Mortgage vs. Saving aggressively for 1-2 years to make cash offer

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Topic Author
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Mortgage vs. Saving aggressively for 1-2 years to make cash offer

Post by MrJedi »

Looking for some advice on navigating a potential move for our family (MFJ (36yo and 36yo, 2 young kids).

We're thinking in the next 1-2 years to find a home in the 350-375k range or so.

Current networth breakdown:
Home:
275k value
(120k) mortgage

Taxable Accounts:
80k cash equivalents (deposit accounts, MMF, t bills, I Bonds, etc.)
70k stocks

Tax deferred accounts:
330k stocks

Roth accounts:
215k stocks

HSA:
30k stocks

Income:
150-170k/year

Expenses:
55k/year not including taxes, PITI, etc.
10k/year PITI
14k/year fed+state income tax
8k/year charity


The original plan was to use most of the 80k cash for a down payment and take out a mortgage and take the proceeds from the old house to refill some cash buffer and invest the rest. But we were generously offered by in-laws about 150k gift/loan to reduce the interest burden of a new mortgage. The money is largely a gift and the payback more of a formality to keep us honest, if we ran into financial trouble they would have no problem if we paused payments back to them.

With that gift/loan offer, it would put us pretty close to being able to make a cash offer if we also liquidated our taxable stocks, so now I'm entertaining that idea. To get us over the hump, I was thinking about cutting out Roth IRA and megabackdoor Roth 401k contributions in the next 1-2 years (maintaining maximum 401k and HSA deduction and wife's deductible IRA). I think we could come up with another 50-75k or so in that timeframe by saving hard in that case. We also have about 25k worth of medical receipts "saved" that we could use to cash out most of the HSA. We also have a bunch of basis in the Roth accounts, but I feel adverse to pulling out of those accounts even if I can effectively "replenish" via new Roth contributions that I would otherwise skip during this aggressive saving time.

I appreciate any thoughts. I know this is largely a debt vs. invest question, but like to probe around to see if there are other ideas. One thing I realize is the equity in the current house, which would help if we could leverage that. We want to avoid needing to sell the old house first or need contingencies on it, etc.
LittleMaggieMae
Posts: 2569
Joined: Mon Aug 12, 2019 9:06 pm

Re: Mortgage vs. Saving aggressively for 1-2 years to make cash offer

Post by LittleMaggieMae »

What about just buying a house a in 1 to 2 years and selling your current home as part of the deal?

I think it's common to be able to get a "bridge loan" or something like that on your current home if you aren't able to sell it at the same time as you are buying your new home.

I know quite a few people (with lots of equity in their home) who had their home up for sale - but found and closed on their next home before the first home sold. They were moved and settled in their new home - well before the old house sold. They used the equity in their old home to buy the new home. Yes, it was a pain and an extra expense for a period of time (one went 6 months before the old house sold) but it all worked out. I think the people in my examples didn't take any cash out of the transaction... if their old house sold for 300K - they used all the proceeds for the new house.

I'm not sure how it would work if you just want to put 20% down on the new house - and want the remaining equity from the sale of your old house to go to your bank account. I strongly suspect you can do that (with a bridge loan or whatever it's called-- the bridge loan gets paid when the house sells along with the mortgage on the old house and any remaining money goes to your bank account.)

You also might be able to do a HELOC or HEL on your current home - and then use that money as the down payment on your new home. When your old house sells - the mortgage on it is paid off AND the outstanding HELOC/HEL is paid off any remaining proceeds goes to your bank account.

This is where you work with your mortgage lender to make it all happen.

You shouldn't need to touch any of your savings or retirement accounts. Yes, there are fees and interest involved in the bridge loan or the HELOC/HEL route.
Nate7out
Posts: 410
Joined: Wed Jan 16, 2008 1:06 pm

Re: Mortgage vs. Saving aggressively for 1-2 years to make cash offer

Post by Nate7out »

MrJedi wrote: Thu Jun 08, 2023 11:28 am Looking for some advice on navigating a potential move for our family (MFJ (36yo and 36yo, 2 young kids).

We're thinking in the next 1-2 years to find a home in the 350-375k range or so.

Current networth breakdown:
Home:
275k value
(120k) mortgage

Taxable Accounts:
80k cash equivalents (deposit accounts, MMF, t bills, I Bonds, etc.)
70k stocks

Tax deferred accounts:
330k stocks

Roth accounts:
215k stocks

HSA:
30k stocks

Income:
150-170k/year

Expenses:
55k/year not including taxes, PITI, etc.
10k/year PITI
14k/year fed+state income tax
8k/year charity


The original plan was to use most of the 80k cash for a down payment and take out a mortgage and take the proceeds from the old house to refill some cash buffer and invest the rest. But we were generously offered by in-laws about 150k gift/loan to reduce the interest burden of a new mortgage. The money is largely a gift and the payback more of a formality to keep us honest, if we ran into financial trouble they would have no problem if we paused payments back to them.

With that gift/loan offer, it would put us pretty close to being able to make a cash offer if we also liquidated our taxable stocks, so now I'm entertaining that idea. To get us over the hump, I was thinking about cutting out Roth IRA and megabackdoor Roth 401k contributions in the next 1-2 years (maintaining maximum 401k and HSA deduction and wife's deductible IRA). I think we could come up with another 50-75k or so in that timeframe by saving hard in that case. We also have about 25k worth of medical receipts "saved" that we could use to cash out most of the HSA. We also have a bunch of basis in the Roth accounts, but I feel adverse to pulling out of those accounts even if I can effectively "replenish" via new Roth contributions that I would otherwise skip during this aggressive saving time.

I appreciate any thoughts. I know this is largely a debt vs. invest question, but like to probe around to see if there are other ideas. One thing I realize is the equity in the current house, which would help if we could leverage that. We want to avoid needing to sell the old house first or need contingencies on it, etc.
Two years ago, I did something similar to what you are looking to do. I bought a new house with 20% down, I did not need a bridge loan as I had the 20% down payment in cash and my DTI was acceptable factoring in my existing mortgage (no other debt). Then I listed and sold my old house a month later. Price points of houses and HHI was similar to your situation.

You don't need to do anything fancy. I would definitely not pull out HSA funds or Roth contributions. You have $230k (>50%) to put down without selling stock. Just put down enough money (but not all your cash, keep some reserves) and your DTI will be acceptable and you will be approved for a mortgage buy the new house. Then buy it and move. No contingency on the old house needed. Then sell the old house. At that point you can decide if you want to pay down your mortgage or invest. You might get to refinance in a year or two as well.
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Mortgage vs. Saving aggressively for 1-2 years to make cash offer

Post by MattB »

I don't think it's worth the complication and lost future savings of putting off your tax-advantaged savings. You aren't looking to buy a very expensive house relative to your income. Take the mortgage and pay off as quickly as you can without putting off your tax-advantaged savings.
Topic Author
MrJedi
Posts: 3540
Joined: Wed May 06, 2020 11:42 am

Re: Mortgage vs. Saving aggressively for 1-2 years to make cash offer

Post by MrJedi »

Thanks for the initial thoughts.

Part of the idea of getting cash up front is to avoid mortgage origination costs and also a more attractive offer without finance contingency to the seller (housing here has cooled off a little bit but still seller's market due to low inventory).

If I take the mortgage, I would still need to cut back on new Roth contributions until it's paid off. Each year lately we're basically right on the edge of maxing out all of my 401k, my mega backdoor Roth 401k, HSA, my Roth IRA, and her deductible IRA. The mega backdoor Roth is the last thing to get maxed and it depends on my bonus pay if I get there or not.
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