Best Way to Fund Down Payment

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BurpinBob
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Joined: Sat Oct 16, 2021 11:24 pm

Best Way to Fund Down Payment

Post by BurpinBob »

My wife and I will be purchasing a new house and I'm looking at ways to fund the down payment. Unfortunately, we will have to buy the new house before selling our current house, but would be able to use the proceeds to pay back any loans or reinvest depleted accounts. Here are the relevant details:
  • Down Payment: $167k
  • Cash: $120k
  • Taxable ETFs: $128k (all long term gains)
  • 401k: $500k
  • Current Mortgage Balance: $155k
  • Estimated Selling Price: $400k
  • HHI: $200k
We will be using as much cash as we can towards the down payment, but had some questions on the best and most tax efficient ways to fund the remaining portion of the downpayment:
  • Would a bridge loan be the best option here? I think we should be able to sell our house pretty quickly so we wouldn't be carrying the bridge for very long
  • I believe I can borrow from my 401(k), but my current plan only allows this to happen once. Also, it looks like there is a 3.125% interest rate on the amount borrowed
  • Should I consider selling some of my ETFs? This seems like this might be the least preferred option since I'd incur a 15% capital gains tax
secondcor521
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Re: Best Way to Fund Down Payment

Post by secondcor521 »

BurpinBob wrote: Sun Oct 17, 2021 12:03 am Unfortunately, we will have to buy the new house before selling our current house
Why is this necessary?

People who can move once can usually move twice. I'm guessing you just don't want to move twice. Perhaps you have a good reason, but most of the time it's just the inconvenience and cost of two moves.

I would move twice before I took out a 401(k) loan, or realized capital gains unnecessarily, or did a bridge loan. There are several things that can go wrong trying to just move once, and loans and such can compound the problems. Also, the additional inconvenience of trying to align closing dates and arranging for loans in order to only move once can often rival or exceed the hassle of just renting an apartment for one to six months.

I guess the one risk that I do see in moving twice is if housing prices in your area are skyrocketing, and the move twice approach risks you being priced out of the market if you sell and can't buy again quickly. Certainly something to consider in that case. I guess if that were my situation, I'd probably try to avoid moving until the skyrocketing stopped or at least slowed down to a manageable level.
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whodidntante
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Re: Best Way to Fund Down Payment

Post by whodidntante »

A)
Use your cash and borrow the rest from Interactive Brokers. If you open the account with the right promo you'll borrow your first dollar at tier II margin rates, currently 1.08%. You'll be able to withdraw ~50% of the value of your marginable securities as cash. No payments are required, ever, so long as you meet maintenance margin. If you don't, IB will liquidate your assets to bring you in line. IB does not do margin calls.

B)
You could also do box spread financing at your existing broker, but you'll need to apply for portfolio margin for that. It will be a bit cheaper than IB margin rates, and you'll get a fixed rate until option expiration.

If you choose option A, you'll want to get your ACATS transfer in process at least two weeks prior to needing the money and preferably allowing more time than that in case things don't go perfectly. Sometimes a broker will reject a transfer, for example.
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BurpinBob
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Re: Best Way to Fund Down Payment

Post by BurpinBob »

secondcor521 wrote: Sun Oct 17, 2021 9:23 am Why is this necessary?
We have 3+ pets and likely would not be able to find a rental property that would allow us to stay.
NET1
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Re: Best Way to Fund Down Payment

Post by NET1 »

BurpinBob wrote: Sun Oct 17, 2021 12:03 am
  • I believe I can borrow from my 401(k), but my current plan only allows this to happen once. Also, it looks like there is a 3.125% interest rate on the amount borrowed
The simplest path might be to pull the max from a 401(k). If your specific plan max is 50,000 then you may need to liquidate a bit of taxable to cover proof for closing costs. You'll still have the vast majority of your portfolio (both retirement and taxable) in the market. Pulling from the 401(k) typically requires a signed contract. Longer amortization if you decide to keep the funds for a bit, quick turnaround, no tax implications.

We just had to do something similar due to market conditions. We had set up both closings with a week leaseback on our old house. Made a no contingency offer so needed to liquidate for the new mortgage. 401(k) loan allowed us to avoid additional cap gains.
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JoeRetire
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Re: Best Way to Fund Down Payment

Post by JoeRetire »

BurpinBob wrote: Sun Oct 17, 2021 11:12 am
secondcor521 wrote: Sun Oct 17, 2021 9:23 am Why is this necessary?
We have 3+ pets and likely would not be able to find a rental property that would allow us to stay.
Sell your house with a rentback provision while you find your next house.
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bradinsky
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Location: Ohio

Re: Best Way to Fund Down Payment

Post by bradinsky »

We have used bridge loans twice in the past. Easiest way I’ve found as long as it’s for a short term.
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Toons
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Re: Best Way to Fund Down Payment

Post by Toons »

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Semantics
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Re: Best Way to Fund Down Payment

Post by Semantics »

Do lenders allow using margin/pledged asset line for the down payment if the total borrowed is above the max mortgage we would qualify for? In our situation the rationale is not wanting to liquidate appreciated securities and pay capital gains tax. Since the PAL is borrowing against my existing assets, not my future income, it seems like logically it shouldn't count toward my debt-to-income ratio - but I'm not sure if that's how lenders look at things. It would, of course, reduce asset-based income in the qualification calculation, but so would liquidating the same amount.
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