$275k in cash - increase house down payment or open taxable account?

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ofthewoods
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$275k in cash - increase house down payment or open taxable account?

Post by ofthewoods »

Hi all,

My wife and I have about $275k currently sitting in high yield savings accounts and CDs (not accounting for our emergency fund). We are in the home buying process and considering whether we want to increase our down payment amount or stick with 20% down and invest the rest in a taxable account. We've been quoted interest rates around 3.125 - 3.25% from a few different lending institutions and are looking in the $350 - $425k range.

We are 30/31, have no debt, and our combined income is approximately $143k/year. We should have plenty of earning potential to go. My wife does for sure and so should I, but I do have a health condition that may take it's toll on me in 15 - 20 years or so. We'll see how medicine progresses by then. We currently both have 401ks and Roth IRAs and max each of them and will continue to max them after purchasing the house.

Curious for your thoughts. Thanks for reading
Dandy
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Re: $275k in cash - increase house down payment or open taxable account?

Post by Dandy »

If you are a first time home buyer I'd suggest keeping some liquid until after you close and begin living in the home. Lots of potential expenses can emerge and you don't want to be short handed. Say $50k

A lot depends on where you stand as far as investments and a bit on how much mortgage interest you can deduct. If your investments are pretty much on target as far as reaching your "number" then pay down your mortgage maybe to the level that allows max tax deduction??? and invest the rest? Don't forget the impact on your emergency fund home ownership could entail.
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ofthewoods
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Re: $275k in cash - increase house down payment or open taxable account?

Post by ofthewoods »

Dandy wrote: Sun May 02, 2021 1:22 pm If you are a first time home buyer I'd suggest keeping some liquid until after you close and begin living in the home. Lots of potential expenses can emerge and you don't want to be short handed. Say $50k

A lot depends on where you stand as far as investments and a bit on how much mortgage interest you can deduct. If your investments are pretty much on target as far as reaching your "number" then pay down your mortgage maybe to the level that allows max tax deduction??? and invest the rest? Don't forget the impact on your emergency fund home ownership could entail.
We are accounting for a higher emergency fund for maintenance and possible emergency home expenses. I’ll have to check more into the mortgage interest deduction.
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grabiner
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Re: $275k in cash - increase house down payment or open taxable account?

Post by grabiner »

Dandy wrote: Sun May 02, 2021 1:22 pm A lot depends on where you stand as far as investments and a bit on how much mortgage interest you can deduct. If your investments are pretty much on target as far as reaching your "number" then pay down your mortgage maybe to the level that allows max tax deduction??? and invest the rest? Don't forget the impact on your emergency fund home ownership could entail.
The mortgage that allows the maximum tax deduction is $750K, which is more than the OP would be borrowing. If there is a cutoff, it goes in the other direction; paying down the mortgage until itemized deductions equal the standard deduction removes deductible interest, and paying it down further removes non-deductible interest. (And for most married couples, none of the interest is deductible; you need to donate a lot to charity or have a very large mortgage in order to itemize deductions.)
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tashnewbie
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Re: $275k in cash - increase house down payment or open taxable account?

Post by tashnewbie »

Even if you bought a $500k house and put 30% down, it looks like you have too much cash (I’m not saying you should do either of those things). I’d probably only put 20% down. Definitely keep enough cash to cover increased cash reserve needs and any short-term planned spending. If you have access to a HSA eligible high deductible health plan and it makes sense for your situation, you could start investing in a HSA. After that, I’d put the rest in taxable in something like VTSAX/VTI.
lazynovice
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Re: $275k in cash - increase house down payment or open taxable account?

Post by lazynovice »

Depends on the house. Are you first time homebuyers? You’ll need furniture, window treatments, decor like things to hang on the walls. You might need to paint and change out some flooring. You’ll need a washer and dryer, a refrigerator and a lawn mower. I’d reserve some money for that. If I were you, I’d put the 20% down and invest the rest. Once you have lived with a mortgage long enough, you will know if you are a “pay it off” or “keep it” kind of person.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
hawkfan55
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Re: $275k in cash - increase house down payment or open taxable account?

Post by hawkfan55 »

Don’t touch your Emergency Funds unless it’s an emergency! After putting down 20% towards the house, you might want to set aside some funds for furniture and other items to make the house a home. Maintenance on a home will run you approx. 1-1.5% of the purchase price per year. Then invest the rest in a Vanguard Total Stock fund or ETF. My advice is don’t sacrifice your tax advantaged retirement savings such as IRA, 401k, 403b, Roth IRAs and 403bs just to buy a home or to save after-tax dollars. Keep investing!😎
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rossington
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Re: $275k in cash - increase house down payment or open taxable account?

Post by rossington »

ofthewoods wrote: Sun May 02, 2021 1:10 pm Hi all,

My wife and I have about $275k currently sitting in high yield savings accounts and CDs (not accounting for our emergency fund). We are in the home buying process and considering whether we want to increase our down payment amount or stick with 20% down and invest the rest in a taxable account. We've been quoted interest rates around 3.125 - 3.25% from a few different lending institutions and are looking in the $350 - $425k range.

We are 30/31, have no debt, and our combined income is approximately $143k/year. We should have plenty of earning potential to go. My wife does for sure and so should I, but I do have a health condition that may take it's toll on me in 15 - 20 years or so. We'll see how medicine progresses by then. We currently both have 401ks and Roth IRAs and max each of them and will continue to max them after purchasing the house.

Curious for your thoughts. Thanks for reading
If you make a higher down payment on your home you will know exactly what is left that you will owe over time. If you "invest" that money in a taxable account you do not have a clue as to how that will work out (unless it is a FI investment and over the long run will that be more advantageous vs. the mortgage savings?).
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
Topic Author
ofthewoods
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Re: $275k in cash - increase house down payment or open taxable account?

Post by ofthewoods »

rossington wrote: Mon May 03, 2021 3:49 am
ofthewoods wrote: Sun May 02, 2021 1:10 pm Hi all,

My wife and I have about $275k currently sitting in high yield savings accounts and CDs (not accounting for our emergency fund). We are in the home buying process and considering whether we want to increase our down payment amount or stick with 20% down and invest the rest in a taxable account. We've been quoted interest rates around 3.125 - 3.25% from a few different lending institutions and are looking in the $350 - $425k range.

We are 30/31, have no debt, and our combined income is approximately $143k/year. We should have plenty of earning potential to go. My wife does for sure and so should I, but I do have a health condition that may take it's toll on me in 15 - 20 years or so. We'll see how medicine progresses by then. We currently both have 401ks and Roth IRAs and max each of them and will continue to max them after purchasing the house.

Curious for your thoughts. Thanks for reading
If you make a higher down payment on your home you will know exactly what is left that you will owe over time. If you "invest" that money in a taxable account you do not have a clue as to how that will work out (unless it is a FI investment and over the long run will that be more advantageous vs. the mortgage savings?).
That's the question. Paying more for the down payment up front is essentially a guaranteed 3% return vs. a long-term investment in VTSAX and VTIAX.

We also have money set aside that wasn't mentioned here for home furnishings and what not.
HomeStretch
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Re: $275k in cash - increase house down payment or open taxable account?

Post by HomeStretch »

One option is to make your down payment high enough (> 20%) such that the mortgage payment is affordable on one salary in the event of layoff, etc.
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grabiner
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Re: $275k in cash - increase house down payment or open taxable account?

Post by grabiner »

HomeStretch wrote: Mon May 03, 2021 8:55 am One option is to make your down payment high enough (> 20%) such that the mortgage payment is affordable on one salary in the event of layoff, etc.
This doesn't actually work. If you put an extra $50K down, you will have lower monthly payments, but you will also have $50k less in cash (which you can keep liquid if needed), so the payments are less affordable in case of an emergency.
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z91
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Re: $275k in cash - increase house down payment or open taxable account?

Post by z91 »

Hang onto the cash. Interest rates are pretty low right now, and you could do well putting it into the market instead (assuming you already have emergency funds). I've stopped paying extra principal recently and putting it into VTI instead.
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RickBoglehead
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Re: $275k in cash - increase house down payment or open taxable account?

Post by RickBoglehead »

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babystep
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Re: $275k in cash - increase house down payment or open taxable account?

Post by babystep »

How about 50/50?

275k/2 = 137.5k. First 137.5k for down-payment and the other 137.5k for investment to VTSAX/VTI.

This will be about 35% down-payment for 400k house.
bg5
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Re: $275k in cash - increase house down payment or open taxable account?

Post by bg5 »

We were in your exact same position a year ago....we decided to put it all down on the house and now our house payment is so low it allows us to invest more and have lower monthly bills.....I would do the same thing if I had to do it over again
oslocal
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Re: $275k in cash - increase house down payment or open taxable account?

Post by oslocal »

My experience in California was that the rates were better on a bigger mortgage despite LTV being slightly higher. :oops: :beer

Here's a curveball suggestion perhaps...
If you aren't planning on keeping the mortgage long term, ask if you can get negative point mortgage with a high credit to offset as much closing cost as possible, including possibly having the bank pay your property taxes.

Since credits are based on the size of the mortgage, you should take the largest mortgage, and then put extra principal payment on it post closing.
Your payment amount will be based on the original principal amount, but you can ask for the mortgage to be re-cast to lower your payments as well.
furiouschads
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Re: $275k in cash - increase house down payment or open taxable account?

Post by furiouschads »

do some spreadsheet work to learn what is the 5 year change (after taxes) in net worth if you put 275k into one of

1) paying down the mortgage which would have cost you not much interest after taxes
2) buying a low cost total stock market ETF
3) buying a mix of total stock market and total bond market

At current tax rates, mortgage interest deductibility will be irrelevant to people who take the recently increased standard deduction instead of itemizing. Something I only realized this year when doing my 2020 taxes. The loss of the SALT deduction hit me hard.
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