Financing options for buying new home

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Topic Author
MapRoom
Posts: 8
Joined: Mon Jul 04, 2022 1:12 pm

Financing options for buying new home

Post by MapRoom »

My wife (45) and I (45) have found a home we are interested in buying. We have been in our current home for nearly 20 years and are in a very comfortable position with our monthly spend relative to our income. Our current home is suitable for our needs, but we have been considering upgrading (more outdoor space, in-law suite in case we need to take care of either of our parents in next 5 years or so, quality of life)

Our priorities are:
1. Keeping our monthly spend <$10,000/month to continue building towards retirement.
Our current monthly spending is ~$9,000/month. $2,400 of that are home expenses/current mortgage.
Our target monthly spend in retirement is $10-12K/month.

2. Paying 2 kids (11th grade and 8th grade) college at in-state rates

We are trying to determine what our best strategy would be now with mortgage rates higher.
We would expect to purchase the new house and then immediately prepare to sell our current home.
Options:
  • Liquidate taxable stock funds and pay off new house in full immediately
  • Sell enough taxable stock funds to pay down ~$600K and keep roughly our current monthly house mortgage amount
  • Sell enough taxable stock to make minimum down payment to avoid PMI
  • Other options to consider?
  • We also aren't quite sure yet how to handle the bridge needed between closing on the new home and selling our current house. Bridge loan or HELOC?
Relevant financial background...

New House:
$875K

Current Home Value
Value: ~$400K / $60K mortgage remaining

Income
Spouse1: $285K/year
Spouse2: $150K/year

Cash/HYSA
$200K

Taxable
US Stock Index Fund: $400K
IX Stock Index Fun: $500K

College Savings (2 kids)
$140K

Retirement Accounts
$2.0M
Mix of Roth IRA, Traditional/Rollover IRA, and 401K. Can easily use to rebalance without tax implication.

Appreciate any thoughts or advice that this group has to offer.
Thank you!
deltaneutral83
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Re: Financing options for buying new home

Post by deltaneutral83 »

I can't imagine with your income you couldn't just get a confirming mortgage for home #2 and carry both for a short period of time? There are still attractive margin rates too (IBRK) if you wanted to use your $900k (for down payment) in the taxable without selling triggering the tax event and use 200k of it to get you over 20% down on home #2? Then pay it down when you sell home #1.
Topic Author
MapRoom
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Re: Financing options for buying new home

Post by MapRoom »

Thanks, appreciate the input regarding line of credit against the stock portfolio as a bridge.
eagleeye13
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Re: Financing options for buying new home

Post by eagleeye13 »

You may want to consider temporary loans from 401ks as an option -- depending on the plans, you may be able to get up to $50k per person to help cover the downpayment (and then use the proceeds of the house sale to repay). Seems like the least bad option to me, though I don't know how much of a pain it is to execute.
harikaried
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Re: Financing options for buying new home

Post by harikaried »

MapRoom wrote: Mon Jul 04, 2022 1:58 pmLiquidate taxable stock funds and pay off new house in full immediately
Do you have bonds to exchange from in your retirement accounts if you want to maintain your equities exposure?

Your overall net worth seems to be $3.6M split roughly 90% liquid and 10% real estate. Buying the new house then shifts it to be closer to 75% liquid and 25% real estate. These ratios are independent of whether you acquire debt or sell some/all of taxable as you can look at the debt as offsetting your fixed income portion of investments (potentially making it net negative if you want to be leveraged to have more invested in equities than without debt).

Do you like the idea of using the house for leveraged investing and/or additional liquidity? Would you want to borrow money for some other needs and a primary residence mortgage might be a relatively cheaper way to get that cash?
MapRoom wrote: Mon Jul 04, 2022 1:58 pm
  • Sell enough taxable stock funds to pay down ~$600K and keep roughly our current monthly house mortgage amount
  • Sell enough taxable stock to make minimum down payment to avoid PMI
I believe between these two options is paying down enough to borrow up to the conforming limit where jumbo rates might be higher.
Topic Author
MapRoom
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Re: Financing options for buying new home

Post by MapRoom »

eagleeye13 wrote: Tue Jul 05, 2022 8:59 am You may want to consider temporary loans from 401ks as an option -- depending on the plans, you may be able to get up to $50k per person to help cover the downpayment (and then use the proceeds of the house sale to repay). Seems like the least bad option to me, though I don't know how much of a pain it is to execute.
Thanks, appreciate the idea to consider the 401k loan for the short term bridge.
Topic Author
MapRoom
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Re: Financing options for buying new home

Post by MapRoom »

harikaried wrote: Tue Jul 05, 2022 3:44 pm
MapRoom wrote: Mon Jul 04, 2022 1:58 pmLiquidate taxable stock funds and pay off new house in full immediately
Do you have bonds to exchange from in your retirement accounts if you want to maintain your equities exposure?
Yes, all of our fixed income (mostly Total Bond Fund) is in our tax deferred retirement accounts. We can use that to rebalance and maintain equity allocation.
Your overall net worth seems to be $3.6M split roughly 90% liquid and 10% real estate. Buying the new house then shifts it to be closer to 75% liquid and 25% real estate. These ratios are independent of whether you acquire debt or sell some/all of taxable as you can look at the debt as offsetting your fixed income portion of investments (potentially making it net negative if you want to be leveraged to have more invested in equities than without debt).

Do you like the idea of using the house for leveraged investing and/or additional liquidity? Would you want to borrow money for some other needs and a primary residence mortgage might be a relatively cheaper way to get that cash?
Yes, we were thinking that moving real estate up to 20% to 25% range would actually be ok from a portfolio investment perspective. We've been very conservative over last number of years. However, we are somewhat concerned about the idea of moving a significant portion of our current taxable investments into real estate equity and foregoing the future capital gains.
MapRoom wrote: Mon Jul 04, 2022 1:58 pm
  • Sell enough taxable stock funds to pay down ~$600K and keep roughly our current monthly house mortgage amount
  • Sell enough taxable stock to make minimum down payment to avoid PMI
I believe between these two options is paying down enough to borrow up to the conforming limit where jumbo rates might be higher.
Thanks, agree, appreciate that idea of striking a balance between the two and minimizing interest rate.

Very much appreciate your thoughts on what to consider. Thank you.
pbjzyxuzpf
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Re: Financing options for buying new home

Post by pbjzyxuzpf »

You're close to being able to cash flow the purchase of the new house. It'll be tight but I'd stop all investment contributions for a few months to save additional cash. Check DOM for houses in your area and get it up quickly. Use the proceeds to replenish your cash and pay down the new house. If needed, sell some of your taxable to tax loss harvest.

I also like the idea of 401k loan or LOC on the stock portfolio - whatever is easiest and gets to you the least amount of fees.
harikaried
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Re: Financing options for buying new home

Post by harikaried »

MapRoom wrote: Tue Jul 05, 2022 10:14 pmwe are somewhat concerned about the idea of moving a significant portion of our current taxable investments into real estate equity and foregoing the future capital gains
As in even if you exchanged all bonds into equities, you might need to reduce equity exposure to buy the house in cash?

For example, if we say your $3.2M liquid assets are invested 20% fixed income as $0.4M bonds and $0.2M cash with $2.6M equities, selling all bonds still leaves about $0.3M from equities needed for the new house upfront. However, after selling the current house, you can reinvest the money to restore the original equity exposure with new basis, so future capital gains aren't really foregone. Your overall asset allocation in this example with no debt would be $2.6M equities / $0.1M fixed income / $0.9M real estate or as percentages: 72% / 3% / 25%.
CaptainT
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Re: Financing options for buying new home

Post by CaptainT »

With a kid just going into senior year of high school I would wait a year before I moved. Your home needs are going to change a ton in 1 year and again in 5 years.
In 1 year you need 1 fewer bedroom and in 5 years things like school districts no longer matter. I would wait at least the 1 year and likely the 5
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Watty
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Re: Financing options for buying new home

Post by Watty »

CaptainT wrote: Wed Jul 06, 2022 3:15 am With a kid just going into senior year of high school I would wait a year before I moved. Your home needs are going to change a ton in 1 year and again in 5 years.
+1000 if your kids would need to change schools.

I needed to do a job relocation when I had a kid in middle school and it was real hard on him even through high school since he had to leave his groups of friends.

When a kid changes schools it can be especially hard for them to get involved in new clubs, sports, school plays, band, etc since they do know what is available at the new school or know other kids that are doing those things.

In my case the schools were in a different state so that the school curriculum was somewhat different which caused some academic problems too since my son was out of step in some of the classes.

Unless there is someone going on where switching to a new school would be good to give them a fresh start then there is little reason to move now if that would mean that your kids would need to change schools.

In my case moving was necessary and the right move for us but it was still hard on my son.
MapRoom wrote: Mon Jul 04, 2022 1:58 pm Appreciate any thoughts or advice that this group has to offer.
If you need to sell some investments to free up some money you might be concerned about any taxes you might pay.

Something to keep in mind is that some of those taxes may be unavoidable and you will pay them sooner or later no matter what you do.

Deferring taxes is not the same as avoiding taxes.

There is also a risk that if you defer taxes for 10+ years that when you eventually pay them the tax rates may be higher then. If you can take some capital gains and only pay a 15% federal long term capital gains tax(plus state taxes) then that may be the best rate you will ever see in your lifetime.
MapRoom wrote: Mon Jul 04, 2022 1:58 pm My wife (45) and I (45)....
Keep in mind that if you get a new 30 year mortgage it will not be paid off until you are 75 years old. The numbers can work out all sorts of ways but at least for me having a paid off house when I retired worked out well for me. You should consider how this will work for you.

Also be sure to get a house that is at least somewhat handicap accessible if you might want to stay in that house when you retire. Even if you are not in a wheelchair having stairs can be a big problem when you are older.
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Watty
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Re: Financing options for buying new home

Post by Watty »

MapRoom wrote: Mon Jul 04, 2022 1:58 pm ...in-law suite in case we need to take care of either of our parents in next 5 years or so..
One more thought.

There may be something like cultural expectations that you will take care of your parents like that but you need to be realistic about just how that would work.

By the time it get to the point where there is a need for them to be taken care of then that may be more intensive than you are prepared for and it might not be the best situation for them. Your kids(their grandkids) will likely soon move out and be off to college and living with you could be very socially isolating for them and they will be alone at the house when you are both at work.

It was a different situation but my mom insisted on staying in the large family home I was raised in after my dad died. It was her choice and I can understand it but especially when she needed to give up driving it was very isolating for her since most of her friends had either moved away, died, or were not driving either. Over the years her neighbors had moved to and she barely knew her new neighbors. About the only person she had much contact with was her house keeper who came in several days a week.

For years we tried to get her to do something like get an apartment or condo in some sort of senior community(not assisted living) where she could have more social contact but she would never move.

If any of your parents get to the point where they need assisted living then you also need to be realistic about how much you will be able to do, how long you will be able to do it(they could live to be 95), and if that will work well. There is no way that I would want my kid to be changing my diapers when I am elderly.

I have known people that tried to take care or of their parents in their house and it was a LOT harder and less rewarding than it sounds.
Topic Author
MapRoom
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Re: Financing options for buying new home

Post by MapRoom »

harikaried wrote: Wed Jul 06, 2022 1:19 am
MapRoom wrote: Tue Jul 05, 2022 10:14 pmwe are somewhat concerned about the idea of moving a significant portion of our current taxable investments into real estate equity and foregoing the future capital gains
As in even if you exchanged all bonds into equities, you might need to reduce equity exposure to buy the house in cash?

For example, if we say your $3.2M liquid assets are invested 20% fixed income as $0.4M bonds and $0.2M cash with $2.6M equities, selling all bonds still leaves about $0.3M from equities needed for the new house upfront. However, after selling the current house, you can reinvest the money to restore the original equity exposure with new basis, so future capital gains aren't really foregone. Your overall asset allocation in this example with no debt would be $2.6M equities / $0.1M fixed income / $0.9M real estate or as percentages: 72% / 3% / 25%.
I see, thanks for the example. We would be able to maintain our total equity exposure.
Topic Author
MapRoom
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Re: Financing options for buying new home

Post by MapRoom »

Watty wrote: Wed Jul 06, 2022 8:34 am
CaptainT wrote: Wed Jul 06, 2022 3:15 am With a kid just going into senior year of high school I would wait a year before I moved. Your home needs are going to change a ton in 1 year and again in 5 years.
+1000 if your kids would need to change schools.

I needed to do a job relocation when I had a kid in middle school and it was real hard on him even through high school since he had to leave his groups of friends.
Thank you, appreciate the additional points to consider on school districts, tax deferral vs avoidance, and elderly care. Very helpful.
Serie1926
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Re: Financing options for buying new home

Post by Serie1926 »

MapRoom, we just moved into my wife's new mansion a year ago.

We closed last June and did a 10 year ARM at 2%.

So far we've been successful paying the mortgage each month with market profits off a small position we hold in an S&P 500 index. I will usually take a small clipping on a couple of the 1% pops each month.

On one of our last homes, had an extremely valuable lesson by paying off the home. I tried the borrow as much as you can for as long as you can. I made 3 payments and then sold a good chunk of positions to payoff. Trump gets elected and the market sky rockets. Those coins would have doubled :(

So, I've gone from the full tilt Ramsey mode of ZERO debt, to there can be good debt.

As long as I can have the market pay for the current home, we'll drag this mortgage out until I'm in the ground.

Hope this helps. Good luck!
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MapRoom
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Vanguard / minimizing taxes on upcoming index fund sale

Post by MapRoom »

[Thread merged into here --admin LadyGeek]

I am in the process of closing on a contract to purchase a new primary residence.
As part of the financing, I need to sell $100K (after taxes) of index funds in my taxable Vanguard account, either from VTIAX (TOTAL INTL INDEX) or VTSAX (TOTAL US STOCK INDEX).

I would like to minimize the tax implications of this sale.
What should I look for when going forward with the transaction and the various cost basis Vanguard offers?

Does anyone know if Vanguard offers any advisor services for this type of transaction? I called the support line, but they said they could not help.

Thank you for any advise on the approach to use.
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Nate79
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Re: Vanguard / minimizing taxes on upcoming index fund sale

Post by Nate79 »

It's quite simple, you don't need an advisor. You should have Specific ID selected for your basis. You should look at the cost basis for each lot. You should sell any lots with a loss. You should next sell any lots with the highest cost basis (meaning the least amount of gain).
Makefile
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Re: Vanguard / minimizing taxes on upcoming index fund sale

Post by Makefile »

Never use average basis. If you do, you're locked into using it for all future sales you owned as of the date of the first average basis sale. It's unfortunate that average is the default (IRS requirement I think). It might have been a recordkeeping convenience in more paper-oriented days, but is an anachronism now.
niagara_guy
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Re: Vanguard / minimizing taxes on upcoming index fund sale

Post by niagara_guy »

Lots held over 1 year are taxed at the long term capital gains tax rate, so you might want to sell those lots after you sell the lots at a loss. Those lots might have the lowest cost basis so you might want to consider what works best for you.
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Re: Financing options for buying new home

Post by LadyGeek »

MapRoom - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
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Topic Author
MapRoom
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Re: Financing options for buying new home

Post by MapRoom »

Thanks all. Really appreciate the clear ideas on how to approach.

Sorry for not building off my original post with the related follow on question.

Thank you Bogleheads!
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