mortgage question

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susleni
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Joined: Thu Apr 06, 2017 12:04 pm

mortgage question

Post by susleni »

Greetings, Bogleheads.

I'm looking into purchasing a home, and would like to ask for down payment advice.

Purchase price: $210,000

Salary: $82k base, averaging another $20k per year in overtime (not guaranteed)

Assets: $530k (3-fund portfolio: 85% stocks/15% bonds, 30% of stocks in international)

Federal income tax: 22%
State income tax: 5.75%

Age: 36

No debt.

My initial thoughts: I could swing a $1,200 monthly payment (PITI plus HOA), with all other living expenses at their current level, giving the charitable contributions that I feel I should, and maxing out all available retirement accounts, without depending on overtime income. A 30-year mortgage at a conservative 4.25%, with a conservative insurance estimate, would require a 30% down payment in order to keep the PITI/HOA at $1,200.

I could also pay cash for the place by selling from my taxable account. Given that the purchase price would be just under 40% of my total assets, would it make any sense to pay cash?

Thoughts on my down payment plan/rationale?

Any advice is much appreciated!
ridebikeseveryday
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Re: mortgage question

Post by ridebikeseveryday »

It seems like you should be able to get much better than 4.125% rates these days for a primary residence, so that may help you out. Definitely shop around if that's what you're seeing.
misterjohnny
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Re: mortgage question

Post by misterjohnny »

Given that you are probably not going to itemize deductions on your taxes, I would look to minimize the borrowing as much as possible. But I wouldn't want to sell stocks that have a capital gain to do it.
Maybe sell your bond funds to lower your borrowing amount and get yourself into a 15 year loan with a lower rate? You'll have to run the numbers on that.
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grabiner
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Re: mortgage question

Post by grabiner »

What is the tax cost for selling the stocks? You can treat this as if it were an adjustment to the mortgage amount.

For example, suppose that you can make a 20% down payment and take out a $162K mortgage, or sell stocks to pay cash but then have an $8100 tax bill. In that case, you are effectively paying off a $162K mortgage with minus five points. On a 30-year mortgage, one point is equivalent to about .125% in the interest rate (from the bank's point of view; whether this is a good or bad deal for you depends on how long you keep the mortgage), so the current rates of around 3.75% would be effectively 3.125%. If you choose a 15-year mortgage, 3/4 of a point is equivalent to .125% in the interest rate, so the current rates of around 3.25% would be effectively 2.42%. (I would prefer a 15-year mortgage if you take one out; this might require you to sell part of your portfolio to make mortgage payments, but you have plenty of money if that is needed, and you can invest that part of your portfolio in low-risk bonds.)

So, would you pay off a mortgage at 2.42% for 15 years, or 3.125% for 30 years, or invest the money? Now you can compare to low-risk investments. If you itemize deductions, that 2.42% becomes 1.75% after tax, and it's unlikely you want to pay off a mortgage at that low a rate; you can earn 1.92% on Admiral shares of Vanguard Long-Term Tax-Exempt, which is 1.81% after tax, without taking significant risk. If you don't itemize, then a 2.42% mortgage is probably worth paying off, or not taking out in the first place. (I am assuming from the 5.75% rate that you live in VA, so you must itemize both federal and state tax or neither.)

I made exactly the same decision six years ago. I could have sold stock to pay cash for my home, and it would have been worthwhile if there had been no capital gain, but the huge capital gain (made worse because I lived in NJ, which does not allow carryovers of capital losses) made it worth keeping the mortgage and an equal amount in bonds in my retirement account.
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chw
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Re: mortgage question

Post by chw »

Perhaps get a 7/1 ARM (rate should be much lower than 30 year fixed), then use the dividends and capital gain distributions from your taxable account to make additional payments to principal. You avoid paying capital gains, get a better rate by taking the ARM, and accelerate the early payoff of the loan.
Nutmeg
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Re: mortgage question

Post by Nutmeg »

You mentioned charitable contributions. One option would be to make your charitable donations through contributions of appreciated securities to a donor advised fund, which would then make the payments to the charities at your request. This would mean you wouldn’t have to pay taxes on the capital gains from those securities.

Then you would have the cash that you would normally use to make charitable contributions available for your down payment with no capital gains tax implications.

I also suggest investigating shorter terms for your mortgage in order to save on the interest rate. As you have enough money to buy the house outright and avoid a mortgage completely, it seems that you could be able to repay a mortgage in 10 years.
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Wiggums
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Re: mortgage question

Post by Wiggums »

As others have suggested, shop around for a lower rate, consider a shorted term loan. With all that money in taxable, I’d spend that down if the taxes are not too big.
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susleni
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Re: mortgage question

Post by susleni »

Thanks so much to all who have responded.

Is there a BH consensus on a maximum percentage of one's NW that should be invested in a primary residence? I realize that this is sending us down the path of future market return speculation, but if I made a large enough down payment to get a 15-year mortgage (with my targeted $1,200 PITI + HOA), I'm afraid I'd be shattering the "the best time to sell stock is never" rule.

Thanks again!
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grabiner
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Re: mortgage question

Post by grabiner »

susleni wrote: Tue Aug 27, 2019 5:40 am Is there a BH consensus on a maximum percentage of one's NW that should be invested in a primary residence? I realize that this is sending us down the path of future market return speculation, but if I made a large enough down payment to get a 15-year mortgage (with my targeted $1,200 PITI + HOA), I'm afraid I'd be shattering the "the best time to sell stock is never" rule/
You don't need to keep this amount as your target, unless the bank insists on it (debt-to-income ratio). If you owe $1400 per month on your mortgage, but you have a bond portfolio which produces a guaranteed $200 per month, you are just as well off as if you sold the bond portfolio to get the mortgage payment down to $1200.

And if you don't want to sell stock to hold that bond portfolio, you don't need to. You can hold only stock in your taxable account, and hold a bond fund in your 401(k). If you need to sell taxable stock, you can sell a small amount, and move an equal amount from stock to bonds in the 401(k) to keep the same stock exposure. If you don't need to sell taxable stock because the stock dividends and your salary are enough to pay the mortgage, you can keep the stock.
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LadyGeek
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Re: mortgage question

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (mortgage).
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GT99
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Re: mortgage question

Post by GT99 »

chw wrote: Mon Aug 26, 2019 8:25 pm Perhaps get a 7/1 ARM (rate should be much lower than 30 year fixed), then use the dividends and capital gain distributions from your taxable account to make additional payments to principal. You avoid paying capital gains, get a better rate by taking the ARM, and accelerate the early payoff of the loan.
Interest rates are so low right now that the spread on a 7/1 vs a conventional 30 year is not much - I've been looking at refinancing lately, and 10/1 ARMs are the same as 30 year conventional, and 7/1 are generally .125 lower. That's a difference of about $7.50 per month per $100k mortgaged.
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Nate79
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Re: mortgage question

Post by Nate79 »

I would get the lowest interest rate loan in a 10 -15 year or ARM mortgage possible and push your budget to afford it. But worst case is you have significant assets that you could use to help support any shortfall in any given year just in case.
softwaregeek
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Re: mortgage question

Post by softwaregeek »

If you can move the money to Schwab, they offer .25 off a very competitive 10 year ARM with 250k in assets there. You might or might not get 3.125.
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JoeRetire
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Re: mortgage question

Post by JoeRetire »

susleni wrote: Mon Aug 26, 2019 5:58 pm No debt.

I could also pay cash for the place by selling from my taxable account. Given that the purchase price would be just under 40% of my total assets, would it make any sense to pay cash?
Are you the type who fears all debt? Would you lie awake at night if you had a mortgage? If you had a mortgage would you be aggressively paying it off as fast as possible?

If so, then pay cash and remain debt free. Otherwise, put 20% down and take the rest in a mortgage.
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JoeRetire
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Re: mortgage question

Post by JoeRetire »

susleni wrote: Tue Aug 27, 2019 5:40 amIs there a BH consensus on a maximum percentage of one's NW that should be invested in a primary residence?
No, there is no consensus (on this as well as most questions here).

I for one don't see the point of attempting to associate house price with net worth.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
student
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Re: mortgage question

Post by student »

My own personal rule is the purchase price of a house should be no more than 3 times one salary and less than 2.5 times. So I think you are fine in buying the house. You are doing very well and you are in the top 10% in terms of net worth in the US. https://dqydj.com/net-worth-by-age-calc ... ed-states/

Regarding your charitable contributions, one way to do it is, for now, instead of a yearly contribution, mentally account for them and lump sum it later when your income is higher (while mortgage payment stays the same). This may also make the tax deduction easier. Another option is, as indicated by a poster earlier, donate by using appreciated shares.
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