Choose mortgage 15 vs 30 as well choose larger/smaller down payment

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Rudy63
Posts: 65
Joined: Mon Feb 23, 2015 4:56 pm

Choose mortgage 15 vs 30 as well choose larger/smaller down payment

Post by Rudy63 » Fri Oct 06, 2017 2:26 pm

Hi All,

We are looking to upsize our house (and more importantly our yard) soon due to growing family as well as moving to a district with very good public schools in the next 1-2 years, and I am starting to get finances in order for our upcoming down payment and (scaling back 529 investments, etc.) We are looking at a (no more than) $700K house budget (likely closer to $600K, but wanted to set a ceiling.) We would plan on at least a 20% Down payment.

Background:
Emergency funds: Yes, 6 months;
In addition to e-funds, have $120K set aside at Ally saving account to fund upcoming down payment
Debt: $250K 30 year fixed Mortgage at 3.75% (25 years to go); Home value ~$410K) no other debt
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 5.75% State
State of Residence: VA
Age: 37, spouse 36
3 kids under 5
Household Income: $210K base; $260K counting typical low-end of the bonus spectrum

Desired Asset allocation: 75% stocks, 25% bonds;

Portfolio: $1.36 M
Portfolio is roughly:
$570K Tax Deferred (401K, 403B) (would plan to do conversions from 50 y/o to 70 y/o which is why we are no longer funding backdoor ROTHs)
$450K Post tax (Roth, 529)
$335K Taxable (which includes our $120K cash (in high yield savings) for DP)

New annual Contributions
$18K his 401k
$18K her 403b
$15K, 529

Goals: Sleep well at night and Financial independence/early retirement ~50. Additionally, fund equivalent of 4 year private college (to actually be used for state U + grad school or expensive undergrad) for 3 kids. Current estimated cost for that would be $850K for schools we are considering to send 3 kids through. That puts our FI # at ~$4M (or $3.15M after the kids tuition is taken out).

1. I am toying with either a larger down payment for a 30 year mortgage or a smaller (20%) down payment and a 15 year mortgage. From a cash flow perspective, we could swing either, but would (obviously) be tighter doing a 15 year. Is there a right answer
2. Can we afford a $700K house? (My wife works part time currently for $60K and we pay approximately $30K for year childcare. Expect her to go back to full time in 5 years for $110K)
3. I currently have close to the entire down payment sitting in 1.5% savings. The equity on our current house is approximately the same as the expected down payment depending on moving expenses, actual selling price, etc. Is that overly conservative to not count that equity towards down payment since after we sell our current house (1-3 months after purchasing new house) we will have that cash to plug back into the AA? Or is that prudent? Our house is in a stable market (5% dip at the bottom of 2009 and not astronomical growth since. )

I didn't put the mortgage rates. They will be whatever the market gives us at the time, so not sure how valid today's rates would be to informing the decision.

Thanks in advance for the assistance!
Last edited by Rudy63 on Wed Oct 11, 2017 9:21 am, edited 1 time in total.

Sandi_k
Posts: 462
Joined: Sat May 16, 2015 11:55 am
Location: SF Bay Area

Re: Choose mortgage 15 vs 30 as well choose larger/smaller down payment

Post by Sandi_k » Fri Oct 06, 2017 2:56 pm

A $600k house with 20% down = $480k mortgage, so about 2.5x your base income. Totally appropriate.

IIWY, I would do 20% down, and a 15 year mortgage. It is unbelievable how much money you save in interest when it's paid down on that schedule. You have plenty of cushion, and plenty of savings. No reason not to take the financially prudent path - and when you finish paying off the house, you'll be in a great position to cash flow any unexpected expenses with the kids' colleges

I would not do 30 years - I like predictable savings, fast debt payoff, and enforced frugality. The 15 year term helps with all three.

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Meg77
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Location: Dallas, TX
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Re: Choose mortgage 15 vs 30 as well choose larger/smaller down payment

Post by Meg77 » Fri Oct 06, 2017 3:14 pm

Rudy63 wrote:
Fri Oct 06, 2017 2:26 pm

1. I am toying with either a larger down payment for a 30 year mortgage or a smaller (20%) down payment and a 15 year mortgage. From a cash flow perspective, we could swing either, but would (obviously) be tighter doing a 15 year. Is there a right answer

There's not a right answer. A 15 year loan would have you debt free right around the time you want to retire, conveniently. And of course you save a ton in interest. Your lofty educational goals may be sacrificed a bit along the way though. This rests in my book upon how stable (and how likely to increase) your income is. We got a 30 year fixed to maintain flexibility for other goals, but then our incomes went up and within 18 months we refinanced to a 15 year because we were making double payments for so long anyway. Wish we'd saved the closing costs and done that up front.

2. Can we afford a $700K house? (My wife works part time currently for $60K and we pay approximately $30K for year childcare. Expect her to go back to full time in 5 years for $110K)

Yes you can. Doesn't mean you need to buy one of course - you can afford a Ferrari too.

3. I currently have close to the entire down payment sitting in 1.5% savings. The equity on our current house is approximately the same as the expected down payment depending on moving expenses, actual selling price, etc. Is that overly conservative to not count that equity towards down payment since after we sell our current house (1-3 months after purchasing new house) we will have that cash to plug back into the AA? Or is that prudent? Our house is in a stable market (5% dip at the bottom of 2009 and not astronomical growth since. )

It's definitely prudent to have the DP amount in cash. You will need that money - not the home equity - to buy the new place, and if you invest it and it drops in value that will delay your goal. Once your current home sells, use that money to beef up 529s, pad the EF back up to 6 months or so, fix up the new place a bit if needed (new furniture, etc.) and then invest according to your aa.

However, I think you should go ahead and buy sooner rather than later. Rates and home prices are likely to keep creeping up over 2 years. You already have the money - dip into your EF or taxable brokerage for the little bit more you need; it'll be replaced as soon as you sell your home as you say.
Now for the advice you didn't ask for :beer :
1. You're investing less than 15% toward retirement. Not terrible given your head start and educational savings goals, but not awesome either given an early retirement goal. I'd add back the backdoor Roths. No point investing in taxable and leaving this space available! Even if you can't swing it from the budget right now, move $11k a year from taxable to backdoor Roths each year. Doesn't matter if you intend to do conversions - the more you can get growing tax free the better.

2. Hopefully you're running your family's medical bills through an HSA if you have access to one.

3. Don't count on your wife going back to work full time. It rarely happens, especially once kids are in school and activities start to dominate the family schedule.
"An investment in knowledge pays the best interest." - Benjamin Franklin

fourkids
Posts: 96
Joined: Mon Mar 23, 2015 9:40 am

Re: Choose mortgage 15 vs 30 as well choose larger/smaller down payment

Post by fourkids » Fri Oct 06, 2017 3:29 pm

Very similar to you, but a few years older. Also targeting early retirement.
We bought a bigger house 3 years ago and did the 15 year mortgage. I didn't want to have to remember to make extra payments on the 30 year, and I liked the slightly better interest rate.
Plus, the mortgage will be paid off right when my younger kids go to college, which means I'll have extra cash flow to use for tuition

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Choose mortgage 15 vs 30 as well choose larger/smaller down payment

Post by KlangFool » Fri Oct 06, 2017 3:37 pm

Rudy63 wrote:
Fri Oct 06, 2017 2:26 pm

Additionally, fund equivalent of 4 year private college (to actually be used for state U + grad school or expensive undergrad) for 3 kids. Current estimated cost for that would be $850K for schools we are considering to send 3 kids through.
Rudy63,

How do you plan to fund this 850K?

1) Your kids are going to college while you early retire. It would not make sense for you to pay off the 15 years mortgage and then take a more expensive student loan to finance their college education.

2) If the number is much higher than this, how do you plan to bridge the gap? Student loan? See (1).

My opinion is you should

A) 20% down payment and 30 years mortgage.

B) Continue to Backdoor your Roth. Move money from your taxable account to Backdoor Roth.

KlangFool

Rudy63
Posts: 65
Joined: Mon Feb 23, 2015 4:56 pm

Re: Choose mortgage 15 vs 30 as well choose larger/smaller down payment

Post by Rudy63 » Wed Oct 11, 2017 8:35 am

Hi All,


Thanks for the advice!

Sandi_k--that was my thinking for 15 year as well. Thanks!

Meg--yes, we using an HSA (as well as childcare FSA). Since our max OOP is much less than the limit ($3K/yr) we max it and use it like a ROTH so the investments can grow tax free. To your point about saving less than 15% towards retirement,
Now for the advice you didn't ask for :beer :
1. You're investing less than 15% toward retirement.
, maybe I have been calculating it wrong. When I talk the $51K (our 2 401Ks and 15K in a 529) compared to either our income without bonus of $210K or with of $260K, I get 19.6% or 24.2%. Not sure if when people are calculating savings rates for 401K they reduce it for taxes or something. Please let me know! Also, FWIW, even if my wife doesn't go back to work full time, as long as we get out from the current childcare costs which are more than our mortgage, we should be able to increase our savings there.

Klang--I plan to fund the education with a combination of 529 and selling taxable. Taking a loan for their education isn't really being considered. I would either reduce the amount available and/or work a bit longer.

I hadn't mentioned in my original post, but the FIRE at 50 is not firm. Could be 51, 52, 53. At 55, makes it much easier to cash flow college and much shorter gap until starting SS.

Thanks again to you all for your help!

KlangFool
Posts: 7206
Joined: Sat Oct 11, 2008 12:35 pm

Re: Choose mortgage 15 vs 30 as well choose larger/smaller down payment

Post by KlangFool » Wed Oct 11, 2017 10:25 am

Rudy63 wrote:
Wed Oct 11, 2017 8:35 am
Hi All,


Thanks for the advice!

Sandi_k--that was my thinking for 15 year as well. Thanks!

Meg--yes, we using an HSA (as well as childcare FSA). Since our max OOP is much less than the limit ($3K/yr) we max it and use it like a ROTH so the investments can grow tax free. To your point about saving less than 15% towards retirement,
Now for the advice you didn't ask for :beer :
1. You're investing less than 15% toward retirement.
, maybe I have been calculating it wrong. When I talk the $51K (our 2 401Ks and 15K in a 529) compared to either our income without bonus of $210K or with of $260K, I get 19.6% or 24.2%. Not sure if when people are calculating savings rates for 401K they reduce it for taxes or something. Please let me know! Also, FWIW, even if my wife doesn't go back to work full time, as long as we get out from the current childcare costs which are more than our mortgage, we should be able to increase our savings there.

Klang--I plan to fund the education with a combination of 529 and selling taxable. Taking a loan for their education isn't really being considered. I would either reduce the amount available and/or work a bit longer.

I hadn't mentioned in my original post, but the FIRE at 50 is not firm. Could be 51, 52, 53. At 55, makes it much easier to cash flow college and much shorter gap until starting SS.

Thanks again to you all for your help!
Rudy63,

You have 1.24 million (minus 120K DP). You are 37 years old. You save 51K per year. Could you reach 4 million at 50, 51,53, 55 years old?

Starting Net Worth $1,200,000
Annual Savings $51,000
Years
Annual Return Rate 9 10 11 12 13 14 15
5.00% $2,423,949 $2,596,146 $2,776,953 $2,966,801 $3,166,141 $3,375,448 $3,595,221
6.00% $2,613,432 $2,821,238 $3,041,512 $3,275,003 $3,522,503 $3,784,853 $4,062,944
7.00% $2,817,028 $3,065,220 $3,330,786 $3,614,941 $3,918,987 $4,244,316 $4,592,418
8.00% $3,035,671 $3,329,525 $3,646,887 $3,989,638 $4,359,809 $4,759,593 $5,191,361
9.00% $3,270,345 $3,615,676 $3,992,087 $4,402,374 $4,849,588 $5,337,051 $5,868,386

It works if you are fully-employed continuously over the next 13 years.

KlangFool

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monkey_business
Posts: 583
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Re: Choose mortgage 15 vs 30 as well choose larger/smaller down payment

Post by monkey_business » Wed Oct 11, 2017 11:25 am

I'm more in the 30 year mortgage camp purely from a risk standpoint. With a 15 year mortgage, you are stuck with the higher payments no matter what. This is something to consider in the event of financial downturns such as job loss, health issues, etc. A 30 year mortgage can be paid off in 15 years (or sooner) as well, but allows you to dial back the extra payments if you need to.

Also, the APR spread these days between the two mortgages does not seem that high: ~3.0% for 15 year, and ~3.75% for a 30 year. So the question is whether the higher mortgage payment (risk) is worth the ~0.75% APR savings. Only you can decide that.

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