Home Purchase Questions

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Chindsey
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Joined: Mon Jun 03, 2013 5:09 pm

Home Purchase Questions

Post by Chindsey » Mon Nov 05, 2018 11:35 am

Good morning, all.

My wife and I will be purchasing our first (and hopefully only, at least in the next ~ 18 years) home in the summer of 2019.

We have saved and invested prudently over the past 10 - 15 years to prepare for the purchase. Because we have worked so hard to put ourselves in such a good position, and because we may be transitioning from a dual-income family to a single-income family (~ $225k annually to ~ $125 annually) after the purchase, I want to make sure we handle the home purchase in a prudent manner, too.

The home will likely be in the $300k - $350K range.

We currently have ~ $450k in taxable investments with Vanguard. Approximately $180k in the Total Stock Market Index Fund and ~ $270k in Short-Term Tax Exempt Bond Fund.

Questions:
- How much of the ~ $270k would you put toward the down payment? Why?
- Where would you keep the ~ $270k for the next several months? In the STTE Bond Fund? Primary Money Market? Federal Money Market? Some mix of the three? I would like to keep the money at Vaguard for the sake of simplicity.

Notes:
- We currently max out our annual 401k contributions.
- We currently max out our annual backdoor Roth IRA contributions.
- We have front-loaded our two children's 529s with ~ $48k each (children are ~ 5 and ~ 2 years old).

What are we missing?

Please let me know if any additional information would be helpful.

Thank you very much.

Chindsey

bloom2708
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Re: Home Purchase Questions

Post by bloom2708 » Mon Nov 05, 2018 11:53 am

Seems reasonable. The Federal and/or Prime money markets seem reasonable this close to buying and needing the cash.

I would put down 50% and go with a 15 year mortgage. You can also put down "enough" to make the payment be a comfortable amount. That might be 60% or 62%. I like the 15 year option as you pay a lot less mortgage interest. With the 24k standard deduction you have to give a lot of money away and pay a lot of tax to get over/above the standard deduction. Some will say to go 30 year to stay flexible. That is an option.

Why wait when you have the down payment? Rates could be 1% higher if the Fed keeps on raising rates at the pace they want to. Hard to say if the economy will keep purring along.

We went from 2 to 1 income. But, we had our mortgage paid off before doing that. Just kind of worked out that way and my wife's job went sideways and timing was good.

Great job saving and good luck!
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

Uniballer
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Re: Home Purchase Questions

Post by Uniballer » Mon Nov 05, 2018 11:55 am

A lot of the down payment calculation has to do with the mortgage rate. A high mortgage rate would probably make a big down payment more palatable.

The mortgage on my first house was at 10.6%. I put down the biggest payment I could stomach, and then paid off the principle as fast as I could.

barnaclebob
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Re: Home Purchase Questions

Post by barnaclebob » Mon Nov 05, 2018 12:14 pm

I would put down enough that the PITI would be about 33% of my take home pay on a 15 year mortgage. At that level and below you don't risk feeling house poor and if your income rises over time your housing will become a fairly insignificant cost.

Keep your money in the short term tax exempt bond fund, it has little risk.

megabad
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Re: Home Purchase Questions

Post by megabad » Wed Nov 07, 2018 8:30 pm

Personally, I would go 30 yr 4.8% APR with 20% down or I would just go all cash. Either you feel like the interest rate is a good deal or you don’t. The spread between 15 and 30yr is not high enough for me to go to 15 right now (it was a while back). I would just keep near term money in Prime MM. in short term tax exempt you will be earning less yield right now for more risk in my opinion. Make sure you tax loss harvest.

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grabiner
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Re: Home Purchase Questions

Post by grabiner » Wed Nov 07, 2018 11:01 pm

See Paying down loans versus investing on the wiki.

Putting more money down is a risk-free invetment, earning the mortgage interest rate, with a duration equal to the weighted average of the mortgage payments. For example, a 15-year mortgage with a 4% APR has a 7-year duration, so putting more money down is equivalent to buying a 7-year bond fund with a 4% yield.

Unless you donate a lot to charity, you will be taking the standard deduction of $24,000 or just barely itemizing, so that 4% is tax-free. You can't earn 4% after-tax without taking a lot of risk, so I would suggest paying cash for the house. You have almost enough to pay cash without a capital gain, since you have $270K in a bond fund. (If you use it all, keep your emergency fund in your Roth IRA until you can rebuild it in your taxable account.

If you do donate enough to charity that your mortgage interest is deductible, the after-tax return is 3.04% in a 24% tax bracket, or 3.12% in a 22% tax bracket if you lose one income. At that rate, you'll still come out slightly ahead if you take out the mortgage and put an equal amount in Vanguard Long-Term Tax-Exempt Admiral with its 3.30% yield, and you keep the liquidity. However, you have to weigh this against the additional closing costs, which is why you should use the APR rather than the base rate on the mortgage for this comparison.
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Ben Mathew
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Re: Home Purchase Questions

Post by Ben Mathew » Wed Nov 07, 2018 11:19 pm

It typically does not make sense to hold bonds in a taxable account while having a mortgage at the same time. You are effectively lending money to others while borrowing money from someone else. No sense in doing that unless you're getting a higher interest rate than you are paying. If the interest you're paying on your mortgage is higher than the interest you're earning on your bonds, you're losing money. Why borrow at 5% and lend at 2%?

One reason to keep some of the $270K in bonds is if you need to access the money for some unforeseen circumstances. A HELOC or a refinancing can bail you out in an emergency as long as the housing market does not crash. If your job is relatively stable, I'd suggest putting all $270K into the mortgage. If your job is risky, keep some of those bonds in case you lose your job and the housing market crashes at the same time.
Last edited by Ben Mathew on Wed Nov 07, 2018 11:24 pm, edited 1 time in total.

msk
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Re: Home Purchase Questions

Post by msk » Wed Nov 07, 2018 11:22 pm

As long as the house is worth no more than 3x sole income or 2.5x joint income then I would consider it as comfortably affordable. It is probably the investment the two of you have put the most time into studying and vetting. You also get an excellent tenant. Why on earth would you not pay for it in cash? Only fly in the ointment might be loss of tax deductions. Some simple arithmetic should clear that up and tell you if your after tax situation will be better off with any mortgage at all. I have always opted for all-cash as soon as I was able to, including selling stocks to finance the house purchase. Worked well for me over the decades. If you do not believe that it is an excellent investment, then don't go there, or go for a more modest home.

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