How to fund down payment on second home.

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seattletom1
Posts: 6
Joined: Wed Aug 17, 2016 1:37 pm

How to fund down payment on second home.

Post by seattletom1 » Wed Aug 17, 2016 1:40 pm

Hi,
I have some second home buying questions that I thought the group could help me with. Right now I am in the early stages of looking to buy a house. I currently own one was well, that I plan to sell. I am thinking of how to fund the down payment and how much of a payment. I could make the purchase contingent on the sale of my current house. While I have very little doubt I could sell my house, the market I am in does not look favorable to contingent sales. I need cash. I’d like to put 20% down on a 550K house. I can’t save that much up in the time frame we are looking at. I would need to sell some investments. Whatever we sold would be replaced with profit from the sale of our old house.

Here are what I believe are my best options:

I can sell investments in non tax advantaged accounts. All would be long term gains pushing us into the 28% bracket. If I did this, after I sold my current house I would increase 457 contributions to 100% until house sale profits (about 200k) gone.

Or

Borrow from IRA with the intent of repaying in 60 days. The house should sell in that time frame. But if it doesn’t I could always sell the above investments to fund the repayment.

Or

Sell my house and rent until I find something else.

I’m sure there are others that I don’t know about. I have not really looked into a HELC but read that may be an option. I also read that bridge loans are a thing of the past.

What option do you think is best?

Thanks for your help! Let me know if you would like more info.

orca91
Posts: 1223
Joined: Thu Mar 03, 2016 7:17 pm

Re: How to fund down payment on second home.

Post by orca91 » Wed Aug 17, 2016 3:45 pm

A bridge loan might work.

Rupert
Posts: 2731
Joined: Fri Aug 17, 2012 12:01 pm

Re: How to fund down payment on second home.

Post by Rupert » Wed Aug 17, 2016 4:09 pm

You could use a HELOC, but note that it will impact your debt-to-income ratio and hence the size mortgage you can get for the new house.

itstoomuch
Posts: 4837
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: How to fund down payment on second home.

Post by itstoomuch » Wed Aug 17, 2016 4:33 pm

We are looking to downsize and buy in Seattle to be closer to son. We are currently in sunny Oregon.
We are also need less yard work.

I have been moving funds into cash within IRA & Roths, too slowly. I have pretty good trading gains for 2016.
I have been moving IRA into taxable accounts, also too slowly
We will begin to get prequalified for a home loan. We have looked at open houses.
We may get a loan (1st mortgage) from a Seattle rental that we own clear.
Biggest obstacle is showing "Income" to support a purchase. Retirement assets does not count as heavily as does Income.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

HomoLudens
Posts: 114
Joined: Sat Oct 31, 2015 8:27 pm

Re: How to fund down payment on second home.

Post by HomoLudens » Wed Aug 17, 2016 6:09 pm

seattletom1 wrote:Hi,
I have some second home buying questions that I thought the group could help me with. Right now I am in the early stages of looking to buy a house. I currently own one was well, that I plan to sell. I am thinking of how to fund the down payment and how much of a payment. I could make the purchase contingent on the sale of my current house. While I have very little doubt I could sell my house, the market I am in does not look favorable to contingent sales. I need cash. I’d like to put 20% down on a 550K house. I can’t save that much up in the time frame we are looking at. I would need to sell some investments. Whatever we sold would be replaced with profit from the sale of our old house.

Here are what I believe are my best options:

I can sell investments in non tax advantaged accounts. All would be long term gains pushing us into the 28% bracket. If I did this, after I sold my current house I would increase 457 contributions to 100% until house sale profits (about 200k) gone.

Or

Borrow from IRA with the intent of repaying in 60 days. The house should sell in that time frame. But if it doesn’t I could always sell the above investments to fund the repayment.

Or

Sell my house and rent until I find something else.

I’m sure there are others that I don’t know about. I have not really looked into a HELC but read that may be an option. I also read that bridge loans are a thing of the past.

What option do you think is best?

Thanks for your help! Let me know if you would like more info.


I suggest that you use HELOC. Just keep in mind that you should obtain the HELOC prior to listing the first house. A bridge loan sounds good in theory, but banks know pretty well that you will use it only for a couple of months before repaying it. They aren't interested in having you as a client for a couple of months. You can always argue that that you have been a loyal client for X number of years, but you know how this plays out with the banks nowadays. :happy In the case of the bridge loan, you have no leverage.
"'Thoughts without content are empty, intuitions without concepts are blind." Immanuel Kant

seattletom1
Posts: 6
Joined: Wed Aug 17, 2016 1:37 pm

Re: How to fund down payment on second home.

Post by seattletom1 » Thu Aug 18, 2016 9:52 am

Thank you for the replies! I will look more into a home equity line of credit. I did not do too much research because I thought I could fund it my self but a HELOC might be better/easier.

SuzBanyan
Posts: 108
Joined: Thu Jun 02, 2016 11:20 am

Re: How to fund down payment on second home.

Post by SuzBanyan » Thu Aug 18, 2016 10:03 am

One option that did not get much discussion was your suggestion to sell the first then buy the second, renting if needed between. While it has been a while, this is what we did for our last transition. Put our current house on the market. Entered into a sale transaction with a 60 day closing. Entered into a purchase agreement with a 45 day closing for the new home.

The feasibility of such an option will depend on the market in your locale and particularly the availability of acceptable inventory. We did end up "homeless" for a couple days between the sale of our first and the purchase of our second, but this was because we bought a spec home under construction that had a couple of days delay in completion.

Jags4186
Posts: 1469
Joined: Wed Jun 18, 2014 7:12 pm

Re: How to fund down payment on second home.

Post by Jags4186 » Thu Aug 18, 2016 10:09 am

Long term capital gains should not affect your marginal tax rate as it is not income...it's LTCG. That said, you probably don't want to realize the taxes now so I would look into a bridge loan.

itstoomuch
Posts: 4837
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: How to fund down payment on second home.

Post by itstoomuch » Fri Aug 19, 2016 11:36 pm

just finished talking to a mortgage broker for a pre-qualification.
He said that we need to step up our monthly income considerably. A annual draw from retirement accounts counts less than a steady income stream even though we don't need that income from IRA/annuities.

It is odd that even though we own our home and have a rental condo in Seattle without mortgage, we would need to show a history of income sufficient to cover a mortgage on a home which will be a our new primary residence. We will sell our current home after we secure the target home in Seattle.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

Nearly A Moose
Posts: 563
Joined: Fri Apr 22, 2016 5:28 pm

Re: How to fund down payment on second home.

Post by Nearly A Moose » Sat Aug 20, 2016 6:59 am

itstoomuch wrote:just finished talking to a mortgage broker for a pre-qualification.
He said that we need to step up our monthly income considerably. A annual draw from retirement accounts counts less than a steady income stream even though we don't need that income from IRA/annuities.

It is odd that even though we own our home and have a rental condo in Seattle without mortgage, we would need to show a history of income sufficient to cover a mortgage on a home which will be a our new primary residence. We will sell our current home after we secure the target home in Seattle.


I infer you're retired? My retired parents had a similar problem when buying a second home - they could have paid in cash without a problem, but they thought the mortgage rates were so low they didn't want to do that. They ended up finding a speciality mortgage broker who was more familiar with situations faced by higher-net worth retirees. May or may not be relevant to you.
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

cherijoh
Posts: 4070
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: How to fund down payment on second home.

Post by cherijoh » Sat Aug 20, 2016 7:33 am

Jags4186 wrote:Long term capital gains should not affect your marginal tax rate as it is not income...it's LTCG. That said, you probably don't want to realize the taxes now so I would look into a bridge loan.


LTCG are indeed income and are included in your total income (1040 line 22) and adjusted gross income (1040 line 37) and therefore DO affect your marginal tax rate. :oops: They are simply taxed at a lower tax rate than your marginal bracket on your federal taxes. They also have an impact on how much of any SS you receive is taxable.

In addition, state treatment of Cap Gains will vary - in NC they are taxed at the same marginal tax bracket as wage income.

itstoomuch
Posts: 4837
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: How to fund down payment on second home.

Post by itstoomuch » Sat Aug 20, 2016 10:45 am

thx @Nearly A Moose
Retired.
Don't know if the mortgage broker is familiar with this.
HELOC is a possibility.
Thinking about this, we will probably take an interest rate hit or tax hit or use some IRA/Roth.
We had a good experience in buying with cash. Finding the optimal cash combination for purchase then take a conventional loan after purchase is my tentative plan.
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

saver007
Posts: 68
Joined: Fri Nov 07, 2014 9:18 pm

Re: How to fund down payment on second home.

Post by saver007 » Sat Aug 20, 2016 7:28 pm

You can transfer your taxable account portfolio to a portfolio margin account with Interactive Brokers and borrow cash from the account. Margin requirement for portfolio margin account is only 15% or so (lower if you hold index funds). Meaning you can withdraw upto 85% of account equity in cash . Having said that, don't borrow upto limit.. if u reach limits, your account position s will be liquidated.. only use this option if you have sufficient equity cushion..

TRC
Posts: 1838
Joined: Sat Dec 20, 2008 5:38 pm

Re: How to fund down payment on second home.

Post by TRC » Sun Aug 21, 2016 6:44 am

If you can get your current house sold, you'll be in a much stronger position to make a compelling offer on your new house.

livesoft
Posts: 57317
Joined: Thu Mar 01, 2007 8:00 pm

Re: How to fund down payment on second home.

Post by livesoft » Sun Aug 21, 2016 7:37 am

cherijoh wrote:
Jags4186 wrote:Long term capital gains should not affect your marginal tax rate as it is not income...it's LTCG. That said, you probably don't want to realize the taxes now so I would look into a bridge loan.


LTCG are indeed income and are included in your total income (1040 line 22) and adjusted gross income (1040 line 37) and therefore DO affect your marginal tax rate. :oops: They are simply taxed at a lower tax rate than your marginal bracket on your federal taxes. They also have an impact on how much of any SS you receive is taxable.

In addition, state treatment of Cap Gains will vary - in NC they are taxed at the same marginal tax bracket as wage income.

Because the way income is "stacked" (which comes first the earned income or the capital gains income?) perhaps one's earned income won't be taxed at 28%?

In any event, selling $120,000 of investments would not normally mean $120,000 of capital gains. With appropriate specification of the shares to be sold, maybe it would only be $20,000 of capital gains and $100,000 of tax-free return of capital?

Yes, I realize there are credits to be lost and phaseouts to be phased out of, but it would make sense to pull out your tax software and run the numbers in a few scenarios. It could even be that a mixture of selling investments, a HELOC, and raiding emergency savings is what one should do.

Perversely, maybe donating to charity some investments with LTCG will also reduce your income and lower your taxes, too.
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