Investing proceeds of home sale

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daheld
Posts: 224
Joined: Wed Sep 13, 2017 8:14 am

Investing proceeds of home sale

Post by daheld » Mon Apr 16, 2018 3:01 pm

First, I know there are a million "how do I invest this money?" threads, and I apologize that I'm adding to that number. In addition to that question, I've got a couple others that I'll try to summarize below.

My wife and I (34 and 32, $145k combined gross income) have recently sold our previous home and purchased a new (to us) home. We did alright on the previous house--my wife purchased it in 2014, we married in 2016, and just a few weeks ago, we sold it for $30,000 more than she paid. We had been keeping a chunk of money in a Vanguard Money Market fund for the down payment. After the purchase of our new home and sale of the old home, we have roughly $85,000 to invest.

Here is our current plan for that money:
1. Put about $20,000 toward a recast on our current mortgage (which is $232,500 at 4.25% over 30 years). This would bring the mortgage to about $212,000, and with an additional payment of about $200/month, we will pay the loan off in 20 years, at which point we're hoping (planning) that my wife can retire at age 55.

2. Invest the remaining roughly $65,000 in our taxable Vanguard account.

We utilize Vanguard Advisor Services, and yes, I'm planning on setting up a meeting to ask them some questions. I just wanted to bounce this off someone first

My questions are:
1. We both max out workplace 401k's and our Roth's at Vanguard. We also contribute $750 monthly to a Vanguard taxable account that is invested 80/20. Investing this lump sum in that taxable account is just about the only BH option, correct? What other options do we have to invest this money that would be in line with BH thinking?

2. I know this is a personal decision, but I'm struggling a little with thinking of contributing more to the recast of our mortgage. Should we recast more? I don't want to go too crazy, but the thought of knocking off a ton of that mortgage debt is really attractive. I know my wife is hesitant to do more than $20,000 in the recast. We have about $300k saved for retirement between workplace savings and Roth's, and I will be eligible for a FERS retirement pension (...in a short 27 years). I feel like we're doing a good enough job saving for retirement that we could stand to put some extra money toward the recast.

EDIT: Other than the mortgage, we have ZERO debt.

Thanks for any help or guidance.

bloom2708
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Re: Investing proceeds of home sale

Post by bloom2708 » Mon Apr 16, 2018 3:26 pm

Do you have an HSA you can fill up?

At 4.25%, paying down the mortgage is a pretty nice guaranteed return. Is there a fee to re-cast? Re-cast is different from just paying a chunk on principle. Paying ahead keeps your payment the same but more goes to principal. You skip ahead on the payment schedule. Re-cast lowers the payment and resets back to 30 years. It doesn't seem like a re-cast is warranted unless you drop from 30 to 20 years or 15 years. That would make sense. Leap forward on the "get it paid off" schedule.

You are maxing pre-tax 401ks, Roths. HSA and front loading 529s (kid/kids?). After that it is taxable or pay down the mortgage. A good place to be.

Personally, I'd slay the mortgage, but that is 50-50 popular here.With higher standard deductions, mortgage interest will likely not be partially deductible. Paying a dollar in interest to save 22 or 25 cents isn't a great deal. That is only over and above the bigger standard deduction.

Why does your spouse not like the "pay down mortgage" idea? We have Total US, Total International and Int-Term Tax-Exempt Bond index in taxable. We invest there at our overall asset allocation. But, we also paid off our mortgage in 2007 before the "big meltdown".

You seem to be doing all the right things, so it will be a lifestyle decision. Do you want to do your "debt free scream" (Dave Ramsey) someday or keep piling up your investments.
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend very little time here! | 3. You have no control <--spend no time here

chevca
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Re: Investing proceeds of home sale

Post by chevca » Mon Apr 16, 2018 3:38 pm

If you plan to pay the mortgage off early anyway, what does it look like to throw the whole $85k at the recast?

You're already maxing out retirement accounts and saving an additional $750/month in taxable. Throwing the whole windfall at the recast would lower the payment quite a bit. What would the lower payment give you for options as far as investing in taxable, and how much extra per month would have to go towards the mortgage to pay it off in 20 years?

Just my thoughts. I think either way, you guys are sitting good. If you can't come to an easy decision, 50/50 would work fine and be a good compromise.

mega317
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Re: Investing proceeds of home sale

Post by mega317 » Mon Apr 16, 2018 3:46 pm

daheld wrote:
Mon Apr 16, 2018 3:01 pm
Investing this lump sum in that taxable account is just about the only BH option, correct? What other options do we have to invest this money that would be in line with BH thinking?
The only BH option (other than pay down the mortgage) is low-cost index funds according to an appropriate-for-you allocation. How you get there is much less important. Lump sum is more likely to come out ahead, but psychological and behavioral factors are not unimportant.

CurlyDave
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Re: Investing proceeds of home sale

Post by CurlyDave » Mon Apr 16, 2018 9:37 pm

daheld wrote:
Mon Apr 16, 2018 3:01 pm
...Should we recast more? ...
What is the cost of the recast, and can you do it more than once?

If you can recast more than once and for a reasonable cost, you might do the recast you are thinking of now, put the remainder into your taxable account, and re-evaluate in a few years.

A lot of variables here and you might want to keep the liquidity just in case there are any unknowns lurking in the move to the new house. Maybe the new neighborhood isn't quite what you thought. Maybe a car breaks down, that kind of stuff.

Over the course of a few years, the difference in return on $65k in a taxable account vs. a guaranteed 4.25% on that same money is not going to be a huge deal one way or the other.

There is also a psychological issue. Lower mortgage payments can sometimes lead to lifestyle creep. For me, at least, money in an investment account is locked away -- accessible only in a real emergency.

runner540
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Re: Investing proceeds of home sale

Post by runner540 » Mon Apr 16, 2018 11:00 pm

You're borrowing money at 4.25% post tax (100% certain) to invest in the market (100% UNcertain). You would need to get at least 5% (4.25% / 85%, assuming 15% LT cap gains tax rate) on your investments to break even, and on a risk adjusted basis, you need to get a lot more than 5%. Would you take out a HELOC to invest more? If not, why not use all the taxable to pay down the mortgage?

daheld
Posts: 224
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Re: Investing proceeds of home sale

Post by daheld » Tue Apr 17, 2018 7:34 am

bloom2708 wrote:
Mon Apr 16, 2018 3:26 pm
Do you have an HSA you can fill up?

At 4.25%, paying down the mortgage is a pretty nice guaranteed return. Is there a fee to re-cast? Re-cast is different from just paying a chunk on principle. Paying ahead keeps your payment the same but more goes to principal. You skip ahead on the payment schedule. Re-cast lowers the payment and resets back to 30 years. It doesn't seem like a re-cast is warranted unless you drop from 30 to 20 years or 15 years. That would make sense. Leap forward on the "get it paid off" schedule.

You are maxing pre-tax 401ks, Roths. HSA and front loading 529s (kid/kids?). After that it is taxable or pay down the mortgage. A good place to be.

Personally, I'd slay the mortgage, but that is 50-50 popular here.With higher standard deductions, mortgage interest will likely not be partially deductible. Paying a dollar in interest to save 22 or 25 cents isn't a great deal. That is only over and above the bigger standard deduction.

Why does your spouse not like the "pay down mortgage" idea? We have Total US, Total International and Int-Term Tax-Exempt Bond index in taxable. We invest there at our overall asset allocation. But, we also paid off our mortgage in 2007 before the "big meltdown".

You seem to be doing all the right things, so it will be a lifestyle decision. Do you want to do your "debt free scream" (Dave Ramsey) someday or keep piling up your investments.
1. No HSA. Wife and I have separate health insurance because she has a serious, chronic health condition and really great coverage through her employer. I am healthy and have a plan that's pretty darn affordable and works well for me. I considered an HSA, but if she were to lose her job, it would not be ideal for her to be on a HSA.

2. There is a small fee to recast the mortgage, a couple hundred bucks. We are pretty disciplined and would continue to pay our current payment (mortgage plus about $200) even after the lowered payment of the recast.

3. We do not have a 529 yet, but the plan is to keep contributing to the taxable account, then when we have kids, convert some or all of that (current balance is about $100k) to a 529 to fund college later on down the road.

4. It isn't that she doesn't like the idea of paying down the mortgage, I think she's just a little more cautious and perhaps a little slower to come around to the idea of making big money decisions. She's smart and frugal and wonderful, though. :wink:
CurlyDave wrote:
Mon Apr 16, 2018 9:37 pm
daheld wrote:
Mon Apr 16, 2018 3:01 pm
...Should we recast more? ...
What is the cost of the recast, and can you do it more than once?

If you can recast more than once and for a reasonable cost, you might do the recast you are thinking of now, put the remainder into your taxable account, and re-evaluate in a few years.

A lot of variables here and you might want to keep the liquidity just in case there are any unknowns lurking in the move to the new house. Maybe the new neighborhood isn't quite what you thought. Maybe a car breaks down, that kind of stuff.

Over the course of a few years, the difference in return on $65k in a taxable account vs. a guaranteed 4.25% on that same money is not going to be a huge deal one way or the other.

There is also a psychological issue. Lower mortgage payments can sometimes lead to lifestyle creep. For me, at least, money in an investment account is locked away -- accessible only in a real emergency.
Recast costs a couple hundred bucks; not much. I looked into the specifics of recasting at time of closing, and at that point our lender was unsure if/to whom our mortgage would be sold. I can't remember if our current lender allows multiple recasts; that's something I should check in to. We will certainly keep an emergency fund of about a year's worth of expenses, plus a little chunk to fund some new home expenses.
mega317 wrote:
Mon Apr 16, 2018 3:46 pm
daheld wrote:
Mon Apr 16, 2018 3:01 pm
Investing this lump sum in that taxable account is just about the only BH option, correct? What other options do we have to invest this money that would be in line with BH thinking?
The only BH option (other than pay down the mortgage) is low-cost index funds according to an appropriate-for-you allocation. How you get there is much less important. Lump sum is more likely to come out ahead, but psychological and behavioral factors are not unimportant.
Yeah, whatever we invest into our taxable account will be in line with our current AA, which is 80/20.
chevca wrote:
Mon Apr 16, 2018 3:38 pm
If you plan to pay the mortgage off early anyway, what does it look like to throw the whole $85k at the recast?

You're already maxing out retirement accounts and saving an additional $750/month in taxable. Throwing the whole windfall at the recast would lower the payment quite a bit. What would the lower payment give you for options as far as investing in taxable, and how much extra per month would have to go towards the mortgage to pay it off in 20 years?

Just my thoughts. I think either way, you guys are sitting good. If you can't come to an easy decision, 50/50 would work fine and be a good compromise.
Thanks for this. The more I think about it, I think a 50/50 contribution to taxable/recast might be a good solution. I agree that throwing the whole thing at the mortgage is really attractive, but I also get hung up on trying to squirrel away as much as possible for retirement. I know it kind of becomes a "six of one, half a dozen of another" type deal, but I appreciate your help!

mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: Investing proceeds of home sale

Post by mega317 » Tue Apr 17, 2018 8:32 am

daheld wrote:
Tue Apr 17, 2018 7:34 am
1. No HSA. Wife and I have separate health insurance because she has a serious, chronic health condition and really great coverage through her employer. I am healthy and have a plan that's pretty darn affordable and works well for me. I considered an HSA, but if she were to lose her job, it would not be ideal for her to be on a HSA.
Not ideal maybe, but in that scenario it would only be for a year or less since you could change your plan at open enrollment, no?

daheld
Posts: 224
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Re: Investing proceeds of home sale

Post by daheld » Tue Apr 17, 2018 8:35 am

mega317 wrote:
Tue Apr 17, 2018 8:32 am
daheld wrote:
Tue Apr 17, 2018 7:34 am
1. No HSA. Wife and I have separate health insurance because she has a serious, chronic health condition and really great coverage through her employer. I am healthy and have a plan that's pretty darn affordable and works well for me. I considered an HSA, but if she were to lose her job, it would not be ideal for her to be on a HSA.
Not ideal maybe, but in that scenario it would only be for a year or less since you could change your plan at open enrollment, no?
This is true. I have considered it, but I'm just not willing to take the risk. She takes, at minimum, three prescriptions daily. This is during a period of "remission". She was hospitalized for a week about four years ago and upon discharge was taking about 25 pills per day. Over the last four years, she's done chemotherapy (she does not have cancer), and been on multiple medications that would be very expensive without good drug coverage. The nature of her disease is unpredictable and I'm just not willing to chance it in order to squirrel away a few grand a year. The benefits of an HSA can be very significant, but I think that benefit has to be weighed against the risk of unintended consequences, as well as the real risk of actually spending more than you save.

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randomizer
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Re: Investing proceeds of home sale

Post by randomizer » Tue Apr 17, 2018 11:03 am

daheld wrote:
Mon Apr 16, 2018 3:01 pm
First, I know there are a million "how do I invest this money?" threads, and I apologize that I'm adding to that number.
I think that's pretty much what the forum is for.
87.5:12.5 — HODL the course!

daheld
Posts: 224
Joined: Wed Sep 13, 2017 8:14 am

Re: Investing proceeds of home sale

Post by daheld » Tue Apr 17, 2018 11:09 am

randomizer wrote:
Tue Apr 17, 2018 11:03 am
daheld wrote:
Mon Apr 16, 2018 3:01 pm
First, I know there are a million "how do I invest this money?" threads, and I apologize that I'm adding to that number.
I think that's pretty much what the forum is for.
Agreed. Just wanted folks to know I did search for some answers. :D

mortfree
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Re: Investing proceeds of home sale

Post by mortfree » Tue Apr 17, 2018 11:34 am

daheld wrote:
Mon Apr 16, 2018 3:01 pm
Investing this lump sum in that taxable account is just about the only BH option, correct? What other options do we have to invest this money that would be in line with BH thinking?
One missing piece of info is in regards to your current "cash" savings (non-investments). how is that - does it need a boost?

Options:
1. Save up for your next car(s) purchase.
2. Home upkeep (appliances, flooring, roof, HVAC) paid in cash.
3. Charitable donations.
4. Vacation

daheld
Posts: 224
Joined: Wed Sep 13, 2017 8:14 am

Re: Investing proceeds of home sale

Post by daheld » Tue Apr 17, 2018 11:47 am

mortfree wrote:
Tue Apr 17, 2018 11:34 am
daheld wrote:
Mon Apr 16, 2018 3:01 pm
Investing this lump sum in that taxable account is just about the only BH option, correct? What other options do we have to invest this money that would be in line with BH thinking?
One missing piece of info is in regards to your current "cash" savings (non-investments). how is that - does it need a boost?

Options:
1. Save up for your next car(s) purchase.
2. Home upkeep (appliances, flooring, roof, HVAC) paid in cash.
3. Charitable donations.
4. Vacation
We keep about a year's worth of expenses in a money market account. But yes, we were just talking this over and I think it does make sense to keep some liquid cash in a money market account for some things we think we'll be spending on in the near-ish term:
1. We want kids. We have 0 kids now, but we hear they cost money.
2. Just bought a new home, and there'll be the usual expenses there, plus possibly a new driveway in the next few years.
3. We do take a few weekend trips per year, plus usually one good week long vacation. We normally never have a "vacation fund", but I think it might make sense to keep some liquid funds set aside for travel.

mortfree
Posts: 1210
Joined: Mon Sep 12, 2016 7:06 pm

Re: Investing proceeds of home sale

Post by mortfree » Tue Apr 17, 2018 12:16 pm

daheld wrote:
Tue Apr 17, 2018 11:47 am
mortfree wrote:
Tue Apr 17, 2018 11:34 am
daheld wrote:
Mon Apr 16, 2018 3:01 pm
Investing this lump sum in that taxable account is just about the only BH option, correct? What other options do we have to invest this money that would be in line with BH thinking?
One missing piece of info is in regards to your current "cash" savings (non-investments). how is that - does it need a boost?

Options:
1. Save up for your next car(s) purchase.
2. Home upkeep (appliances, flooring, roof, HVAC) paid in cash.
3. Charitable donations.
4. Vacation
We keep about a year's worth of expenses in a money market account. But yes, we were just talking this over and I think it does make sense to keep some liquid cash in a money market account for some things we think we'll be spending on in the near-ish term:
1. We want kids. We have 0 kids now, but we hear they cost money.
2. Just bought a new home, and there'll be the usual expenses there, plus possibly a new driveway in the next few years.
3. We do take a few weekend trips per year, plus usually one good week long vacation. We normally never have a "vacation fund", but I think it might make sense to keep some liquid funds set aside for travel.
I was going to guess a year's worth of expenses given your responsible ways. Some may tell you that's too much.

maybe you want to start a CD ladder with some of the excess or I think another favorite around here is I bonds (??)...

daheld
Posts: 224
Joined: Wed Sep 13, 2017 8:14 am

Re: Investing proceeds of home sale

Post by daheld » Tue Apr 17, 2018 1:16 pm

mortfree wrote:
Tue Apr 17, 2018 12:16 pm
daheld wrote:
Tue Apr 17, 2018 11:47 am
mortfree wrote:
Tue Apr 17, 2018 11:34 am
daheld wrote:
Mon Apr 16, 2018 3:01 pm
Investing this lump sum in that taxable account is just about the only BH option, correct? What other options do we have to invest this money that would be in line with BH thinking?
One missing piece of info is in regards to your current "cash" savings (non-investments). how is that - does it need a boost?

Options:
1. Save up for your next car(s) purchase.
2. Home upkeep (appliances, flooring, roof, HVAC) paid in cash.
3. Charitable donations.
4. Vacation
We keep about a year's worth of expenses in a money market account. But yes, we were just talking this over and I think it does make sense to keep some liquid cash in a money market account for some things we think we'll be spending on in the near-ish term:
1. We want kids. We have 0 kids now, but we hear they cost money.
2. Just bought a new home, and there'll be the usual expenses there, plus possibly a new driveway in the next few years.
3. We do take a few weekend trips per year, plus usually one good week long vacation. We normally never have a "vacation fund", but I think it might make sense to keep some liquid funds set aside for travel.
I was going to guess a year's worth of expenses given your responsible ways. Some may tell you that's too much.

maybe you want to start a CD ladder with some of the excess or I think another favorite around here is I bonds (??)...
Thanks--I also considered a CD ladder. I may bring that up with my wife.

mariezzz
Posts: 196
Joined: Mon Oct 02, 2017 11:02 pm

Re: Investing proceeds of home sale

Post by mariezzz » Tue Apr 17, 2018 9:54 pm

I'm surprised you didn't go for a 15 year mortgage to get a lower interest rate, with that much cash on hand and that high of a combined income. As someone already said, you'd need to be making around 5% on investments (at least) to break even, to justify keeping the cash. You don't really need it as you say you have a year's expenses in cash. With the tax changes occurring in 2018, you likely won't get any tax benefit from the interest, and may not even benefit from itemizing.

But there are 2 people involved in the decision, and you've already taken out the mortgage. Why bother with the recast at all? Just pay down the principal. Even if it's only a couple hundred bucks, it's time and hassle. (Did you make sure your mortgage allows you to pay it off early? Most do, but not all. I suspect you did check that.)

One thing to do is agree with spouse to throw the 20,000 at the mortgage this year, then re-assess in another year. At that point, possibly throw another 20,000 at the principal, or maybe in another year you'll have decided to remodel the kitchen. Cash on hand will keep that cost lower than having to borrow. Perhaps your wife has something like that in mind, but wants to live in the house a bit to figure out what needs to be done.

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