Home Buying: Mortgage or Realize Cap Gains?

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teigers
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Home Buying: Mortgage or Realize Cap Gains?

Post by teigers »

I'm 20 years from retirement and am in the process of buying my first home. My question regards whether I should take out a 30 year mortgage at 7% or cash in some stocks from my brokerage account and just pay cash. It's a 345k condo and if I sold some stocks I'd realize about 100k in gains and pay 15k in capital gains taxes. And of course I wouldn't be able to deduct mortgage interest. I'd also be able to save $1500 a month that I wouldn't have to put to the mortgage that I could then invest. I'd also save 6k in loan origination fees. What do people think here?
toddthebod
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by toddthebod »

teigers wrote: Sun Feb 11, 2024 7:20 pm I'm 20 years from retirement and am in the process of buying my first home. My question regards whether I should take out a 30 year mortgage at 7% or cash in some stocks from my brokerage account and just pay cash. It's a 345k condo and if I sold some stocks I'd realize about 100k in gains and pay 15k in capital gains taxes. And of course I wouldn't be able to deduct mortgage interest. I'd also be able to save $1500 a month that I wouldn't have to put to the mortgage that I could then invest. I'd also save 6k in loan origination fees. What do people think here?
Are you able to fully deduct the mortgage interest? Do you have enough itemized deductions to approach or exceed the standard deduction otherwise? What is your marginal tax rate?
Backtests without cash flows are meaningless. Returns without dividends are lies.
KlangFool
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by KlangFool »

OP,

If you cannot or will not buy the condo with a 20% down payment and 30 years fixed rate mortgage, just do not buy the condo. It is not a good deal.

"I'd also be able to save $1500 a month that I wouldn't have to put to the mortgage "

That is a false statement. You lose the opportunity cost of tying down 345K into the condo.

It costs you 345K one way or another. Keeping it into the house does not change that.

KlangFool
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teigers
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by teigers »

Are you able to fully deduct the mortgage interest? Do you have enough itemized deductions to approach or exceed the standard deduction otherwise? What is your marginal tax rate?
So the standard deduction is at $13,850 currently and the amortization table puts mortgage interest above that for the first 9 years. First year interest is $15,677. And I'm in the 24% bracket.
toddthebod
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by toddthebod »

teigers wrote: Sun Feb 11, 2024 8:10 pm
Are you able to fully deduct the mortgage interest? Do you have enough itemized deductions to approach or exceed the standard deduction otherwise? What is your marginal tax rate?
So the standard deduction is at $13,850 currently and the amortization table puts mortgage interest above that for the first 9 years. First year interest is $15,677. And I'm in the 24% bracket.
How much are your deductions otherwise (i.e., state and local taxes and charitable contributions)?
Backtests without cash flows are meaningless. Returns without dividends are lies.
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teigers
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by teigers »

teigers wrote: ↑Mon Feb 12, 2024 2:10 am
Are you able to fully deduct the mortgage interest? Do you have enough itemized deductions to approach or exceed the standard deduction otherwise? What is your marginal tax rate?
So the standard deduction is at $13,850 currently and the amortization table puts mortgage interest above that for the first 9 years. First year interest is $15,677. And I'm in the 24% bracket.
How much are your deductions otherwise (i.e., state and local taxes and charitable contributions)?
The mortgage interest would likely be it.
KlangFool
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by KlangFool »

teigers wrote: Sun Feb 11, 2024 8:16 pm
teigers wrote: ↑Mon Feb 12, 2024 2:10 am
Are you able to fully deduct the mortgage interest? Do you have enough itemized deductions to approach or exceed the standard deduction otherwise? What is your marginal tax rate?
So the standard deduction is at $13,850 currently and the amortization table puts mortgage interest above that for the first 9 years. First year interest is $15,677. And I'm in the 24% bracket.
How much are your deductions otherwise (i.e., state and local taxes and charitable contributions)?
The mortgage interest would likely be it.
How could that be true?

Do you pay state income tax?

How much is that?

KlangFool
Last edited by KlangFool on Sun Feb 11, 2024 8:19 pm, edited 1 time in total.
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toddthebod
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by toddthebod »

teigers wrote: Sun Feb 11, 2024 8:16 pm
teigers wrote: ↑Mon Feb 12, 2024 2:10 am
Are you able to fully deduct the mortgage interest? Do you have enough itemized deductions to approach or exceed the standard deduction otherwise? What is your marginal tax rate?
So the standard deduction is at $13,850 currently and the amortization table puts mortgage interest above that for the first 9 years. First year interest is $15,677. And I'm in the 24% bracket.
How much are your deductions otherwise (i.e., state and local taxes and charitable contributions)?
The mortgage interest would likely be it.
In that case the mortgage interest is effectively not deductible, since the difference between deducting the mortgage interest and taking the standard deduction is negligible.
Backtests without cash flows are meaningless. Returns without dividends are lies.
Topic Author
teigers
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by teigers »

Do you pay state income tax?

How much is that?
$8,000 in state taxes.
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Watty
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by Watty »

teigers wrote: Sun Feb 11, 2024 7:20 pm What do people think here?
Paying 15% long term gains may not really be a big issue to consider. The problem is that it you will likely pay those capital gains taxes sooner or later like when you sell the stock a couple of decades from now. Not paying them now may not just be delaying them, not avoiding them. There is also a chance that capital gains taxes will be higher in the future.

The real question is how this decision fits in the rest of your financial situation and you did not say much about that. If you have a net worth of a million+ dollars then paying cash would look like an easy choice to me. If your net worth is more like $400K then a mortgage would look like a reasonable choice to me. How stable your job is would also be an important consideration.
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by harikaried »

teigers wrote: Sun Feb 11, 2024 7:20 pmIt's a 345k condo and if I sold some stocks I'd realize about 100k in gains and pay 15k in capital gains taxes… I'd also save 6k in loan origination fees.
Are there significant differences in the basis where maybe you can get say $200k with relatively low gains? Any gains you sell now then rebuy later will have new basis likely reducing your future taxes, so the main opportunity cost of the used cash is not having access or it invested in the meantime.

The closing costs can be covered by the lender with upfront credits that come at a long-term cost of higher interest rates. However, if you can pay down the mortgage quickly, that lessens the effect of higher interest rate. For example, instead of a 7% mortgage with 6k closing costs, it could be 7.5% with $0 closing costs that would normally result in $425k total interest over 30 years instead of $390k, i.e., $35k extra 0.5% interest. But if you pay down the loan immediately with $200k, the total interest paid off in ~50 months would both be around $14k with only $400 in "extra" interest from the 0.5% higher rate. Although either case here requires going through the mortgage process, and it could be preferable to avoid that by paying the capital gains taxes instead.
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by KlangFool »

teigers wrote: Sun Feb 11, 2024 8:27 pm
Do you pay state income tax?

How much is that?
$8,000 in state taxes.
teigers,

"So the standard deduction is at $13,850 currently and the amortization table puts mortgage interest above that for the first 9 years. First year interest is $15,677. And I'm in the 24% bracket."

That means your itemized deduction is 8K+ 16K = 24K bigger than the standard deduction of 14K.

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Walkure
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by Walkure »

KlangFool wrote: Mon Feb 12, 2024 11:56 am
teigers wrote: Sun Feb 11, 2024 8:27 pm
Do you pay state income tax?

How much is that?
$8,000 in state taxes.
teigers,

"So the standard deduction is at $13,850 currently and the amortization table puts mortgage interest above that for the first 9 years. First year interest is $15,677. And I'm in the 24% bracket."

That means your itemized deduction is 8K+ 16K = 24K bigger than the standard deduction of 14K.

KlangFool
Don't forget that the new condo will likely include property taxes on top of state income taxes up to the SALT limit of $10k, so potentially $26k in extra deductions.
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grabiner
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by grabiner »

teigers wrote: Sun Feb 11, 2024 8:27 pm
Do you pay state income tax?

How much is that?
$8,000 in state taxes.
Now add property taxes on the house, and anything you donate to charity, and you are already close to the standard deduction if not over it. Thus, if you are single, most of the mortgage interest will be tax deductible.

This reduces the return from 7% to 5.32% on taking out a smaller mortgage, or even less if your state also allows an income tax deduction. Even then, taking out a smaller mortgage is a risk-free return after tax which is significantly higher than the return you can otherwise get with low risk.

So you need to weigh the cost against the benefit. The return on Admiral shares of Vanguard Long-Term Tax-Exempt is 3.49%. (You don't hold exactly that bond fund, but it is the closest to a fair comparison. If you take out a smaller mortgage by selling taxable stock, and moving an equal amount from bonds to stock in your 401(k), you keep the same stock-market exposure for a similar benefit).

It also sounds like you will pay down the mortgage aggressively if you do take it out. If so, then a 15-year loan at a lower rate would be a better deal; if that rate is 6%, then the after-tax return on a paydown decreases to 4.56%.

Even so, it looks attractive to pay cash. If you are going to pay off the mortgage in five years, then paying it down now saves you 7% (including the 2% loan origination fee), and I don't think you will lose 7% of your stock value to capital-gains tax. It also makes the process easier, and as a cash buyer, you will be more attractive to the seller.

I made the opposite decision myself, but that was when rates were much lower. I had a 15-year rate of 3% in 2013, fully deductible at 28% federal and 8.2% MD tax. There wasn't much gain from paying cash, and I had large capital gains on all my stock. Therefore, I sold only enough stock to put 20% down, and to pay extra points to buy down the rate to 2.625%. At that rate, I assumed that I would never want to pay more than the minimum, which made the points worthwhile. (And that assumption turned out to be wrong; I paid off the mortgage early in 2020 when muni yields were 1.24%.)
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by learning30 »

KlangFool wrote: Sun Feb 11, 2024 7:48 pm OP,

If you cannot or will not buy the condo with a 20% down payment and 30 years fixed rate mortgage, just do not buy the condo. It is not a good deal.

"I'd also be able to save $1500 a month that I wouldn't have to put to the mortgage "

That is a false statement. You lose the opportunity cost of tying down 345K into the condo.

It costs you 345K one way or another. Keeping it into the house does not change that.

KlangFool
Can I ask why you think it's not a good investment if you have to put down more than 20% with today's interest rates? I'm curious as someone who is actually in a somewhat similar situation. I live in CA and condos are so expensive that I feel like if I want to get in, it will have to be 50% down to get the mortgage where I want it. If I can max out retirement and save cash at the same time, is it still a dumb idea to put down more than 20%?
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Re: Home Buying: Mortgage or Realize Cap Gains?

Post by KlangFool »

learning30 wrote: Mon Feb 12, 2024 8:40 pm
KlangFool wrote: Sun Feb 11, 2024 7:48 pm OP,

If you cannot or will not buy the condo with a 20% down payment and 30 years fixed rate mortgage, just do not buy the condo. It is not a good deal.

"I'd also be able to save $1500 a month that I wouldn't have to put to the mortgage "

That is a false statement. You lose the opportunity cost of tying down 345K into the condo.

It costs you 345K one way or another. Keeping it into the house does not change that.

KlangFool
Can I ask why you think it's not a good investment if you have to put down more than 20% with today's interest rates? I'm curious as someone who is actually in a somewhat similar situation. I live in CA and condos are so expensive that I feel like if I want to get in, it will have to be 50% down to get the mortgage where I want it. If I can max out retirement and save cash at the same time, is it still a dumb idea to put down more than 20%?
learning30,

Why is this a better deal than renting?

"If I can max out retirement and save cash at the same time, is it still a dumb idea to put down more than 20%?"

And, how is that matters? It is still a lousy deal.

KlangFool
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