Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

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Topic Author
bg5
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Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by bg5 » Fri Aug 02, 2019 5:40 am

Hey Gang,

Really need some help here. I have just sold my home and have $300,000 in cash in my bank account. The question I have is should I invest this or should I use it to pay cash for my new home and avoid a home payment? I live in a LCOL area and $250,000-$300,000 will get you a really nice home.

Sadly we just sold our lake home because we have a family of 5 and it was just to small.

Info on me

Wife and I are both teachers and we make a combined income of $145,000. We are 38 and 34 and have very stable jobs, and our incomes will go up about 1% a year for life. We will both get pensions in Michigan and that are around 40% of our highest 3 years of salary. The pensions to do have a cost of living adustment that is really nice.

Retirement accounts = $200,000

Emergency Fund = $20,000

No debt

Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them

Our previous house payment was about $1500 a month and we could easily save around $2000 a month after taking vacations etc in our old home. We are currently saving around $32,000 a year in Roth IRAs and a 457 b plan. So the question is should we take the 300k and just invest it for the long hall or do we just pay cash for our new home and live the rest our lives debt free?????? I am ok with either as I am not worried about losing our jobs because in Michigan you cannot find teachers and we both are beloved in our school districts.

Any thoughts would be greatly appreciated and I apologize for how this post is set up but I have a baby who is sleeping on my lap so my typing mobility is limited :)

ddurrett896
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by ddurrett896 » Fri Aug 02, 2019 6:17 am

How are you saving $32k/year in Roth IRAs?

Silk McCue
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Silk McCue » Fri Aug 02, 2019 6:20 am

Congratulations on all of the financial progress you have made!

I would not go back into debt with a mortgage in order to invest the returns from this sale. Debt free is wonderful state to be in. I would pour more money into your investment accounts, including taxable accounts, over time that you would have otherwise paid on the new mortgage.

Cheers

Topic Author
bg5
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by bg5 » Fri Aug 02, 2019 6:21 am

Sorry for the confusing post.....we save $12,000 in Roth IRA's ($6000 each) and then I max out my 457b at $19,000 so it looks like I had a math issue and the total should be $31,000 annually.

These numbers are based off of our old budget when we had the $1500 house payment so we were still able to save a nice chunk of money.

Compound
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Compound » Fri Aug 02, 2019 6:29 am

What sort of rate could you get on a new mortgage? Do you get a tax deduction from your mortgage or do you take the standard deduction? How would your mortgage rate compare to the expected return on investing those funds in your investment vehicle of choice? How much does having debt bother you?

Dude2
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Dude2 » Fri Aug 02, 2019 6:38 am

As much as I hate debt and having to pay a lender to use their money, I was recently in this situation, and I opted to compromise. I put a hefty amount down, and then the rest I invested in taxable (went 50/50 in other words). With a "simple loan", I still have the option to pay down the mortgage at any time.

HomeStretch
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by HomeStretch » Fri Aug 02, 2019 6:38 am

It’s a personal choice. My choice would be to pay off the mortgage and be debt free. Then save the former mortgage payment of $1,500/mo. That will increase your annual savings from $31k to $49k.

You mentioned both are teachers but only you are saving $19k per year in a 457b plan. So $19k of new savings can go into the spouse’s 457b and the balance into a Taxable account.

JoeRetire
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by JoeRetire » Fri Aug 02, 2019 6:40 am

Mortgage rates are pretty low now.

Unless the thought of having a mortgage keeps you awake at night, you should get a 30 year fixed mortgage for your next home.

stan1
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by stan1 » Fri Aug 02, 2019 7:02 am

Given your specifics (stable income, pensions) I personally would pay cash for the new house and increase savings by what the mortgage payment would have been for the next 15-30 years. An equally good argument could be made for the mortgage and investing. It's a personal preference with the outcome dependent upon future things you have no control over.

I'd put some of that in the 529s if you plan to assist kids with instate public education costs at least until the first enters college. Your college costs will be spread out almost continuously over 15 years so that will help with cash flow along with solid, stable income and pensions.

hightower
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by hightower » Fri Aug 02, 2019 7:24 am

First of all, congrats on your 300,000k "profit" from your home sale. Is that all truly profit? Meaning, did you account for how much you've spent in interest, fees, repairs, upgrades, etc? Just curious because we're about to sell our home and we're hoping to get that much back after paying off the current mortgage. But, I know for us it won't all be truly profit, it's just recovering a lot of equity that we built up from paying cash for the renovations we did. Regardless, you must be in a hot market, so congrats!
Anyway, I'm getting off topic. I'm curious to read other responses to your question as well because we'll be in a similar situation soon too. Except, we're already in the process of buying a house and what I'm going to have to decide is how much, if any to put towards the new mortgage once our current house sells. I'm leaning towards not paying it down at all and instead keeping it for liquidity/investments. If you do the math on how much potential that money has to build wealth, it's quite staggering. 300k invested now could easily grow to $2.5 mil or more (assuming nearly 30 years in the market and 8% average returns). Obviously there are no guarantees there like there would be to paying cash for a house and avoiding all those finance costs. But, are you certain you'll want to stay in your new house for the rest of your life? That's something else to think about. If you think there's any chance you may want to move again in the next 10, 15 years or so, do you really want to gamble all of that cash on just one house? What if the market tanks over the next 10 years and you decide you want to downsize, but can't because home values dropped to 50% of what you paid. If you take out a mortgage, you're letting a bank take on part of the risk.
There's no right or wrong answer here. I think it's probably best to do a little of both honestly...put some down, invest the rest.

Dandy
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Dandy » Fri Aug 02, 2019 7:35 am

You seem to be in very good financial shape. One of the good points about mortgage debt was the ability to itemize the interest expense and reduce taxes. The new tax law makes that much harder to do for many. You need to know how that affects you.

In general I like to have no debt. I also don't think this is a great time for investing i.e. during a record length bull market. So, especially if you can't get a tax brake with mortgage interest I'd opt for using the cash to buy the house.

It is great to look forward to 2 COLA pensions from the state. Since most states and lots of private pensions are often way underfunded I would not be totally sure of what they might look like a couple of decades down the road. So, I would make sure to keep investing at a decent rate.

Flyer24
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Flyer24 » Fri Aug 02, 2019 7:51 am

You are doing awesome and congrats on a great profit. Personally, I would rather be debt free. Otherwise, you are basically borrowing money in order to invest. Use the normal house payment and just put it in taxable.

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Sandtrap
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Sandtrap » Fri Aug 02, 2019 7:58 am

Greater percentage, or all, of the funds to pay cash for a home. In some ways, you'll be making as much or more than if invested in a very "known and predictable" way.
Be sure your EF is topped of for any funds you might need for the new home and transition to it.

Congratulations on your successes. :sharebeer
j
Wiki Bogleheads Wiki: Everything You Need to Know

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welderwannabe
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by welderwannabe » Fri Aug 02, 2019 7:59 am

If you were still into the house and owned it free and clear, would you have taken out a $300,000 cash out mortgage to invest the money in the market?

Your answer to that question should be the same as to this one.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

FI4LIFE
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by FI4LIFE » Fri Aug 02, 2019 8:08 am

I'd probably prefer debt free, but would consider taking a smallish mortgage, under $100k, and invest.

Nowizard
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Nowizard » Fri Aug 02, 2019 8:21 am

Most suggest debt free, but it could be significant to consider whether you feel you are on track for your ultimate retirement funding. Interest rates are historically low, a reason some would invest based on the effort to increase assets. Tax laws have changed, so there could be less deduction of mortgage interest depending on whether you itemize. Some love the idea of being debt free while others are comfortable with a more complex approach to investing. Run the figures and determine choices. You will get great opinions here that will aid in determining your decision.

Tim

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Watty
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Watty » Fri Aug 02, 2019 8:40 am

There is a wiki on this choice if you have not seen it.

https://www.bogleheads.org/wiki/Paying_ ... _investing

Investing the money and earning a higher rate of return sounds easy but it really is not as easy as it sounds because you have a large "sequence of returns risk"(Google this). Here is a very simplistic example that I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
bg5 wrote:
Fri Aug 02, 2019 5:40 am
Wife and I are both teachers and we make a combined income of $145,000. We are 38 and 34 and have very stable jobs, and our incomes will go up about 1% a year for life. We will both get pensions in Michigan and that are around 40% of our highest 3 years of salary. The pensions to do have a cost of living adustment that is really nice.
That is if everything goes right for the next 20 or 30 years.

Right now your pension are only worth what you would get if you left your job tomorrow and that is "not much".

Some state pensions are instead of Social Security, if that is true in your case then it really is not all that great.

bg5 wrote:
Fri Aug 02, 2019 5:40 am
We are 38 and 34....
At your age your asset allocation might be 25-30% bonds so if you have an additional $200K invested and a $200K mortage then you would be buying $50-$60K in bonds that might be paying 2% and you might need to buy some of them in a taxable account. Borrowing money at close to 4% to use some of it to buy bonds that are paying 2% makes it even harder to come out ahead.

It is not exact but in some ways having a mortage is like having a negative bond in your asset allocation. If you get a $200K mortage and have an additional $200K to invest that would give you a $400K portfolio. If your target asset allocation is 25% bonds and 75% stocks then you would have;

1) $100K bonds 25%
2) $300K stocks 75%

But if you consider your mortage to be a negative bond then you would have a total portfolio of only $200K because you would have $400K invested less the $200K mortage. That would give you an asset allocation of;

1) $100K bonds - $200K mortgage= negative $100K which is -50% bonds.
2) $300K Stocks which is 150% stocks.

That is way more aggressive than your might be planning on.

A 25% decline in your $400K portfolio would be a $100K loss.

With a paid off house and a $200K portfolio a 25% market decline would be a $50K loss.

In your situation I would pay cash for the house and then invest your "mortage payment" each month.

Ten or twenty years from now it might turn out that having kept having had the mortage might have turned out to have been a financially better choice in retrospect but a couple of decades of monthly savings will have also added up to lot of money.

Decades from now looking back having paid cash for a house might turn out to not have been the optimal choice then but there are few ways for it to turn out really badly.

bg5 wrote:
Fri Aug 02, 2019 5:40 am
Emergency Fund = $20,000
For a family of five you need a larger emergency fund so somewhere in your plans you should increase your emergency fund.

stimulacra
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by stimulacra » Fri Aug 02, 2019 8:49 am

Pay cash, you have to live somewhere anyways, it's all just mental accounting.

It pretty much boils down to: do you want to lump sum $300k into your retirement accounts by taking on a mortgage or do you want to dollar cost average it by paying cash for a new home instead?

I would argue that having a paid off home is a solid foothold to retirement regardless of interest rates.

Congrats on the progress so far.

KlangFool
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by KlangFool » Fri Aug 02, 2019 8:57 am

OP,

<<Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them>>

Why would you pay cash for the house so that you can take an expensive student loan for your kids? Take 30 years low-interest fixed-rate mortgage instead.

KlangFool

ny_rn
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by ny_rn » Fri Aug 02, 2019 9:00 am

I would bump up the emergency fund as well.

rascott
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by rascott » Fri Aug 02, 2019 9:23 am

If you take what would be your mortgage payment and actually diligently invest it.... then paying cash for the house would be ok.

If you just up your lifestyle and consume what would have been your mortgage payment, the numbers aren't going to look so good.

With how stable your jobs/income are... If it were me, I'd probably take the mortgage out to some level and put 100% of it in equities, or buy a rental property if that appealed to you. I wouldn't borrow and then invest it in bonds in any manner.

If you had less stable employment a paid for house might be the better choice. But two teachers with locked in jobs and a pension....I'd be willing to take more risk. But my risk tolerance seems to be higher than many.

Flyer24
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Flyer24 » Fri Aug 02, 2019 9:27 am

KlangFool wrote:
Fri Aug 02, 2019 8:57 am
OP,

<<Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them>>

Why would you pay cash for the house so that you can take an expensive student loan for your kids? Take 30 years low-interest fixed-rate mortgage instead.

KlangFool
I do agree to avoid a student loan if able. However, you don’t need to take a mortgage for it. He could divert his $1500 house payment into the college fund. Then, when the oldest starts college he could likely cash flow college since he is debt free. No sense in borrowing money. His kids are far enough apart in age to make it work. His oldest kid is still 7 years from college. An additional $1500 monthly going into the college fund for those 7 years would yield over $130K plus growth. By then you have a very large 529 account and no house payment when the first one is in college.

KlangFool
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by KlangFool » Fri Aug 02, 2019 9:56 am

Flyer24 wrote:
Fri Aug 02, 2019 9:27 am
KlangFool wrote:
Fri Aug 02, 2019 8:57 am
OP,

<<Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them>>

Why would you pay cash for the house so that you can take an expensive student loan for your kids? Take 30 years low-interest fixed-rate mortgage instead.

KlangFool
I do agree to avoid a student loan if able. However, you don’t need to take a mortgage for it. He could divert his $1500 house payment into the college fund. Then, when the oldest starts college he could likely cash flow college since he is debt free. No sense in borrowing money. His kids are far enough apart in age to make it work. His oldest kid is still 7 years from college. An additional $1500 monthly going into the college fund for those 7 years would yield over $130K plus growth. By then you have a very large 529 account and no house payment when the first one is in college.
Flyer24,

1) You are assuming that everything goes well and nothing could ever go wrong for the next 10 to 20 years.

<<No sense in borrowing money. >>

2) At less than 4% mortgage interest rate, the chances of beating that over the next 10 to 20 years are high.

KlangFool

Flyer24
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Flyer24 » Fri Aug 02, 2019 10:09 am

KlangFool wrote:
Fri Aug 02, 2019 9:56 am
Flyer24 wrote:
Fri Aug 02, 2019 9:27 am
KlangFool wrote:
Fri Aug 02, 2019 8:57 am
OP,

<<Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them>>

Why would you pay cash for the house so that you can take an expensive student loan for your kids? Take 30 years low-interest fixed-rate mortgage instead.

KlangFool
I do agree to avoid a student loan if able. However, you don’t need to take a mortgage for it. He could divert his $1500 house payment into the college fund. Then, when the oldest starts college he could likely cash flow college since he is debt free. No sense in borrowing money. His kids are far enough apart in age to make it work. His oldest kid is still 7 years from college. An additional $1500 monthly going into the college fund for those 7 years would yield over $130K plus growth. By then you have a very large 529 account and no house payment when the first one is in college.
Flyer24,

1) You are assuming that everything goes well and nothing could ever go wrong for the next 10 to 20 years.

<<No sense in borrowing money. >>

2) At less than 4% mortgage interest rate, the chances of beating that over the next 10 to 20 years are high.

KlangFool
You are proposing taking out a loan 7 years before the money for college is even needed. It would be different if his oldest was 18. Life happens and things don’t go as planned. That is why you have a back up including an adequately funded emergency fund. I am not saying you are wrong. I am just saying borrowing money is not necessary. Why be in debt when you don’t have to be? I am not a proponent of borrowing to invest neither are many others on this board.

Chadnudj
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Chadnudj » Fri Aug 02, 2019 10:35 am

It doesn't have to be one or the other (you can do 50/50).

Yet if you want to do just one, buy the house:
1. You won't regret not having a house payment.
2. It locks in the mortgage interest rate (3.5%-4%, likely) as your return, which is nice (I'm ignoring any tax benefits you might get from writing off mortgage interest).
3. It probably sounds a bit like market timing, but markets are at/near all-time highs and/or valuations.
4. Related to 3, buying the house allows you to dollar-cost average your former mortgage payment into the markets, allowing you to buy dips if/when they occur.

Now, for 4, you need to actually DO THAT, by increasing/automating your former house payment to investment accounts. Ideally you do this in tax-advantaged accounts to reduce your income tax burden, giving you (hopefully) an even better long term return (as you use pre-tax money at your highest marginal tax bracket, and will draw it out later hopefully spread across lower brackets).

KlangFool
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by KlangFool » Fri Aug 02, 2019 11:09 am

Flyer24 wrote:
Fri Aug 02, 2019 10:09 am
KlangFool wrote:
Fri Aug 02, 2019 9:56 am
Flyer24 wrote:
Fri Aug 02, 2019 9:27 am
KlangFool wrote:
Fri Aug 02, 2019 8:57 am
OP,

<<Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them>>

Why would you pay cash for the house so that you can take an expensive student loan for your kids? Take 30 years low-interest fixed-rate mortgage instead.

KlangFool
I do agree to avoid a student loan if able. However, you don’t need to take a mortgage for it. He could divert his $1500 house payment into the college fund. Then, when the oldest starts college he could likely cash flow college since he is debt free. No sense in borrowing money. His kids are far enough apart in age to make it work. His oldest kid is still 7 years from college. An additional $1500 monthly going into the college fund for those 7 years would yield over $130K plus growth. By then you have a very large 529 account and no house payment when the first one is in college.
Flyer24,

1) You are assuming that everything goes well and nothing could ever go wrong for the next 10 to 20 years.

<<No sense in borrowing money. >>

2) At less than 4% mortgage interest rate, the chances of beating that over the next 10 to 20 years are high.

KlangFool
You are proposing taking out a loan 7 years before the money for college is even needed. It would be different if his oldest was 18. Life happens and things don’t go as planned. That is why you have a back up including an adequately funded emergency fund. I am not saying you are wrong. I am just saying borrowing money is not necessary. Why be in debt when you don’t have to be? I am not a proponent of borrowing to invest neither are many others on this board.
Flyer24,

<<Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them>>
<<I am just saying borrowing money is not necessary.>>
<<That is why you have a back up including an adequately funded emergency fund.>>

Let's assume the annual college cost is 30K per year. For 3 kids, it is 4 X 3 X 30K = 360K. The numbers do not add up as far as I can tell.

KlangFool

Flyer24
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Flyer24 » Fri Aug 02, 2019 11:34 am

KlangFool wrote:
Fri Aug 02, 2019 11:09 am
Flyer24 wrote:
Fri Aug 02, 2019 10:09 am
KlangFool wrote:
Fri Aug 02, 2019 9:56 am
Flyer24 wrote:
Fri Aug 02, 2019 9:27 am
KlangFool wrote:
Fri Aug 02, 2019 8:57 am
OP,

<<Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them>>

Why would you pay cash for the house so that you can take an expensive student loan for your kids? Take 30 years low-interest fixed-rate mortgage instead.

KlangFool
I do agree to avoid a student loan if able. However, you don’t need to take a mortgage for it. He could divert his $1500 house payment into the college fund. Then, when the oldest starts college he could likely cash flow college since he is debt free. No sense in borrowing money. His kids are far enough apart in age to make it work. His oldest kid is still 7 years from college. An additional $1500 monthly going into the college fund for those 7 years would yield over $130K plus growth. By then you have a very large 529 account and no house payment when the first one is in college.
Flyer24,

1) You are assuming that everything goes well and nothing could ever go wrong for the next 10 to 20 years.

<<No sense in borrowing money. >>

2) At less than 4% mortgage interest rate, the chances of beating that over the next 10 to 20 years are high.

KlangFool
You are proposing taking out a loan 7 years before the money for college is even needed. It would be different if his oldest was 18. Life happens and things don’t go as planned. That is why you have a back up including an adequately funded emergency fund. I am not saying you are wrong. I am just saying borrowing money is not necessary. Why be in debt when you don’t have to be? I am not a proponent of borrowing to invest neither are many others on this board.
Flyer24,

<<Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them>>
<<I am just saying borrowing money is not necessary.>>
<<That is why you have a back up including an adequately funded emergency fund.>>

Let's assume the annual college cost is 30K per year. For 3 kids, it is 4 X 3 X 30K = 360K. The numbers do not add up as far as I can tell.

KlangFool
By the time the first one is in college, he will have approaching half of it saved in a 529. Based on saving $18K a year plus growth plus whatever he was already saving. So that leaves the rest to be used from cash flow of no house payment.

$360K - 160K (low est of 529) = $200K
$200K/12 years = $16.7K per year
His house payment was $18K per year.
He can cash flow.
He is in a position to never have to borrow for his house or college. That is so awesome.
Last edited by Flyer24 on Fri Aug 02, 2019 11:41 am, edited 1 time in total.

KlangFool
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by KlangFool » Fri Aug 02, 2019 11:41 am

Flyer24 wrote:
Fri Aug 02, 2019 11:34 am

By the time the first one is in college, he will have approaching half of it saved in a 529. Based on saving $18K a year plus growth plus whatever he was already saving. So that leaves the rest to be used from cash flow of no house payment.

$360K - 160K (low est) = $200K.
$200K/12 years = $16.7K per year
His house payment was $18K per year.
He can cash flow.
Flyer24,

A) Assuming that everything goes well for the next 8 to 20 years.

Versus

B) 300K growing at 5% to 6% nominal and even if not everything goes well, OP will be fine. Essentially, the 300K investment will pay for the college.

KlangFool

tlk59
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by tlk59 » Fri Aug 02, 2019 11:47 am


Flyer24,

<<Kids are ages 11, 8, and 1 and we have around $20,000 in 529 plans for all of them>>
<<I am just saying borrowing money is not necessary.>>
<<That is why you have a back up including an adequately funded emergency fund.>>

Let's assume the annual college cost is 30K per year. For 3 kids, it is 4 X 3 X 30K = 360K. The numbers do not add up as far as I can tell.

KlangFool
I know college cost is a bear compared to when I went to school, but this isn't a hard and fast number. It still depends on choices.

My son went to two years of Community College. Then finished up at the local San Jose State U, all while living at home with us. We did have some savings bonds earmarked for his college costs, but nothing huge.

Now maybe your kid will insist on an Ivy League school, living in the dorms, etc. But if they're going to cut you out of those decisions, maybe they should be a little more involved in the financing part as well. :-)
Last edited by tlk59 on Fri Aug 02, 2019 12:45 pm, edited 1 time in total.

bullmoose85
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by bullmoose85 » Fri Aug 02, 2019 12:10 pm

I'm impressed that you have such a high income on teacher's salaries in a LCOL area. You're doing something right!

In your situation, it's a no brainer: pay cash for your next house and stay debt free. The only qualifier would be if you don't plan on staying in your next house for a reasonably long time (7+ years), then you're more exposed to the whims of the housing market.

Don't let anyone sell you on "but you're giving up those compound returns in the market!" It's entirely possible we could have a decade of low (or even negative) market returns, in which case you've made little money on your investments, and you have a house payment around your neck. And even if the opposite happens and this bull market goes on for another decade, that would probably mean other asset prices (i.e. your house) have increased as well.

You'll never go wrong choosing to be debt free.

Chadnudj
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Chadnudj » Fri Aug 02, 2019 2:43 pm

KlangFool wrote:
Fri Aug 02, 2019 11:41 am
Flyer24 wrote:
Fri Aug 02, 2019 11:34 am

By the time the first one is in college, he will have approaching half of it saved in a 529. Based on saving $18K a year plus growth plus whatever he was already saving. So that leaves the rest to be used from cash flow of no house payment.

$360K - 160K (low est) = $200K.
$200K/12 years = $16.7K per year
His house payment was $18K per year.
He can cash flow.
Flyer24,

A) Assuming that everything goes well for the next 8 to 20 years.

Versus

B) 300K growing at 5% to 6% nominal and even if not everything goes well, OP will be fine. Essentially, the 300K investment will pay for the college.

KlangFool
I'll offer one quibble: you're ignoring financial aid possibilities/considerations. Generally speaking (and I'm not entirely up to speed on this, so I apologize in advance if I get anything wrong), financial aid doesn't consider your home value or retirement accounts in assessing ability to pay, but does consider your income/taxable accounts/savings. Buying the house outright effectively "shields" the $300k from being considered by financial aid, and then OP/OP's spouse can fill up retirement accounts with what they would have been paying in housing. There are a probably a few more strategies to consider in connection with this (when they retire, for instance -- retiring earlier might help them get more financial aid, etc.), but regardless OP needs to think about this decision in part in regards to how it might impact his kids' eligibility for financial aid.

KlangFool
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by KlangFool » Fri Aug 02, 2019 3:04 pm

Chadnudj wrote:
Fri Aug 02, 2019 2:43 pm
KlangFool wrote:
Fri Aug 02, 2019 11:41 am
Flyer24 wrote:
Fri Aug 02, 2019 11:34 am

By the time the first one is in college, he will have approaching half of it saved in a 529. Based on saving $18K a year plus growth plus whatever he was already saving. So that leaves the rest to be used from cash flow of no house payment.

$360K - 160K (low est) = $200K.
$200K/12 years = $16.7K per year
His house payment was $18K per year.
He can cash flow.
Flyer24,

A) Assuming that everything goes well for the next 8 to 20 years.

Versus

B) 300K growing at 5% to 6% nominal and even if not everything goes well, OP will be fine. Essentially, the 300K investment will pay for the college.

KlangFool
I'll offer one quibble: you're ignoring financial aid possibilities/considerations. Generally speaking (and I'm not entirely up to speed on this, so I apologize in advance if I get anything wrong), financial aid doesn't consider your home value or retirement accounts in assessing ability to pay, but does consider your income/taxable accounts/savings. Buying the house outright effectively "shields" the $300k from being considered by financial aid, and then OP/OP's spouse can fill up retirement accounts with what they would have been paying in housing. There are a probably a few more strategies to consider in connection with this (when they retire, for instance -- retiring earlier might help them get more financial aid, etc.), but regardless OP needs to think about this decision in part in regards to how it might impact his kids' eligibility for financial aid.
Chadnudj,

A) If OP is doing well, aka fully employed, OP will not be qualified for financial aid just by income alone.

B) If OP is not doing well, aka unemployed, the money in the taxable account will be spent to feed the family. Hence, it will no longer be a problem for financial aid consideration.

KlangFool

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Watty
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Watty » Fri Aug 02, 2019 3:09 pm

KlangFool wrote:
Fri Aug 02, 2019 11:09 am

Let's assume the annual college cost is 30K per year. For 3 kids, it is 4 X 3 X 30K = 360K. The numbers do not add up as far as I can tell.
It will be about 22 years until the OP's one year old kid will graduate from college. That is 264 months which is a lot of time to save up a hefty amount if you don't have a mortage payment.

JoeRetire
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by JoeRetire » Fri Aug 02, 2019 3:13 pm

bullmoose85 wrote:
Fri Aug 02, 2019 12:10 pm
You'll never go wrong choosing to be debt free.
House poor with no cash is "going wrong".

KlangFool
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by KlangFool » Fri Aug 02, 2019 3:26 pm

Watty wrote:
Fri Aug 02, 2019 3:09 pm
KlangFool wrote:
Fri Aug 02, 2019 11:09 am

Let's assume the annual college cost is 30K per year. For 3 kids, it is 4 X 3 X 30K = 360K. The numbers do not add up as far as I can tell.
It will be about 22 years until the OP's one year old kid will graduate from college. That is 264 months which is a lot of time to save up a hefty amount if you don't have a mortage payment.
Watty,

A) Or, 22 years for the 300K investment to beat the 3+% mortgage interest and pay for the college. Is that a good bet? That is the question.

B) No mortgage payment worked out if it is sunny all the way. Is that a good assumption?

C) OP only has 200K of retirement saving besides the house.

KlangFool

stlutz
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by stlutz » Fri Aug 02, 2019 3:51 pm

Would you ever consider posting a thread entitled, "should I buy stocks on margin?" The question isn't whether you will buy a house--it sounds like you are going to do that regardless; the question is whether you will take out a low-interest loan to invest in stocks and bonds.

Note that most people do this at some point in their lives if not for their whole lives. The questions whether you want to do that.

bullmoose85
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by bullmoose85 » Fri Aug 02, 2019 3:53 pm

JoeRetire wrote:
Fri Aug 02, 2019 3:13 pm
bullmoose85 wrote:
Fri Aug 02, 2019 12:10 pm
You'll never go wrong choosing to be debt free.
House poor with no cash is "going wrong".
Ok fine, don't spend every last dollar of your savings on the purchase price of a house. I figured this was common sense. OP could buy a 275k house with cash and still have 45k left in savings, which he could build up rapidly without a house payment.

vested1
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by vested1 » Sat Aug 03, 2019 4:48 am

If I were in your shoes I would much rather be paying myself the interest than paying it to the bank in the form of a mortgage. Your saving rate is already good, so I would buy the new house with cash and add to current investments in the amount of what you were previously paying in P&I, virtually "paying" yourself the interest (gain) rather than giving it to someone else. Interest paid on a mortgage is lost money.

Your oldest will be ready for college in 7-8 years, so your timeline should take that into account. I would also advise you to encourage your kids to put some skin in the game by having them start their own savings accounts using money from odd jobs like mowing lawns or doing chores for an allowance when they are old enough, the proceeds of which to be used to supplement what you will be able to assist them with in regards to their education. It's never too early to start their financial education.

GoldenFinch
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by GoldenFinch » Sat Aug 03, 2019 6:47 am

What I would do with the 300k: Find a nice enough house for 200k. Take out a mortgage for 100k and invest the 200k.

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bg5
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by bg5 » Mon Aug 05, 2019 11:22 am

Alot of really good feedback although now I may be more confused than ever :oops:

Chadnudj
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Chadnudj » Tue Aug 06, 2019 3:42 pm

KlangFool wrote:
Fri Aug 02, 2019 3:04 pm
Chadnudj wrote:
Fri Aug 02, 2019 2:43 pm

I'll offer one quibble: you're ignoring financial aid possibilities/considerations. Generally speaking (and I'm not entirely up to speed on this, so I apologize in advance if I get anything wrong), financial aid doesn't consider your home value or retirement accounts in assessing ability to pay, but does consider your income/taxable accounts/savings. Buying the house outright effectively "shields" the $300k from being considered by financial aid, and then OP/OP's spouse can fill up retirement accounts with what they would have been paying in housing. There are a probably a few more strategies to consider in connection with this (when they retire, for instance -- retiring earlier might help them get more financial aid, etc.), but regardless OP needs to think about this decision in part in regards to how it might impact his kids' eligibility for financial aid.
Chadnudj,

A) If OP is doing well, aka fully employed, OP will not be qualified for financial aid just by income alone.

B) If OP is not doing well, aka unemployed, the money in the taxable account will be spent to feed the family. Hence, it will no longer be a problem for financial aid consideration.

KlangFool
You're missing option C: OP and/or OP's spouse retires early/goes part-time such that their combined income is low enough to qualify for financial aid when their kids start entering college in 7 years.

And I'm not sure A is at all accurate. You have to make a LOT of money to be ineligible for any financial aid when you have 2 kids in college at the same time (as OP will have with the 11 and 8 year old, likely). Stanford, for instance, provides free tuition to any student with family income below $125k (just below OP's combined income of $145k), suggesting that OP would get some percentage (albeit less than 100%) of financial aid from Stanford with combined income at $145k. OP/OP's spouse may be entitled to some level of financial aid at $145k in income, and certainly would be entitled to some level more than if they had that level of income plus $300k (plus growth) in a taxable account.

There's also an additional reason to buy the house, and then defer what OP was paying for housing to retirement accounts: liability protection. Many states (including Michigan?) will not allow a lawsuit to get at retirement accounts/your house, but would let a judgment be assessed against taxable accounts. Not a major concern, but just another factor to consider.

KlangFool
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by KlangFool » Tue Aug 06, 2019 4:43 pm

Chadnudj wrote:
Tue Aug 06, 2019 3:42 pm
KlangFool wrote:
Fri Aug 02, 2019 3:04 pm
Chadnudj wrote:
Fri Aug 02, 2019 2:43 pm

I'll offer one quibble: you're ignoring financial aid possibilities/considerations. Generally speaking (and I'm not entirely up to speed on this, so I apologize in advance if I get anything wrong), financial aid doesn't consider your home value or retirement accounts in assessing ability to pay, but does consider your income/taxable accounts/savings. Buying the house outright effectively "shields" the $300k from being considered by financial aid, and then OP/OP's spouse can fill up retirement accounts with what they would have been paying in housing. There are a probably a few more strategies to consider in connection with this (when they retire, for instance -- retiring earlier might help them get more financial aid, etc.), but regardless OP needs to think about this decision in part in regards to how it might impact his kids' eligibility for financial aid.
Chadnudj,

A) If OP is doing well, aka fully employed, OP will not be qualified for financial aid just by income alone.

B) If OP is not doing well, aka unemployed, the money in the taxable account will be spent to feed the family. Hence, it will no longer be a problem for financial aid consideration.

KlangFool
You're missing option C: OP and/or OP's spouse retires early/goes part-time such that their combined income is low enough to qualify for financial aid when their kids start entering college in 7 years.

And I'm not sure A is at all accurate. You have to make a LOT of money to be ineligible for any financial aid when you have 2 kids in college at the same time (as OP will have with the 11 and 8 year old, likely). Stanford, for instance, provides free tuition to any student with family income below $125k (just below OP's combined income of $145k), suggesting that OP would get some percentage (albeit less than 100%) of financial aid from Stanford with combined income at $145k. OP/OP's spouse may be entitled to some level of financial aid at $145k in income, and certainly would be entitled to some level more than if they had that level of income plus $300k (plus growth) in a taxable account.

There's also an additional reason to buy the house, and then defer what OP was paying for housing to retirement accounts: liability protection. Many states (including Michigan?) will not allow a lawsuit to get at retirement accounts/your house, but would let a judgment be assessed against taxable accounts. Not a major concern, but just another factor to consider.
Chadnudj,

<<You're missing option C: OP and/or OP's spouse retires early/goes part-time such that their combined income is low enough to qualify for financial aid when their kids start entering college in 7 years. >>

For (C), if the income is low enough, they can move all their money from the taxable account to the retirement accounts over the 7 years. It is only 300K.

<<And I'm not sure A is at all accurate. You have to make a LOT of money to be ineligible for any financial aid when you have 2 kids in college at the same time>>

Let's be clear here. We are talking about need-based financial aid. Merit-based financial aid do not subject to the same restriction.

<<Stanford, for instance, provides free tuition to any student with family income below $125k (just below OP's combined income of $145k), >>

Please check out other normal FAFSA based universities.

<<There's also an additional reason to buy the house, and then defer what OP was paying for housing to retirement accounts: liability protection.>>

1) If you want to go that route, unemployment has a higher likelihood. Hence, you need to protect against. And, if someone is really worried about liability protection, umbrella insurance of 1 million only costs about $300 per year.

2) Without umbrella insurance, the person would need to hire a lawyer to fight the lawsuit. After that, there may not be any money left.

The OP only has 220K if he buys the house with the 300K cash. It does not take a big financial emergency to wipe him out.

KlangFool

StealthRabbit
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by StealthRabbit » Tue Aug 06, 2019 7:48 pm

looks like you better invest...

Keep 20% out for your 'next' home. (Mortgages are CHEAP!!!, time (Investing) is on your side, long road ahead - changes will be plenty)

just another idea...
At your age, I took my (taxable) windfalls and stuck them in a Donor Advised Fund, that has been an extraordinary nice tax tool, and now in retirement (No income, no pension) I can fund plenty of charities. Kids get ZERO, but they will be able to gift via their choice from the DAF.

College.. no problem.. WA State paid for FREE FT college instead of High school for ours. There are 30+ universities abroad that offer FREE college for USA (or any other students that qualify) Several in USA!

cashisking500
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by cashisking500 » Tue Aug 06, 2019 9:16 pm

Buy the next house with cash and be debt free. It’ll change your life.

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Ben Mathew
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Ben Mathew » Tue Aug 06, 2019 10:01 pm

Watty wrote:
Fri Aug 02, 2019 8:40 am
Investing the money and earning a higher rate of return sounds easy but it really is not as easy as it sounds because you have a large "sequence of returns risk"
Watty, you are right that if you focus on the $300K investment account being drawn down for mortgage payments, there is more sequence of return risk vs paying off the house. But if you look at the bigger picture for a young couple who are still saving, this will usually not be the case. Taking out a mortgage to invest will most likely reduce, not increase, sequence of return risk of their overall portfolio. That's because their annual savings create a sequence of return risk in the opposite direction--returns later in life have bigger impact because more savings will have flowed in. Taking out the mortgage works in the opposite direction and increases the impact of earlier returns. So the overall sequence of return risk will be lowered. This is why the lifecycle investing approach advocates leveraging to increase stock exposure early. By leveraging early and reducing stock exposure later, you reduce the overly high impact of later returns that a more traditional glidepath will have.

Olemiss540
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Olemiss540 » Tue Aug 06, 2019 10:15 pm

I would set a goal for retirement and work backwards from there. What age are you eligible for your pension and how much do you need in investments at that time? Are you on track or behind that goal?

That's a LOTTA money and could supercharge your investments. I would lend towards investing a large portion pending your answers to the above questions.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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Watty
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by Watty » Tue Aug 06, 2019 10:18 pm

Ben Mathew wrote:
Tue Aug 06, 2019 10:01 pm
Watty wrote:
Fri Aug 02, 2019 8:40 am
Investing the money and earning a higher rate of return sounds easy but it really is not as easy as it sounds because you have a large "sequence of returns risk"
Watty, you are right that if you focus on the $300K investment account being drawn down for mortgage payments, there is more sequence of return risk vs paying off the house. But if you look at the bigger picture for a young couple who are still saving, this will usually not be the case. Taking out a mortgage to invest will most likely reduce, not increase, sequence of return risk of their overall portfolio. That's because their annual savings create a sequence of return risk in the opposite direction--returns later in life have bigger impact because more savings will have flowed in. Taking out the mortgage works in the opposite direction and increases the impact of earlier returns. So the overall sequence of return risk will be lowered. This is why the lifecycle investing approach advocates leveraging to increase stock exposure early. By leveraging early and reducing stock exposure later, you reduce the overly high impact of later returns that a more traditional glidepath will have.
That sounds interesting but I don't really follow it. I agree that using a mortage for leverage will work out well a lot of the time but there will also be a significant percentage of the time when it does not work out well.

Could you give a simple example of what you are saying with some numbers like my example where there is decline in the investments the first year?

ssquared87
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by ssquared87 » Tue Aug 06, 2019 10:34 pm

Interest rates are low right now somewhere around 4%

Both you and your wife have extremely stable jobs with pensions

In all likelihood, an s&p index fund will return >4% per year. It would be a very fringe case to have a lower return than that over a 30 year horizon probably less than 5% chance of that happening, maybe even less than 1% chance but it’s possible

You are not relying on the $300k to pay the mortgage. You can easily pay the mortgage from your income, so you have options to significantly reduce sequencing risk

There is absolutely no way I’d pay cash for the house. Invest it and take out the mortgage. That also frees up cash in case you want to use some of the money for home improvements or something of that nature.

Im quite surprised by how averse the previous posters are to having debt. Debt in itself is not a bad thing if used responsibly, and in OP case, this would be a very responsible move.

The comments likening taking a mortgage and investing the cash in stocks to margin investing is simply bs. If you invest on margin and the value of your investments drop you get a margin call and you’ll have a serious cash flow issue. In contrast, If you have a mortgage and the value of the house drops, the bank isn’t going to take your house as long as you are making the payments, which given your income level and stability shouldn’t be an issue at all.
Last edited by ssquared87 on Tue Aug 06, 2019 10:44 pm, edited 1 time in total.

rascott
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by rascott » Tue Aug 06, 2019 10:37 pm

bg5 wrote:
Mon Aug 05, 2019 11:22 am
Alot of really good feedback although now I may be more confused than ever :oops:

It's because there is no right answer.... Nobody knows the future, and everyone has different risk tolerances.

ssquared87
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Re: Sold Home - $300,000 Profit - Invest or Pay Cash For New House?

Post by ssquared87 » Tue Aug 06, 2019 10:45 pm

Ben Mathew wrote:
Tue Aug 06, 2019 10:01 pm
Watty wrote:
Fri Aug 02, 2019 8:40 am
Investing the money and earning a higher rate of return sounds easy but it really is not as easy as it sounds because you have a large "sequence of returns risk"
Watty, you are right that if you focus on the $300K investment account being drawn down for mortgage payments, there is more sequence of return risk vs paying off the house. But if you look at the bigger picture for a young couple who are still saving, this will usually not be the case. Taking out a mortgage to invest will most likely reduce, not increase, sequence of return risk of their overall portfolio. That's because their annual savings create a sequence of return risk in the opposite direction--returns later in life have bigger impact because more savings will have flowed in. Taking out the mortgage works in the opposite direction and increases the impact of earlier returns. So the overall sequence of return risk will be lowered. This is why the lifecycle investing approach advocates leveraging to increase stock exposure early. By leveraging early and reducing stock exposure later, you reduce the overly high impact of later returns that a more traditional glidepath will have.
This

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