How to fund home purchase

[tryingtogetahead]

DW and I are planning on upgrading homes and towns in 3 years when our child starts Kindergarten. We are currently 40 and have a NW of 6.77mm (2mm of which is accessible in taxable brokerage account but would cause us to realize long-term capital gains). We live in a 1mm home with about 520k of equity. We are planning on buying a new home in a nicer town for about 2.5mm or more. We currently make 1.4-1.5mm or so combined. We save about 700k per year (cash, company stock, and retirement accounts combined). All cash savings is invested in S&P500 every month. Given we know we have a 3-yr time table to upgrade homes and are pretty set on making this move, but do not want to carry a 2+mm mortgage at 6-7% (assuming rates don't decline significantly), do you suggest we (1) keep saving all of our disposable income in the S&P500 index fund and sell 2mm of it in 3 years to fund the purchase, (2) keep saving all of our disposable income in the S&P500 index fund and take a 7% mortgage (or whatever the rate is then) to fund the purchase and just aggressively prepay it by postponing investing in the S&P500 at that time, or (3) save some or all of the cash now in cash to fund some or all of the home purchase?

Appreciate any thoughts.

[Parkinglotracer]

Might be some financial institutions that will give you a special interest rate on a mortgage using your assets as collateral if they are held by them. I’d check into that so you know what interest rate you would pay with that kind of deal.

Not to be held hostage to interest rates when it’s time to buy, I’d start planning to be able to pay cash or pay a large portion of the 2.5M in cash. I wouldn’t save money I need in the next three years in equities but in shorter term treasuries / federal money market accounts that are paying north of 4.5%.

So you have 500K equity in your house, you need another 2M. At say 500K a year cash saved x 3 you could get to another 1.5M quickly. If you only got to 1M you would still only have to borrow 1M so high rates wouldn’t stop the plan. I’d also list my taxable assets and basis of those to know what you could sell that would generate the least amount of capital gains so you know what you would sell / what taxes would be if you had to raise money from there.

I’d look overall at my asset allocation outside the house money to make sure it was a rational AA for your willingness and ability to assume risk.

How safe are your jobs? If they weren’t safe or came into jeopardy you could adjust the timing / prudence of move I assume.

Congrats tryingtogetahead, sounds like you are killing it, enjoy the journey and the destination!

[tryingtogetahead]

Might be some financial institutions that will give you a special interest rate on a mortgage using your assets as collateral if they are held by them. I’d check into that so you know what interest rate you would pay with that kind of deal.

Not to be held hostage to interest rates when it’s time to buy, I’d start planning to be able to pay cash or pay a large portion of the 2.5M in cash. I wouldn’t save money I need in the next three years in equities but in shorter term treasuries / federal money market accounts that are paying north of 4.5%.

So you have 500K equity in your house, you need another 2M. At say 500K a year cash saved x 3 you could get to another 1.5M quickly. If you only got to 1M you would still only have to borrow 1M so high rates wouldn’t stop the plan. I’d also list my taxable assets and basis of those to know what you could sell that would generate the least amount of capital gains so you know what you would sell / what taxes would be if you had to raise money from there.

I’d look overall at my asset allocation outside the house money to make sure it was a rational AA for your willingness and ability to assume risk.

How safe are your jobs? If they weren’t safe or came into jeopardy you could adjust the timing / prudence of move I assume.

Congrats tryingtogetahead, sounds like you are killing it, enjoy the journey and the destination!

Where can I find this 4.5% fixed return?

[llin]

A 3-month treasury is returning 4.67%. Interest drops with longer time frames (inverted yield curve) hence the suggestion to stick with the shorter term bills.

[furwut]

Keep in mind interest is deductible on mortgages up to $750,000. So an intermediate goal might be to finance only that much and pay cash for the rest.

How Do You Calculate the After-Tax Interest Rate on a Mortgage?

[Parkinglotracer]

Might be some financial institutions that will give you a special interest rate on a mortgage using your assets as collateral if they are held by them. I’d check into that so you know what interest rate you would pay with that kind of deal.

Not to be held hostage to interest rates when it’s time to buy, I’d start planning to be able to pay cash or pay a large portion of the 2.5M in cash. I wouldn’t save money I need in the next three years in equities but in shorter term treasuries / federal money market accounts that are paying north of 4.5%.

So you have 500K equity in your house, you need another 2M. At say 500K a year cash saved x 3 you could get to another 1.5M quickly. If you only got to 1M you would still only have to borrow 1M so high rates wouldn’t stop the plan. I’d also list my taxable assets and basis of those to know what you could sell that would generate the least amount of capital gains so you know what you would sell / what taxes would be if you had to raise money from there.

I’d look overall at my asset allocation outside the house money to make sure it was a rational AA for your willingness and ability to assume risk.

How safe are your jobs? If they weren’t safe or came into jeopardy you could adjust the timing / prudence of move I assume.

Congrats tryingtogetahead, sounds like you are killing it, enjoy the journey and the destination!

Where can I find this 4.5% fixed return?

https://investor.vanguard.com/investmen ... file/vmfxx


It is not a “fixed return” but the current yield of the settlement (default) money market account for a vanguard brokerage account. Other major brokerage accounts like fidelity may have similar yields. The yields can change as interest rates change. Short term treasury securities one can easily buy thru vanguard can lock in high yields but with interest rate risk of the principle declining in value if rates rise. Short term securities will allow you to make sure you don’t have to sell bonds at a loss if rates rise to buy your house in 3 years.

[bartl007]

Congratulations, you've won the game. By my back of napkin calculations, you are already financially independent (~25x expenses). In my opinion, any money for a spending goal 3-5 years away should be saved in cash. With money market funds paying 4-5% this would be where I park all the money for the next 3 years, then try to pay cash for the home upgrade.

Mortgage interest deductions are for chumps that can't afford to pay cash for a house. Don't let the tax tail wag the dog! Your net worth will be much higher without sending the bank ~$43,000 of interest payments PER YEAR in order to receive a tax deduction (assuming you finance $750k at 6%)

[quantAndHold]

At your income and asset level I’m pretty sure it doesn’t matter. Personally, I would save the $700k in a money market until you find the house you want, then decide whether to pay cash or finance based on your bank balance and mortgage rates at the time you buy.

[goodenyou]

Same situation here. Finishing architectural plans and going to finish outs to establish the price point and budget. Going to custom cabinet meeting in a few weeks. That should be sobering. Have the cash ready in a MM and Treasuries to do all cash purchase. The biggest issue is our priority to the price/budget and choosing the upgrades that we feel are a priority. Want to keep price in line with comps and total cost less than 20% of our net worth.

The interest rates and financial friction of transaction fees/costs of a mortgage motivate us to do a cash deal. We have not revealed to the potential builder that it is a cash transaction and the dynamics of choosing finish outs with the suppliers is interesting. We are very cognizant of each cost since we aren’t just throwing it on the long term tab that just costs a few extra dollars per month over 30 years. It’s a different mindset than “what’s the monthly?”.

The challenge that I am going through is how to structure the construction loan. I want a buffer between us and the builder for draws and to be sure that all the proper documentation and inspections are done before money is released. Working that out. I posted that question here several months ago and a Boglehead kindly offered to give me some advice on a PM.