buy a house is always a good idea is false.  It depends on a number of factors including the current interest rate, what you think the future interest rate will do over the life of your mortgage, the relative cost of renting vs. buying, and how long you would stay in the house that you bought. To the extent that a mortgage for a house is more often recommended than buying other goods on credit, it is for these reasons: Except for #1 above, you could and can find other situations where taking a loan makes more sense than buying in cash.  This more true if you have the resources and the skill to invest money at a rate that beats the interest rate you pay to the creditor.  The general advice not to try this rests in the fact that most people don't have the resources or the skill to actually make this pay off, especially on high-interest rate loans or over short time periods.

negative: Buy a home. A home is the first and best investment, u can own a home with as little as 3% down and as u pay for your living u pay it off.....also banks will always give you equity loans in case you need your money

negative: Consider not buying the house? Consider a cheaper property? What are your actual goals? Owning vs renting? Perhaps an actual investment goal? What is your rent now vs the mortgage on the house? What is the time frame for the mortgage you are considering?  Those are the real questions you need to ask yourself. It does sound like you can become overleveraged with this property, although your down payment is quite substantial, but one single thing goes wrong and your cash flow is irreparably constricted. I personally wouldn't take that risk if I had the same forecast of expenditures, but this could be altered if there were particular investment goals I had in mind.

negative: Take the long term view.  Build up the cash.  Once you have enough cash in the bank, you don't need a credit score.  With 6 months living expenses in the bank after paying 20% down on a small house, he should have no issues getting a reasonably priced mortgage.   However, if he waited just a bit longer he might buy the same house outright with cash. When I ran the computations for myself many years ago, it would have taken me half as long to save the money and pay cash for my home as it did for me to take a mortgage and pay it off.

negative: As average house prices continue to rise, almost 40% of homes in the UK are purchased with cash. Stage 1 – Finding a property you can afford Stage 2 – Making an offer Stage 3 – Organise a solicitor and surveyor Stage 4 – Finalising the offer and mortgage (in your case, cash with proof of funds, balance due at closing) Stage 5 – Exchanging contracts Stage 6 – Completion and final steps You don't need to prove where the money came from but, as you have said that you are a cash buyer, you do need to be able to prove that you have the cash to buy the house. So, assuming you have the money in an account with a bank or building society, you should be able to satisfy your solicitors by showing them a recent bank statement or passbook which clearly shows that you have whatever amount it is in cash.

negative: As a new graduate, aside from the fact that you seem to have the extra $193/mo to pay more towards your loan, we don't know anything else.  I wrote a lengthy article on this in response to a friend who had a loan, but was also pondering a home purchase in the future. Student Loans and Your First Mortgage discusses the math behind one's ability to put a downpayment on a house vs having that monthly cash to pay towards the mortgage. In your case, the question is whether, in 5 years, the $8500 would be best spent as a home down payment or to pay off the 6.8% loan.  If you specifically had plans toward home ownership, the timing of that plan would affect my answer here, as I discuss in the article.  The right answer to your question can only come by knowing far more of your personal situation.  Meanwhile, the plan comes at a cost. Your plan will get rid of the loan in about 5 years, but if you simply double up the payments, advising the servicing company to apply the extra to principal, it would drop to just a couple month over over 4. As you read more about personal finance, you'll find a lot of different views. Some people are fixated on having zero debt, others will focus on liquidity. In the end, you need to understand each approach and decide what's right for you.

negative: >As it turns out, the idea that your parents paid less for their house than you will is only true in absolute terms  People carrying a similar amount of mortgage debt doesn't solidify this conclusion at all, as people have not been buying houses because they can't afford them. There were about 600k new home sales this year vs about 800k in 1985; despite population differences of 323m vs. 238m.

negative: I suggest that you first decide on what %'s of the home value you each have a legal claim to. Then split the mortgage using the same %'s. Then, if someone feels their % is slightly higher, they are compensated because they 'own' a correspondingly higher share of the house. Use the same %'s for downpayments (which may mean that an 'adjustment' payment might be required to bring your initial cash outlay from 70/30 into the %'s that you agree to). Tenant income gets split the same way. Utilities are a bit more difficult - as heating depends more on square feet, but water and hydro depend more on how many people are there. You can try to be really precise about working out the %'s, or just keep it simple by using the same %'s as the mortgage.

negative: Here's another way to think about.  Let's assume it is 2011 and we have a married couple who are 25 and make a combined salary of $50,000/yr net.  A suitable first house in their area is $300,000, six times their annual net salary.  Assuming they could scrimp so that 1/2 of take-home went toward saving for their home, they could save enough to buy the house using cash in 12 years, at the age of 37.  Onerous, but they could do it. But now let's allow salaries to increase by 3% a year and homes at 10%/yr, as in your question, and let's run things out for 20 years. Now a 25 year old couple at the same sort of jobs would be making $87,675/yr.  But the houses in that town would be worth not $300k but $1,834,772.  Instead of six times their salary, a house is now nearly 21 times their salary.  This means that if they saved 1/2 of take-home to save up for a house, they could afford to buy the house using cash when they were 67 years old. It gets worse quickly.  If you run it out for just ten more years, to 30 years, a couple would be able to buy the house -- at $4.8 million or 40x a year's salary -- in cash when they were 105 years old.  (Let's hope they ate brown rice). Mortgages can't save them, since even if they could put down ten years' worth of savings on the 2041 house (that'd be 14% down), they'd still carry a $4.1 million mortgage with a $118k annual net salary.

negative: The bars have moved over time, if you were born in 1960's you are now considered to be a gen X, the first boom came very quickly after the war so they would be 24 in 1970. Since fewer people went to college, they were buying homes, but the recession put a damper on the home buying. The 1970's are famous for stagflation with high inflation and high jobless rates! High interest rates were common in the late 1970's and 1980's

negative: Short answer: the CD can be considered as part of the down payment calculations. they will want a plan to cash them in the last days or weeks before settlement. When approving you for a mortgage they will be looking at: They now know what you can afford to dedicate to this new property every month. They take into account principal, interest, taxes, insurance and the HOA fee. They will then look at how much money you will use as a down payment. They want this money to exist before applying, and they will check on its existence in the last days before settlement.  The best is cash sitting in a bank. But it can also be money in savings bonds, or a CD, but they will want a plan for cashing that in just before settlement.  They won't be comfortable with it being in a volatile account such as stocks especially if the current balance is exactly what you need for a mortgage that won't be closed for 3 more months. Because people use money they borrow from their 401K for a home purchase, it is possible to use money from volatile account. They will want to see a plan for getting money from these accounts just before settlement.

negative: "Some pros and cons to renting vs buying: Some advantages of buying: When you rent, the money you pay is gone. When you buy, assuming you don't have the cash to buy outright but get a mortgage, some of the payment goes to interest, but you are building equity. Ultimately you pay off the mortgage and you can then live rent-free. When you buy, you can alter your home to your liking. You can paint in the colors you like, put in the carpet or flooring you like, heck, tear down walls and alter the floor plan (subject to building codes and safety consideration, of course). If you rent, you are usually sharply limited in what alterations you can make. In the U.S., mortgage interest is tax deductible. Rent is not. Property taxes are deductible from your federal income tax. So if you have, say, $1000 mortgage vs $1000 rent, the mortgage is actually cheaper. Advantages of renting: There are a lot of transaction costs involved in buying a house. You have to pay a realtor's commission, various legal fees, usually ""loan origination fees"" to the bank, etc. Plus the way mortgages are designed, your total payment is the same throughout the life of the loan. But for the first payment you owe interest on the total balance of the loan, while the last payment you only owe interest on a small amount. So early payments are mostly interest. This leads to the conventional advice that you should not buy unless you plan to live in the house for some reasonably long period of time, exact amount varying with whose giving the advice, but I think 3 to 5 years is common. One mitigating factor: Bear in mind that if you buy a house, and then after 2 years sell it, and you discover that the sale price minus purchase price minus closing costs ends up a net minus, say, $20,000, it's not entirely fair to say ""zounds! I lost $20,000 by buying"". If you had not bought this house, presumably you would have been renting. So the fair comparison is, mortgage payments plus losses on the resale compared to likely rental payments for the same period."

negative: Well the problem is it's tough for people to get loans through banks and mortgage brokers now. Even if you can afford it on a monthly basis.   Investors are paying cash for homes and renting them for more than it would cost people who legitimately need a place to live.

negative: you are discounting the cash used, the discount rate for cash should be whatever you determine is your risk premium over the risk free rate not the equity growth rate. if equity growth rate is above your determined required return the equity investment is wealth destroying and if it is above that then it is wealth increasing.   The difficulty I see is that the scenario is all wrong, what you are really after is a rent vs buy decision. Do I take this money and rent a place or do I buy a house? In either case you could invest the remainder after paying your rent/mortgage in the equity market no?  So what really matters is the difference in cost between renting and buying.   Let  (EGR)=equity growth rate  Rent = rent M = Mortgage payment  I = income  HA =  home value appreciation  Now the question is is renting or buying a better decision two scenarios, renting first  PMT =(I - rent)  I/y = (EGR)  N =Time horizon in years  FV= Gain from cf left after paying rent    then discount to present day at your required rate of return to find present value  now scenario for buying, this is more complicated because you are investing two different cf streams at different rates and have to calculate both and add them together.  1) CF 1 the mortgage payments buy you equity in the house which appreciates (hopefully) but can be extremely volatile. This is the cf stream scenario one doesnt have, when renting the rent payments poof disappear forever and you earn nothing on them 2) The income left after mortgage payment which can be invested at the market rate measured the same way as above. **This is extremely simplistic and doesnt take into account expected maintenance, property taxes and other costs intrinsic to the investment. It also doesnt take into account the lost down payment setting you well behind the renter.   TL DR: It is complicated but you determine the required return(discount rate) based on the perceived risk of the investment and your particular views  and it doesnt matter what expected growth rates are since any investment with an expected growth rate below your required rate is wealth destroying since you are paying for something which returns cash flows too small for its risk level. If you use growth rates as discount rates then all your investments will net to zero

negative: The simple answer is that you are correct. You should not purchase a house until you are financially stable enough to do so. A house is an asset that you must maintain, and it can be expensive to do so.  Over the long term, you will generally save money by purchasing. However, in any given year you may spend much more money than a similar rental situation - even if the rent is higher than your mortgage payment. If you are financially stable with good cash savings or investments plus a 20% down payment, then anytime is a good time to buy if that is part of your financial plan. As of now in 2016, is is safe to assume that mortgage rates   would/should not get back to 10%?   Does this mean that one should always buy a house ONLy when mortgage   rates are low? Is it worth the wait IF the rates are high right now? The mortgage rates are not the primary driver for your purchase decision. That might be like saying you should buy everything on sale at Target... because it's on sale. Don't speculate on future rates. Also, keep in mind that back when rates were high, banks were also giving much better savings/CD rates. That is all connected.  Is refinancing an option on the table, if I made a deal at a bad time   when rates are high? You need to make sure you get a loan that allows it. Always do a break-even analysis, looking at the money up-front you spend to refi vs the savings-per-year you will get. This should give you how many years until the refi pays for itself. If you don't plan on being in the house that long, don't do it. How can people afford 10% mortgage? Buying a house they can afford, taking into consideration the entire payment+interest. It should be a reasonable amount of your monthly income - generally 25% or less. Note that this is much less than you will be 'approved' for by most lenders.  Don't let good rates suck you into a deal you will regret. Make sure you have the margin to purchase and maintain a home. Consider where you want to be living in 5 years. Don't leave so little financial breathing room that any bump will place you at risk of foreclosure.  That said, home ownership is great! I highly recommend it.

negative: "For the vast majority, ""buying"" a house via a mortgage is not an investment.  I use quotes around buying because from a technical perspective you don't own anything until you've paid it off; this is often an important point that people forget. It's highly unlikely you'll make more on it than the amount you put into it (interest, repairs, etc).  Even with relatively low interest rates. The people who successfully invest in homes are those that use actual cash (not borrowed) to buy a home at well below market value.  They then clean it up and make enough repairs to make it marketable and sell it shortly there after.  Sometimes these people get hosed if the housing market tumbles to the point that the home is now worth less than the amount they put into it.  This is especially problematic if they used bank loans to get the process going.  They were actually the hardest hit when the housing bubble popped several years ago.  Well, them and the people who bought on interest only loans or had balloon payments. Whereas the people who use a mortgage are essentially treating it like a bank account with a negative interest rate.  For example, $180k loan on a 30 yr fixed at 4% will mean a total payout of around $310k, excluding normal repairs like roofs, carpet, etc.  Due to how mortgage's work, most of the interest is collected during the first half of the loan period.  So selling it within 2 to 5 years is usually problematic unless the local housing market has really skyrocketed. Housing markets move up and down all the time due to a hundred different things completely out of your control.  It might be a regional depression, weather events, failed large businesses, failed city/local governments, etc.  It could go up because businesses moved in, a new highway is built, state/local taxes decline, etc. My point is, homes are not long term investments.  They can be short term ones, but only in limited circumstances and there is a high degree of risk involved.  So don't let that be a driving point of your decision. Instead you need to focus on other factors.  Such as: what is really going on with the house you are currently in?  Why would they lose it?  Can you help out, and, should you help out?  If things are precarious, it might make more sense to sell that home now and everyone move into separate locations, possibly different rentals or apartments.  If they are foreclosed on then they will be in a world of financial hurt for a long time. If we ignore your parents situation, then one piece of advice I would give you is this: Rent the cheapest apartment you can find that is still a ""safe"" place to live in.  Put every dollar you can into some type of savings/investment that will actually grow.  Stay there for 5+ years, then go pay cash for a nice home.  Making $75k a year while single means that you don't need much to live on.  In other words, live extremely cheap now so you can enjoy a fantastic living experience later that is free from financial fear.  You should be able to put $30k+ per year aside going this route. edit: A bit of support data for those that somehow think buying a home on a mortgage is somehow a good investment:   Robert Shiller, who won a Nobel prize in economics and who predicted the bursting of the housing bubble, has shown that a house is not a good investment.  Why?  First, home prices (adjusted for inflation) have been virtually unchanged for the past 100 years.  (link 1, link 2)  Second, after you add in the costs of maintenance alone then those costs plus what you've paid for the home will exceed what you get out of it.  Adding in the cost of a mortgage could easily double or even triple the price you paid which makes things even worse.  Maintenance costs include things like a new roof, carpet/flooring, water heater, appliances, etc. Yes, a home might cost you $100k and you might sell it for $200k after 15 years.  However during that time you'll likely replace the roof ($10k to $20k), replace appliances ($2k to $5k), water heater ($1k), carpet/flooring ($5k to $20k), paint ($3k to $6k), and mortgage related costs (~$60k - assuming 30 yr fixed @4%).  So your ""costs"" are between $180k and $200k just on those items.  There are many more that could easily escalate the costs further.  Like a fence ($5k+), air conditioner ($5k+), windows, etc. The above is assuming the home actually appreciates in value faster than inflation: which they historically haven't over the long term.   So you have to consider all of the costs ultimately paid to purchase and maintain the home vs the costs of renting during the same time period.   Point is: do your research and be realistic about it.  Buying a home is a huge financial risk."

negative: "Here is the thing if in 2020-2040 you can buy CD's that pay 4% then you would kick yourself for paying your mortgage early and costing you a no risk 1% revenue on your money. Think about this?  You have a 4% mortgage that is costing you less than 3% after tax deduction"" in 2025 you are buying 10 year notes at 7% which is not out of the question.   You will be making 4% on your money with virtually no risk. Personally I agree with JoeTaxpayer.  I have gone a step further and done so with two houses and I netted myself over 20 grand in 30 months. So in short you have to ask yourself ""Can I make more than 3% on my money?"""

negative: You did borrow money for the downpayment.  When you apply for a mortgage loan on your new home, you will be required to list all your assets and all your liabilities. You must disclose the first mortgage as well as the second mortgage on your current condo as well as the monthly payment on each of these loans.  If you took out the second mortgage five years ago, you can truthfully say that you have not taken out any loans within the past year to get cash for the down payment when you apply for a mortgage for purchasing your new house. But, what the lender will be looking at is: Can  the applicants' current income support monthly payments of   $1000 for the first mortgage on the condo plus $300 for the second   mortgage on the condo plus $1500 for the proposed mortgage on the   new house? You might argue that you will be selling that condo soon, or will be renting it out and that the rental income will cover the mortgage payments on the condo, but will the lender give much credence to this? The condo may not sell easily, you might not be able to find a tenant right away, or be able to rent the condo at a high enough rental to cover the costs etc. If you simply save money from your current extra cash flow and use that to make the down payment, the lender will be pondering the question Can  the applicants' current income support monthly payments of   $1000 for the mortgage on the condo plus $1500 for the proposed mortgage on the new house? Which deal will the lender be happier with? If you are uncomfortable saving your extra cash flow in a savings account or CD or investing it in stocks and/or bonds until you need the money for the down-payment on your new house, put that money in a sock under your mattress (and don't smoke in bed!)

negative: Risk. A shorter-term mortgage is less risky than a long-term mortgage - in this case there's half the chance of something bad happening because there's half the time allotted (15 vs 30 years). Bad things include you going bankrupt, massive inflation, or your home being destroyed in a meteor impact that your insurer won't cover. They entice consumers to these less risky mortgages by offering a lower interest rate.

negative: Emergency funds are good to keep yourself out of debt, for whatever reason. Job loss is a big place where an emergency fund can help you out.  It buys you time to find another job before hauling out the credit cards for your groceries, falling behind on your mortgage and car payments, etc. But it can just as easily be used for major car repairs, serious medical issues, home repairs, etc. ... anything that needs to be done quickly, and isn't a discretionary item. The bigger your cash reserves, the better, especially now that the economy is bad.

negative: Having someone else paying you rent is always going to be the better deal financially. The question is, what does $450k buy in the neighborhood in which you want to live, vs $800k? I'm going to assume you can afford either option (buying a $450k home and not selling, or an $800k home and selling your current one) whether someone's paying you rent or not. Let's make up some numbers here; a $450k home, financed 80/20 (360k principal) at 4% for 30 years will cost you about $1720 in P&I payments per year (plus escrows such as RE taxes, PMI, and homeowners insurance where applicable). An $800k home financed 80/20 (640k principal) at 4% for 30yr will give you payments of about $3,055/mo before taxes and insurance. So, the worst case overall is that you buy a 450k home in the new neighborhood and are not, at any given time, collecting rent on the old property. That would (assuming the mortgage terms on both home loans were comparable) cost you $3440/mo and you'd be living in a $450k home in a neighborhood where 450k may not buy a home as nice as the one you moved out of. The question as I stated above is this; assuming you had a reliable tenant in your home for the entire remaining life of the loan on your current home, which is more acceptable to you: buying $450k of home (which might be a downgrade in sqft or amenities) and paying $2020 in P&I, or paying about a grand more ($3055/mo) for a much nicer home in the new location? Strictly from a money perspective, the renter is going to be the best option, IF you get reliable tenancy for the entire life of the mortgage on that house; you'll be paying $2020/mo for 30 years, which is $727,200, to end up with $950k of total home value (plus adjustments for actual home value appreciation/depreciation). That's the only way you'll come out ahead on any mortgage; have someone else pay most of it for you. If you don't rent, the $800k home will cost you $1,099,800, while two $450k homes will cost you $1,454,400. The percentage of home value over total payments for the 800k home would be 72% (you will have paid 137% of the value of the home), while you will have paid 153% of the value of two 450k homes.

negative: Presumably, the inverse of the advantages? You are guaranteed the interest rate that is written on your mortgage commitment as long as the first draw happens before the rate hold expiry date (typically 120 days from application date). In most cases, it takes at least 6 months or more to build a home from the ground up. That means that you are taking a chance at what the interest rates and qualifying criteria will be several months down the road. You can normally only lock in 120 days prior to possession with a 'Completion Mortgage'. Lenders are constantly changing their guidelines and rates are predicted to increase over the coming months. That means you are much better to obtain draw mortgage financing to avoid any of these uncertainties. You will know that you have your financing in place right away before construction even starts. This is a huge peace of mind so you can relax and get ready for the big move. So thus, if interest rates are lower 6 months or a year from now, that'd be the disadvantage -- a longer lock-in period.

negative: Lets do the math, using your numbers. We start off with $100K, a desire to buy a house and invest, and 30 years to do it.  Scenario #1 We buy a house for $100K mortgage at 5% interest over 30 years. Monthly payment ends up being $536.82/month. We then take the $100K we still have and invest it in stocks, earning an average of 9% annually and paying 15% taxes.  Scenario #2 We buy a house for our $100K cash, and then, every month, we invest the $536.82 we would have paid for the mortgage. Again, investments make 9% annually long term, and we pay 15% taxes.  How would it look in 30 years?  Scenario #1 Results: 30 years later we would have a paid off house and $912,895 in investments Scenario #2 Results: 30 years later we would have a paid off house and $712,745 in investments Conclusion: NOT paying off your mortgage early results in an additional $200,120 in networth after 30 years. That's 28% more. Therefore, not paying off your mortgage is the superior scenario.  Caveats/Notes/Things to consider Play with the numbers yourself:

negative: "You are mixing issues here. And it's tough for members to answer without more detail, the current mortgage rate in your country, for one.  It's also interesting to parse out your question. ""I wish to safely invest money. Should I invest in real estate."" But then the text offers that it's not an investment, it's a home to live in. This is where the trouble is. And it effectively creates 2 questions to address.  The real question - Buy vs Rent. I know you mentioned Euros. Fortunately, mortgages aren't going to be too different, lower/higher, and tax consequence, but all can be adjusted. The New York Times offered a beautiful infographing calculator Is It Better to Rent or Buy?  For those not interested in viewing it, they run the math, and the simple punchline is this - The home/rent ratio can have an incredibly wide range. I've read real estate blogs that say the rent should be 2% of the home value. That's a 4 to 1 home/rent (per year). A neighbor rented his higher end home, and the ratio was over 25 to 1. i.e. the rent for the year was about 4% the value of the home. It's this range that makes the choice less than obvious.  The second part of your question is how to stay safely invested if you fear your own currency will collapse. That quickly morphs into too speculative a question. Some will quickly say ""gold"" and others would point out that a stockpile of weapons, ammo, and food would be the best choice to survive that."

negative: Some of the items required as part of the home buying and mortgage process are traditionally paid prior to closing. These are usually the items that the buyer purchases as part of the process: home inspection, credit check. These expenses take place early in the process and if the deal falls through due to the inspection or credit history problems the seller doesn't want to get stuck paying for. The buyer will frequently have to write a check for these as they occur. Other items occur later in the process or even at the very end of the process. Determining which side pays for each item is a combination negotiation and local tradition. Even for the items that the buyer has to pay for, there can be a negotiation between the  buyer and the lender. Sometimes the lender allows the buyer to roll the closing costs into the loan, this does mean that they will be paying interest on the closing costs for years. But not rolling in the closing costs mean that you need more cash on hand. This is in addition to the down-payment and the costs of moving.   The closing costs covered by the seller reduce the size of the check they will receive at the end of the process. Their willingness to kick in this cash is a function of will they still make money on the deal, how many other bidders there were, and do they need the cash to buy their next house. At settlement the forms identify each item involved and who agreed to pay for it, then each side is credited for the items they paid for already. Then each side either writes a check for the balance due or receives a check for their reimbursement. Keep in mind there are also money exchanges that take place at the closing that are not covered by the buyer: real estate commissions. There are also items such as interest for the current month, and property tax credit that depend on the day of the month and month of the year.  Sit down with your agent or your lender to get an idea of what you need to pay before closing.  Though telling everybody that you will have zero cash to pay for these things may make the lender very nervous about approving a loan.

negative: Rent. You have no idea whether you will still be in the same part of the country five years from now; you may not even be in the same country. A house is a boat anchor you really do not need or want at this time. It's also a set of obligations you may not want to take on yet.  And buying is not automatically more financially advantageous than renting, when you remember that money not going into the house can go into your retirement plan or other investments.

negative: A loan with modest interest is better than paying by cash if there are better alternatives for investment. For example, suppose you are buying a house. Consider two extremes: a) you pay the house entirely by cash, b) the entire buy is financed by the bank.  Historically, real (subtracting inflation) house prices (at least in the U.S.) have not risen at all in the long run, and investing all of your own capital in this way may not be optimal. Notice that we are looking at a situation where one is buying a house and living in it in any case. Rent savings are equal in cases a) and b). If instead you were buying a house not for yourself, but as a separate investment for renting out, then you would receive rent. In the case a), the real return on your capital will be zero, whereas in case b), you can invest the cash in e.g. the stock market and get, on average, 7% (the stock market has yielded a 7% real return annually including dividends)  annually minus the bank's interest rate. If the interest is lower than 7%, it may be profitable to take the loan. Of course, the final decision depends on your risk preferences.

negative: Just general advice but you should pay off your credit cards and car loans before buying a house. Or you may be able to add some extra on to the mortgage to pay off your credit card and car debt right away. Credit card interest rates can be ten times the interest rates on mortgages and car loans are not far behind. The sooner you get them paid off completely the sooner you will have enough money for mortgage payments.

negative: "What you're looking at is something called ""Bridge-Financing"".  Essentially, it allows you to borrow your down-payment from the bank, using your old home as collateral.  The interest rate varies, but if you get the bridge from the same institution as your new mortgage, they will often be a bit flexible.   You take possession of the new home, and begin mortgage payments on it normally.  When the old home is sold, the bridge is paid off.   Note that the deposit on signing for the new house will still have to be cash.  All bets are off if you are talking about a NEW new home, as builders usually require advance payments during the build."

negative: "So here are some of the risks of renting a property: Plus the ""normal"" risk of losing your job, health, etc., but those are going to be bad whether you had the rental or not, so those aren't really a factor. Can you beat the average gain of the S&P 500 over 10 years?  Probably, but there's significant risk that something bad will happen that could cause the whole thing to come crashing down. How many months can you go without the rental income before you can't pay all three mortgages? Is that a risk you're willing to take for $5,000 per year or less?   If the second home was paid for with cash, AND you could pay the first mortgage with your income, then you'd be in a much better situation to have a rental property.  The fact that the property is significantly leveraged means that any unfortunate event could put you in a serious financial bind, and makes me say that you should sell the rental, get your first mortgage paid down as soon as possible, and start saving cash to buy rental property if that's what you want to invest in. I think we could go at least 24 months with no rental income Well that means that you have about $36k in an emergency fund, which makes me a little more comfortable with a rental, but that's still a LOT of debt spread across two houses.   Another way to think about it:  If you just had your main house with a $600k mortgage (and no HELOC), would you take out a $76k HELOC and buy the second house with a $200k mortgage?"


query: Selling mutual fund and buying equivalent ETF: Can I 1031 exchange?

positive: I don't believe you can do that. From the IRS: Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of: I highlighted the relevant items for emphasis.

positive: You cannot do a 1031 exchange with stocks, bonds, mutual funds, or ETFs.  There really isn't much difference between an ETF and its equivalent index mutual fund. Both will have minimal capital gains distributions. I would not recommend selling an index mutual fund and taking a short-term capital gain just to buy the equivalent ETF.

negative: In the case of VFIAX versus VOO, if you're a buy-and-hold investor, you're probably better off with the mutual fund because you can buy fractional shares. However, in general the expense ratio for ETFs will be lower than equivalent mutual funds (even passive index funds). They are the same in this case because the mutual fund is Admiral Class, which has a $10,000 minimum investment that not all people may be able to meet. Additionally, ETFs are useful when you don't have an account with the mutual fund company (i.e. Vanguard), and buying the mutual fund would incur heavy transaction fees.

negative: "If anything, the price of an ETF is more tightly coupled to the underlying holdings or assets than a mutual fund, because of the independent creation/destruction mechanism. With a mutual fund, the price is generally set once at the end of each day, and the mutual fund manager has to deal with investments and redemptions at that price. By the time they get to buying or selling the underlying assets, the market may have moved or they may even move the market with those transactions. With an ETF, investment and redemption is handled by independent ""authorized participants"". They can create new units of the ETF by buying up the underlying assets and delivering them to the ETF manager, and vice versa they can cancel units by requesting the underlying assets from the ETF manager. ETFs trade intraday (i.e. at any time during trading hours) and any time the price diverges too far from the underlying assets, one of the authorized participants has an incentive to make a small profit by creating or destroying units of the ETF, also intraday."

negative: A mutual fund has several classes of shares that are charged different fees. Some shares are sold through brokers and carry a sales charge (called load) that compensates the broker in lieu of a fee that the broker would charge the client for the service.  Vanguard does not have sales charge on its funds and you don't need to go through a broker to buy its shares; you can buy directly from them.  Admiral shares of Vanguard funds are charged lower annual expenses than regular shares (yes, all mutual funds charge expenses for fund adninistration that reduce the return that you get, and Vanguard has some of the lowest expense ratios) but Admiral shares are available only for large investments, typically $50K or so.  If you have invested in a Vanguard mutual fund, your shares can be set to automatically convert to Admiral shares when the investment reaches the right level. A mutual fund manager can buy and sell stocks to achieve the objectives of the fund, so what stockes you are invested in as a share holder in a mutual fund will typically be unknown to you on a day-to-day basis.  On the other hand, Exchange-traded funds (ETFs) are fixed baskets of stocks, and you can buy shares in the ETF.  These shares are bought and sold through a broker (so you pay a transaction fee each time) but expenses are lower since there is no manager to buy and sell stocks: the basket is fixed. Many ETFs follow specific market indexes (e.g. S&P 500).  Another difference between ETFs and mutual funds is that you can buy and sell ETFs at any time of the day just as if you could if you held stocks. With mutual funds, any buy and sell requests  made during the day are processed at the end of the day and the value of the shares that you buy or sell is determined by the closing price of the stocks held by the mutual fund.  With ETFs, you are getting the intra-day price at the time the buy or sell order is executed by your broker.

negative: would buying the stock of a REIT qualify as a 'Like-Kind' exchange? Short answer, no. Long answer, a 1031 (Starker) exchange only applies to real estate.  From the Wikipedia page on the topic: To qualify for Section 1031 of the Internal Revenue Code, the properties exchanged must be held for productive use in a trade or business, or for investment. Stocks, bonds, and other properties are listed as expressly excluded by Section 1031 of the Internal Revenue Code, although securitized properties are not excluded. A REIT, being stock in a real estate company, is excluded from Section 1031.

negative: "ETFs purchases are subject to a bid/ask spread, which is the difference between the highest available purchase offer (""bid"") and the lowest available sell offer (""ask""). You can read more about this concept here. This cost doesn't exist for mutual funds, which are priced once  per day, and buyers and sellers all use the same price for transactions that day. ETFs allow you to trade any time that the market is open. If you're investing for the long term (which means you're not trying to time your buy/sell orders to a particular time of day), and the pricing is otherwise equal between the ETF and the mutual fund (which they are in the case of Vanguard's ETFs and Admiral Shares mutual funds), I would go with the mutual fund because it eliminates any cost associated with bid/ask spread."

negative: "An Exchange-Traded Fund (ETF) is a special type of mutual fund that is traded on the stock exchange like a stock.  To invest, you buy it through a stock broker, just as you would if you were buying an individual stock. When looking at a mutual fund based in the U.S., the easiest way to tell whether or not it is an ETF is by looking at the ticker symbol.  Traditional mutual funds have ticker symbols that end in ""X"", and ETFs have ticker symbols that do not end in ""X"".   The JPMorgan Emerging Markets Equity Fund, with ticker symbol JFAMX, is a traditional mutual fund, not an ETF.  JPMorgan does have ETFs; the JPMorgan Diversified Return Emerging Markets Equity ETF, with ticker symbol JPEM, is an example.  This ETF invests in similar stocks as JFAMX; however, because it is an index-based fund instead of an actively managed fund, it has lower fees. If you aren't sure about the ticker symbol, the advertising/prospectus of any ETF should clearly state that it is an ETF.  (In the example of JPEM above, they put ""ETF"" right in the fund name.)  If you don't see ETF mentioned, it is most likely a traditional mutual fund. Another way to tell is by looking at the ""investment minimums"" of the fund.  JFAMX has a minimum initial investment of $1000.  ETFs, however, do not have an investment minimum listed; because it is traded like a stock, you simply buy whole shares at whatever the current share price is.  So if you look at the ""Fees and Investment Minimums"" section of the JPEM page, you'll see the fees listed, but not any investment minimums."

negative: Mutual funds buy (and sell) shares in companies in accordance with  the policies set forth in their prospectus, not according to the  individual needs of an investor, that is, when you invest money in (or withdraw money from) a mutual fund,  the manager buys or sells whatever shares that, in the manager's judgement,  will be the most appropriate ones (consistent with the investment policies). Thus, a large-cap mutual fund manager will not buy the latest hot small-cap stock that will likely be hugely profitable; he/she must choose only between various large capitalization companies. Some exchange-traded funds are fixed baskets of stocks. Suppose you will not invest in a company X as a matter of principle. Unless a mutual fund prospectus says that it will not invest in X, you may well end up having an investment in X at some time because the fund manager bought shares in X. With such an ETF,  you know what is in the basket, and if the basket does not include stock in X  now, it will not own stock in X at a later date. Some exchange-traded funds are constructed based on some index and track the index as a matter of policy. Thus, you will not be investing in X unless X becomes part of the index because Standard or Poor or Russell or somebody changed their minds, and the ETF buys X in order to track the index. Finally, some ETFs are exactly like general mutual funds except that you can buy or sell ETF shares at any time at the price at the instant that your order is executed whereas with mutual funds, the price of the mutual fund shares that you have bought or sold is the NAV of the mutual fund shares for that day, which is established based on the closing prices at the end of the trading day of the stocks, bonds etc that the fund owns.  So, you might end up owning stock in X at any time based on what the fund manager thinks about X.

negative: Probably.  It sounds like you're looking for a 1031-exchange for stocks and bonds.  From the wikipedia page for 1031-exchanges: To qualify for Section 1031 of the Internal Revenue Code, the properties exchanged must be held for productive use in a trade or business or for investment. Stocks, bonds, and other properties are listed as expressly excluded by Section 1031 of the Internal Revenue Code, though securitized properties are not excluded.  1031-exchanges usually are applicable in real estate.

negative: Your tax efficient reasoning is solid for where you want to distribute your assets. ETFs are often more tax efficient than their equivalent mutual funds but the exact differences would depend on the comparison between the fund and ETF you were considering. The one exception to this rule is Vanguard funds and ETFs which have the exact same tax-efficiency because ETFs are a share class of the corresponding mutual fund.

negative: The ETF is likely better in this case. The ETF will generally generate less capital gains taxes along the way.  In order to pay off investors who leave a mutual fund, the manager will have to sell the fund's assets.  This creates a capital gain, which must be distributed to shareholders at the end of the year.  The mutual fund holder is essentially taxed on this turnover.  The ETF does not have to sell any stock when an investor sells his shares because the investor sells the shares himself on the open market.  This will result in a capital gain for the specific person exiting his position, but it does not create a taxable event for anyone else holding the ETF shares.

negative: "Your broker, Ameritrade, offers a variety of Exchange Traded Funds (ETFs) that you can buy and sell with zero commission.  An ETF is like a mutual fund, but you buy and sell shares the same way you buy and sell shares of stocks.  From your point of view, the relevance of this is that you can buy and sell as many or as few shares as you like, even down to a single share.  Note that to get the commission-free trades on the available ETFs you have to sign up for it in your account profile.  Be sure to do that before you enter any buy orders. You'll want to start by looking at the Ameritrade's list of commission-free ETFs.  Notice that they are divided into different categories:  stocks, bonds, international, and commodities.  Which categories you pick from will depend on your personal investing goals, time horizon, risk tolerance, and so on.  There are lots of questions and answers on this site that talk about asset allocation.  You should read them, as it is the most important decision you will make with your portfolio. The other thing you want to be aware of is the expense ratio for each fund.  These expenses reduce the fund's return (they are included in the calculation of the net asset value of the shares), so lower is definitely better.  Personally, I wouldn't even consider paying more than about 0.10% (commonly read ""10 basis points"" or ""10 bp"") for a broad-based domestic stock fund.  For a sectoral fund you might put up with as much as 20 bp in expenses.  Bond funds tend to be a little more expensive, so maybe allow as much as 25 bp, and likewise for international funds.  I've never invested in commodity funds, so I'll let someone else opine on appropriate expense ratios for those. Once you've decided what funds you want (and have signed up for commission-free trades), all you have to do is enter the trade orders.  The website where you manage your account has tutorials on how to do that.  After that you should be all set. Good luck with your investing!"

negative: ETFs trade on specific exchanges. If your broker deals with those exchanges, you should have access to the ETF. If your broker does not deal with that exchange, then you will not have access through that broker. This is different than, say, mutual funds, which don't trade on the exchanges are proprietary to certain brokerages or financial institutions.

negative: The way it is handled with ETF's is that someone has to gather a block of units and redeem them with the fund. So, with the mutual fund you redeem your unit directly with the fund, always, you never sell to another player. With the ETF - its the opposite, you sell to another player. Once a player has a large chunk of units - he can go to the fund and redeem them. These are very specific players (investment banks), not individual investors.

negative: A stock, bond or ETF is basically a commodity. Where you bought it does not really matter, and it has a value in USD only inasmuch as there is a current market price quoted at an American exchange. But nothing prevents you from turning around and selling it on a European exchange where it is also listed for an equivalent amount of EUR (arbitrage activities of investment banks ensure that the price will be equivalent in regard to the current exchange rate). In fact, this can be used as a cheap form of currency conversion. For blue chips at least this is trivial; exotic securities might not be listed in Europe. All you need is a broker who allows you to trade on European exchanges and hold an account denominated in EUR. If necessary, transfer your securities to a broker who does, which should not cost more than a nominal fee. Mutual funds are a different beast though; it might be possible to sell shares on an exchange anyway, or sell them back to the issuer for EUR. It depends. In any case, however, transferring 7 figure sums internationally can trigger all kinds of tax events and money laundering investigations. You really need to hire a financial advisor who has international investment experience for this kind of thing, not ask a web forum!

negative: "Buy the ETF with ticker ""SPY"".  This will give you exposure to exactly the S&P 500 stocks,  This is similar to the mutual fund suggestion by Ben Miller, except that the ETF has several advantages over mutual funds, especially as regards taxes.  You can find information on the difference between ETF and mutual fund in other questions on this site or by searching the web."

negative: Exchange-traded funds are bought and sold like stocks so you'd be able to place stop orders on them just like you could for individual stocks. For example, SPY would be the ticker for an S & P 500 ETF known as a SPDR. Open-end mutual funds don't have stop orders because of how the buying and selling is done which is on unknown prices and often in fractional shares. For example, the Vanguard 500 Index Investor shares(VFINX) would be an example of an S & P 500 tracker here.

negative: While it may not be your preferred outcome, and doesn't eliminate the income, in the event you find yourself in the path described here you have a way to defer gains to the future. but I would then want to buy another house as a rental If you sell this house and buy another investment property (within strict time windows: 45 days to written contract and closed in 180 days),  you can transfer your basis and defer your gains via what is called a 1031 like-kind exchange

negative: "For a non-ETF mutual fund, you can only buy shares of the mutual fund from the mutual fund itself (at a price that the mutual fund will reveal only at the end of the day) and can only shares back to the mutual fund (again at a price that the mutual fund will reveal only at the end of the day). There is no open market in the sense that you cannot put in a bid to buy, say, 100 shares of VFINX at $217 per share through a brokerage, and if there is a seller willing to sell 100 shares of VFINX to you at $217, then the sale is consummated and you are now the proud owner of 100 shares of VFINX. The only buyer or seller of VFINX is the mutual find itself, and you tell it that you ""want to buy 100 shares of VFINX and please take the money out of my checking account"". If this order is entered before the markets close at 4 pm, the mutual fund determines its share price as of the end of the day, opens a new account for you and puts 100 shares of VFINX in it (or adds 100 shares of VFINX to your already existing pile of shares) and takes the purchase price out of your checking account via an ACH transfer. Similarly for redeeming/selling shares of VFINX that you own (and these are held in an account at the mutual fund itself, not by your brokerage): you tell the mutual fund to that you ""wish to redeem 100 shares and please send the proceeds to my bank account"" and the mutual fund does this at the end of the day, and the money appears in your bank account via ACH transfer two or three days later.  Generally, these transactions do not need to be for round lots of multiples of 100 shares for efficiency; most mutual fund will gladly sell you fractional shares down to a thousandth of a share. In contrast, shares of an exchange-traded fund (ETF) are just like stock shares in that they can be bought and sold on the open market and your broker will charge you fees for buying and selling them. Selling fractional shares on the open market is generally not possible, and trading in round lots is less expensive. Also, trades occur at all times of the stock exchange day, not just at the end of the day as with non-ETF funds, and the price can fluctuate during the day too. Many non-ETF mutual funds have an ETF equivalent: VOO is the symbol for Vanguard's S&P 500 Index ETF while VFINX is the non-ETF version of the same index fund.  Read more about the differences between ETFs and mutual funds, for example, here."

negative: The main difference between an ETF and a Mutual Fund is Management. An ETF will track a specific index with NO manager input. A Mutual Fund has a manager that is trying to choose securities for its fund based on the mandate of the fund. Liquidity ETFs trade like a stock, so you can buy at 10am and sell at 11 if you wish. Mutual Funds (most) are valued at the end of each business day, so no intraday trading.  Also ETFs are similar to stocks in that you need a buyer/seller for the ETF that you want/have. Whereas a mutual fund's units are sold back to itself. I do not know of many if any liquity issues with an ETF, but you could be stuck holding it if you can not find a buyer (usually the market maker). Mutual Funds can be closed to trading, however it is rare. Tax treatment Both come down to the underlying holdings in the fund or ETF. However, more often in Mutual Funds you could be stuck paying someone else's taxes, not true with an ETF.  For example, you buy an Equity Mutual Fund 5 years ago, you sell the fund yourself today for little to no gain. I buy the fund a month ago and the fund manager sells a bunch of the stocks they bought for it 10 years ago for a hefty gain. I have a tax liability, you do not even though it is possible that neither of us have any gains in our pocket. It can even go one step further and 6 months from now I could be down money on paper and still have a tax liability. Expenses A Mutual Fund has an MER or Management Expense Ratio, you pay it no matter what. If the fund has a positive return of 12.5% in any given year and it has an MER of 2.5%, then you are up 10%. However if the fund loses 7.5% with the same MER, you are down 10%. An ETF has a much smaller management fee (typically 0.10-0.95%) but you will have trading costs associated with any trades. Risks involved in these as well as any investment are many and likely too long to go into here. However in general, if you have a Canadian Stock ETF it will have similar risks to a Canadian Equity Mutual Fund. I hope this helps.

negative: "I wonder if ETF's are further removed from the actual underlying holdings or assets giving value to the fund, as compared to regular mutual funds. Not exactly removed. But slightly different. Whenever a Fund want to launch an ETF, it would buy the underlying shares; create units. Lets say it purchased 10 of A, 20 of B and 25 of C. And created 100 units for price x. As part of listing, the ETF company will keep the purchased shares of A,B,C with a custodian. Only then it is allowed to sell the 100 units into the market. Once created, units are bought or sold like regular stock. In case the demand is huge, more units are created and the underlying shares kept with custodian.  So, for instance, would VTI and Total Stock Market Index Admiral Shares be equally anchored to the underlying shares of the companies within the index? Yes they are. Are they both connected? Yes to an extent. The way Vanguard is managing this is given a Index [Investment Objective]; it is further splitting the common set of assets into different class. Read more at Share Class. The Portfolio & Management gives out the assets per share class. So Vanguard Total Stock Market Index is a common pool that has VTI ETF, Admiral and Investor Share and possibly Institutional share. Is VTI more of a ""derivative""? No it is not a derivative. It is a Mutual Fund."

negative: No, there's nothing special in mutual funds or ETFs. Wash sale rules apply to any asset.

negative: Bond ETFs are just another way to buy a bond mutual fund.  An ETF lets you trade mutual fund shares the way you trade stocks, in small share-size increments.  The content of this answer applies equally to both stock and bond funds. If you are intending to buy and hold these securities, your main concerns should be purchase fees and expense ratios.  Different brokerages will charge you different amounts to purchase these securities.  Some brokerages have their own mutual funds for which they charge no trading fees, but they charge trading fees for ETFs.  Brokerage A will let you buy Brokerage A's mutual funds for no trading fee but will charge a fee if you purchase Brokerage B's mutual fund in your Brokerage A account. Some brokerages have multiple classes of the same mutual fund.  For example, Vanguard for many of its mutual funds has an Investor class (minimum $3,000 initial investment), Admiral class (minimum $10,000 initial investment), and an ETF (share price as initial investment).  Investor class has the highest expense ratio (ER).  Admiral class and the ETF generally have much lower ER, usually the same number.  For example, Vanguard's Total Bond Market Index mutual fund has Investor class (symbol VBMFX) with 0.16% ER, Admiral (symbol VBTLX) with 0.06% ER, and ETF (symbol BND) with 0.06% ER (same as Admiral).  See Vanguard ETF/mutual fund comparison page.  Note that you can initially buy Investor class shares with Vanguard and Vanguard will automatically convert them to the lower-ER Admiral class shares when your investment has grown to the Admiral threshold. Choosing your broker and your funds may end up being more important than choosing the form of mutual fund versus ETF.  Some brokers charge very high purchase/redemption fees for mutual funds.  Many brokers have no ETFs that they will trade for free.  Between funds, index funds are passively managed and are just designed to track a certain index; they have lower ERs.  Actively managed funds are run by managers who try to beat the market; they have higher ERs and tend to actually fall below the performance of index funds, a double whammy. See also Vanguard's explanation of mutual funds vs. ETFs at Vanguard. See also Investopedia's explanation of mutual funds vs. ETFs in general.

negative: The expense ratio reduces the return of the ETF; your scenario of paying 100.0015 is that of a load.  Most (all?) ETFs can be bought without paying a load (sales charge as a percent of amount invested), and some ETFs can be bought without paying a brokerage fee (fixed or variable charge for a buy transaction just like buying any other stock  through the brokerage) because the brokerage has waived it.  Your broker  might charge fees for both buying and selling shares in an ETF, but in any case, this is quite separate from the expense ratio.

negative: First, it's not always the case that ETFs have lower expenses than the equivalent mutual funds.  For example, in the Vanguard family of funds the expense ratio for the ETF version is the same as it is for the Admiral share class in the mutual fund version.  With that in mind, the main advantages of a mutual fund over an equivalent ETF are: From a long-term investor's point of view, the main disadvantage of mutual funds relative to ETFs is the minimum account sizes.  Especially if the fund has multiple share classes (i.e., where better classes get lower expense ratios), you might have to have quite a lot of money invested in the fund in order to get the same expense ratio as the ETF.   There are some other differences that matter to more active investors (e.g., intraday trading, options, etc.), but for a passive investor the ones above are the major ones.  Apart from those mutual funds and ETFs are pretty similar.  Personally, I prefer mutual funds because I'm at a point where the fund minimums aren't really an issue, and I don't want to deal with the more fiddly aspects of ETFs. For investors just starting out the lower minimum investment for an ETF is a big win, as long as you can get commission-free trades (which is what I've assumed above.)

negative: The issue with trading stocks vs. mutual funds (or ETFs) is all about risk. You trade Microsoft you now have a Stock Risk in your portfolio. It drops 5% you are down 5%. Instead if you want to buy Tech and you buy QQQ if MSFT fell 5% the QQQs would not be as impacted to the downside. So if you want to trade a mutual fund, but you want to be able to put in stop sell orders trade ETFs instead.   Considering mutual funds it is better to say Invest vs. Trade.  Since all fund families have different rules and once you sell (if you sell it early) you will pay a fee and will not be able to invest in that same fund for x number of days (30, 60...)

negative: Mutual funds are a collection of other assets, such as stocks, bonds and property. Unless the fund is a type that is traded on an exchange, you will only be able to buy into the fund by applying for units with the fund manager and sell out by contacting the fund manager. These type of non-traded funds are usually updated at the end of the day once the closing prices of all the assets in it are known.

negative: Behind the scenes, mutual funds and ETFs are very similar.  Both can vary widely in purpose and policies, which is why understanding the prospectus before investing is so important. Since both mutual funds and ETFs cover a wide range of choices, any discussion of management, assets, or expenses when discussing the differences between the two is inaccurate.  Mutual funds and ETFs can both be either managed or index-based,  high expense or low expense, stock or commodity backed. Method of investing When you invest in a mutual fund, you typically set up an account with the mutual fund company and send your money directly to them.  There is often a minimum initial investment required to open your mutual fund account.  Mutual funds sometimes, but not always, have a load, which is a fee that you pay either when you put money in or take money out. An ETF is a mutual fund that is traded like a stock.  To invest, you need a brokerage account that can buy and sell stocks.  When you invest, you pay a transaction fee, just as you would if you purchase a stock.  There isn't really a minimum investment required as there is with a traditional mutual fund, but you usually need to purchase whole shares of the ETF.  There is inherently no load with ETFs. Tax treatment Mutual funds and ETFs are usually taxed the same.  However, capital gain distributions, which are taxable events that occur while you are holding the investment, are more common with mutual funds than they are with ETFs, due to the way that ETFs are structured.  (See Fidelity: ETF versus mutual funds: Tax efficiency for more details.)  That having been said, in an index fund, capital gain distributions are rare anyway, due to the low turnover of the fund. Conclusion When comparing a mutual fund and ETF with similar objectives and expenses and deciding which to choose, it more often comes down to convenience.  If you already have a brokerage account and you are planning on making a one-time investment, an ETF could be more convenient.  If, on the other hand, you have more than the minimum initial investment required and you also plan on making additional regular monthly investments, a traditional no-load mutual fund account could be more convenient and less expensive.

negative: The key two things to consider when looking at similar/identical ETFs is the typical (or 'indicative') spread, and the trading volume and size of the ETF. Just like regular stocks, thinly traded ETF's often have quite large spreads between buy and sell: in the 1.5-2%+ range in some cases. This is a huge drain if you make a lot of transactions and can easily be a much larger concern than a relatively trivial difference in ongoing charges depending on your exact expected trading frequency. Poor spreads are also generally related to a lack of liquidity, and illiquid assets are usually the first to become heavily disconnected from the underlying in cases where the authorized participants (APs) face issues. In general with stock ETFs that trade very liquid markets this has historically not been much of an issue, as the creation/redemption mechanism on these types of assets is pretty robust: it's consequences on typical spread is much more important for the average retail investor. On point #3, no, this would create an arbitrage which an authorized participant would quickly take advantage of. Worth reading up about the creation and redemption mechanism (here is a good place to start) to understand the exact way this happens in ETFs as it's very key to how they work.

negative: 1031 is a section of the U.S. Internal Revenue Service Code that allows investors to defer capital gains taxes on any exchange of like-kind properties for business or investment purposes. Taxes on capital gains are not charged on the sale of a property if the money is being used to purchase another property - the payment of tax is deferred until property is sold with no re-investment.

negative: I personally invest in 4 different ETFs.  I have $1000 to invest every month.  To save on transaction costs, I invest that sum in only one ETF each month, the one that is most underweight at the time. For example, I invest in XIC (30%), VTI (30%), VEA (30%), and VWO (10%).  One month, I'll buy XIC, next month VTA, next month, VEA, then XIC again.  Eventually I'll buy VWO when it's $1000 underweight.  If one ETF tanks, I may buy it twice in a row to reach my target allocation, or if it shoots up, I may skip buying it for a while.  My actual asset allocation never ends up looking exactly like the target, but it trends towards it.  And I only pay one commission a month. If this is in a tax-sheltered account (main TFSA or RRSP), another option is to invest in no-load index mutual funds that match the ETFs each month (assuming there's no commission to buy them).  Once they reach a certain amount, sell and buy the equivalent ETFs.  This is not a good approach in a non-registered account because you will have to pay tax on any capital gains when selling the mutual funds.

negative: What you are looking for is a 1031 exchange. https://www.irs.gov/uac/like-kind-exchanges-under-irc-code-section-1031 Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free. You may also sell your house for bitcoin and record the sales price on the deed with an equal or lesser amount that you bought it for.

negative: ETFs are both liquid (benefits active traders) and a simple way for people to invest in funds even if they don't have the minimum balance needed to invest in a mutual fund (EDIT: in which purchases are resolved at the end of the trading day). One big difference between ETFs and mutual funds is that you must buy ETFs in whole units, whereas you can add $100 to a mutual fund and the fund will determine -- usually to 4 decimal places -- how many shares you've purchased.