Mortgage or liquidate securities?

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Yeldon
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Joined: Wed Oct 07, 2015 7:31 pm

Mortgage or liquidate securities?

Post by Yeldon » Fri Oct 05, 2018 3:31 pm

Here’s my situation. 30 years old and no debt. I’m interested in potentially purchasing a small home, targeting a price of $70k. I’m struggling whether it makes more sense to take out a loan for the purchase or liquidate some investments and make it an all cash deal. If I went with the mortgage, I’d put 20% down and take out a 15 year mortgage at a rate (today) of 4.40%, excluding $3,000 in total closing fees (itemized below). I estimate that I’d still incur $1,700 of these fees (see itemized list below) if I went without a mortgage. By my calculation, the $1,300 mortgage-related fees would increase my mortgage rate to more like 4.75%.

So, I can either take out a $56k mortgage at ~4.75%, inclusive of non-essential fees, or liquidate some of my equities. My assets are below. I have no other debt. In order to come up with the $70k, I’d use available cash/bonds of $10k (saving the extra $10k for miscellaneous short-term needs), $45k of taxable equities (probably have $5k-$10k in unrealized gains on these), and take out a $15k 401k loan at 6%.

At 4.75%, and given the somewhat muted outlook for equity returns for the next ten years, I’m leaning towards liquidating the equities, but I’d greatly appreciate any advice on this. Thanks


............Mortgage..No Mortgage
Appraisal Fee 450 0
Closing Fee 430 315
Credit Report Fee 56 0
E-Recording Fee 15 15
Flood Certification 11 11
Recording Fees 335 175
State Tax/Stamps 25 25
Lender's Title Insurance 620 0
Owner's Title Insurance 195 670
Underwriting Fee 420 0
Inspection 500 500
TOTAL 3057 1711


Assets
$20k – cash/medium duration bonds
$45k – taxable equities
$60k – 401k equities
$45k – Roth IRA
$20k – HSA
$190k - TOTAL

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JoMoney
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Re: Mortgage or liquidate securities?

Post by JoMoney » Fri Oct 05, 2018 3:40 pm

I'm curious if you've already found a lender for a $56k mortgage. That's on the small side, and I've heard that makes it more difficult to get better rates on.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Yeldon
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Joined: Wed Oct 07, 2015 7:31 pm

Re: Mortgage or liquidate securities?

Post by Yeldon » Fri Oct 05, 2018 3:44 pm

JoMoney wrote:
Fri Oct 05, 2018 3:40 pm
I'm curious if you've already found a lender for a $56k mortgage. That's on the small side, and I've heard that makes it more difficult to get better rates on.
Yep - those itemized mortgage fees were actually sent to me from a community bank that operates in my state. I'm from a smaller, LCOL state, so $70k houses, while not the norm, aren't uncommon.

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Meg77
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Re: Mortgage or liquidate securities?

Post by Meg77 » Fri Oct 05, 2018 3:52 pm

Hey there, banker here. You don't list your income but I assume it's fairly medium/high since you have so much saved for retirement. If you're being extremelly frugal but can afford a much more expensive home, then I might suggest getting a bit larger/nicer home now rather than potentially wanting to upgrade in just a few years (if you're fine renting this out or staying indefinitely then by all means that's great though).

Also, might you want an appraisal even if a lender doesn't require it? You may want to incur that fee yourself unless you're really confident it's priced well.

All things considered, I think I'd try to pay cash by selling your taxable equities (near all time market highs no less) rather than betting that your after tax, after fee returns will exceed 4.40% over the next 15 years. And you can wipe out the cash, which gets you to $65k. Your Roth IRA can double as an emergency fund in the interim until you build back up reserves (since you can take contributions back out at any point).

I hesitate to recommend a 401k loan, but you could get one and pay it off really quickly. You may also be able to borrow $5k - $10k on an unsecured bank loan. You could do a home equity loan right after closing to pay off whichever of those you go with. It should be cheaper than a purchase mortgage since often title fees and underwriting fees won't apply. But the rate may be higher. However you'd be paying it off pretty quickly either way presumably.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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JoMoney
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Re: Mortgage or liquidate securities?

Post by JoMoney » Fri Oct 05, 2018 3:54 pm

Personally, I'm debt adverse... so if I had made up my mind I was going to buy the house one way or another I would sell the securities.
I don't have as dismal an outlook on equities as others, but nobody knows... I definitely wouldn't be holding bonds and getting a loan though.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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watchnerd
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Location: Seattle, WA, USA

Re: Mortgage or liquidate securities?

Post by watchnerd » Fri Oct 05, 2018 8:24 pm

Yeldon wrote:
Fri Oct 05, 2018 3:31 pm
Here’s my situation. 30 years old and no debt. I’m interested in potentially purchasing a small home, targeting a price of $70k.
I don't mean this offensively, but I'm dying to know where you live with houses on the market at such amazingly reasonable prices.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

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Cycle
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Re: Mortgage or liquidate securities?

Post by Cycle » Fri Oct 05, 2018 8:43 pm

That's pretty inexpensive, just make sure you know how much repairs will run you.

I bought and live in a duplex in Minneapolis I purchased for $190k (our half 95k), and this enables a high savings rate for us. Paid off the mortgage after two years in the property. We get free white noise (busy street!).

Unless you are renting spare bedrooms you are almost always better off getting a house for your situation today, ie not for 3 years from now. But don't take my word for it (or a realtors), do the math. Include estimated selling costs and sitting asset costs (ie money that is stuck in your house), as well as a generous misc improvement/repair estimate.

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Watty
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Re: Mortgage or liquidate securities?

Post by Watty » Fri Oct 05, 2018 9:07 pm

A couple of things.
Yeldon wrote:
Fri Oct 05, 2018 3:31 pm
.....and take out a $15k 401k loan at 6%.
401k loans have a lot of downsides. I have not done it but I have heard that you can get a home equity loan at the time you buy your house to cover amounts like that. You would want to check the current tax laws but the interest on the home equity loan might be deductible. The costs to set up a home equity loan may be a lot less than a traditional mortgage.

If you have a paid off car you may be able to get a car loan to get the additional money you need.

Some companies may limit 401k contributions while you have a 401k loan so be sure to check on that.
Yeldon wrote:
Fri Oct 05, 2018 3:31 pm
probably have $5k-$10k in unrealized gains on these....
Unless you hold the investments for the rest of your life you may not be able to avoid eventually paying capital gains taxes on these gains at some time. When considering the tax impact remember the phrase "You can pay me now, or you can pay me later." so if you don't pay the taxes now you may have just deferred them for a few years.

Yeldon
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Joined: Wed Oct 07, 2015 7:31 pm

Re: Mortgage or liquidate securities?

Post by Yeldon » Fri Oct 05, 2018 10:02 pm

I appreciate everyone's feedback. Responses below.
Meg77 wrote:
Fri Oct 05, 2018 3:52 pm
Hey there, banker here. You don't list your income but I assume it's fairly medium/high since you have so much saved for retirement. If you're being extremelly frugal but can afford a much more expensive home, then I might suggest getting a bit larger/nicer home now rather than potentially wanting to upgrade in just a few years (if you're fine renting this out or staying indefinitely then by all means that's great though).

Also, might you want an appraisal even if a lender doesn't require it? You may want to incur that fee yourself unless you're really confident it's priced well.

All things considered, I think I'd try to pay cash by selling your taxable equities (near all time market highs no less) rather than betting that your after tax, after fee returns will exceed 4.40% over the next 15 years. And you can wipe out the cash, which gets you to $65k. Your Roth IRA can double as an emergency fund in the interim until you build back up reserves (since you can take contributions back out at any point).

I hesitate to recommend a 401k loan, but you could get one and pay it off really quickly. You may also be able to borrow $5k - $10k on an unsecured bank loan. You could do a home equity loan right after closing to pay off whichever of those you go with. It should be cheaper than a purchase mortgage since often title fees and underwriting fees won't apply. But the rate may be higher. However you'd be paying it off pretty quickly either way presumably.
For my current life situation (single and no kids), I don't need much beyond 800sqf or so. As long as I don't have a wife or kids, I don't see my housing needs changing in terms of size.

I hear you on the appraisal. It's something I've gone back and forth on. If that is something I want, it would reduce the marginal cost of the mortgage significantly - from $1,300 to $850. As you mentioned as well, I've wavered on the 401k loan as well. Not ideal but it would be a quick payback.
watchnerd wrote:
Fri Oct 05, 2018 8:24 pm
I don't mean this offensively, but I'm dying to know where you live with houses on the market at such amazingly reasonable prices.
No offense taken. Modest home in a Midwestern city. Similar to Tulsa, OK. Here is a home I found really quick in Tulsa.

https://www.zillow.com/homedetails/1312 ... lpage=true
Cycle wrote:
Fri Oct 05, 2018 8:43 pm
That's pretty inexpensive, just make sure you know how much repairs will run you.

I bought and live in a duplex in Minneapolis I purchased for $190k (our half 95k), and this enables a high savings rate for us. Paid off the mortgage after two years in the property. We get free white noise (busy street!).

Unless you are renting spare bedrooms you are almost always better off getting a house for your situation today, ie not for 3 years from now. But don't take my word for it (or a realtors), do the math. Include estimated selling costs and sitting asset costs (ie money that is stuck in your house), as well as a generous misc improvement/repair estimate.
I've considered a duplex and will give that option another look. I'm shooting for $70k after repairs. Repairs are definitely something I'm daunted by as they seem to be difficult to forecast.
Watty wrote:
Fri Oct 05, 2018 9:07 pm
401k loans have a lot of downsides. I have not done it but I have heard that you can get a home equity loan at the time you buy your house to cover amounts like that. You would want to check the current tax laws but the interest on the home equity loan might be deductible. The costs to set up a home equity loan may be a lot less than a traditional mortgage.

If you have a paid off car you may be able to get a car loan to get the additional money you need.

Some companies may limit 401k contributions while you have a 401k loan so be sure to check on that.

Unless you hold the investments for the rest of your life you may not be able to avoid eventually paying capital gains taxes on these gains at some time. When considering the tax impact remember the phrase "You can pay me now, or you can pay me later." so if you don't pay the taxes now you may have just deferred them for a few years.
Very fair point on the capital gains tax. I worry about the extra fees associated with the home equity loan, but will check on that. Not in love with the 401k loan for the reasons you mentioned. It's probably the strongest driver pushing me towards mortgage.

Bastiat
Posts: 148
Joined: Thu May 26, 2016 11:07 am

Re: Mortgage or liquidate securities?

Post by Bastiat » Fri Oct 05, 2018 11:51 pm

Absolutely don't take a 401k loan.

Would you be able to take advantage of all your tax advantaged space and pay extra on your mortgage? If so, do that.

If not, I'd still get the mortgage. 5 or 10 years from now your income will likely be higher but your mortgage payment will still be the same - so you'll be able to pay more.

Also consider that mortgage interest is deductible. Assuming 25% federal and 5% state tax rates and a 4.75% mortgage rate, your effective mortgage rate will be less than 3.5%.

Nissanzx1
Posts: 303
Joined: Wed Jul 18, 2018 11:13 pm

Re: Mortgage or liquidate securities?

Post by Nissanzx1 » Sat Oct 06, 2018 5:14 am

I'd probably get a small mortgage and pay it off in a couple 2-3 years with angry, chunky payments.

Make sure you are getting enough house. It's expensive to buy and sell, you won't want to do it again in a few years.
Make sure that the house you get has updated windows, HVAC, roof, etc. I spent $22K on my first $70k home in updates (I never got a penny back).

dknightd
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Joined: Wed Mar 07, 2018 11:57 am

Re: Mortgage or liquidate securities?

Post by dknightd » Sat Oct 06, 2018 6:59 am

I would not borrow against 401k. I'd also not be comfortable spending all my emergency cash just before buying a home.

So, I'd take out a mortgage.

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