Well, we bought a house! Financial next steps.

[guitarguy]

Hey all,

Well it all happened kinda quickly...but barring everything falling apart at the home inspection...we bought a house!

This won't really be a "can we afford this" thread because I'm confident and comfortable with the move we're making...but I suppose if anyone thinks this will put us in financial ruin let me know. I'm sure we can find something at the inspection to derail things haha.

Here are some financial details:

Ages 38 with kids 1 and 3
Income = $150k per year
Net worth = $1.1m
Current Home Value = $280k
Current Debt = None
Investments (401k, Roth IRA x2, HSA, Taxable, Inherited IRA, 529) = $705k
Cash + iBonds = $112k (iBonds are part of e-fund)

The new home price is $410k, 20% down $82k. AFTER the new house purchase, we are planning to pull out $200k equity from the sale of our current home and do a recast, which should take the new mortgage payment down to $128k and around $1450/m for PITI pretty conservatively with a high estimate for T&I.

Through the transitional period we'll be on the lower end for cash reserves, but I have a bonus coming in Feb that will bolster that, and we always have taxable to lean on if needed in the very short term. We should be able to cash flow moving expenses, and aren't planning to buy any big ticket items like furniture or anything right away in the new house. Just some paint - turning two "pink" bedrooms to "blue" - is literally all it needs for us to move in!

Our current home we expect to sell very quickly. Our neighbors sold about a month ago (and had a bidding war) in 3 days. Our home is directly across the street and just as nicely updated and desirable. Once the funds are out of this house and the recast is done, even with a VERY conservative $250k selling price we'll be left with plenty of cash and taxable reserves (close to 3 years of expenses) to feel comfortable.

Any issues with this plan or things to consider doing differently?

Edited to clarify the amount down on the new mortgage and the plan for pulling equity out of the old house.

[chicagoan23]

Are you sure you need to sell a nicely updated, desirable and affordable home that has no mortgage, instead of renting it? I'd consider doing that instead of maintaining three years of expenses in reserves. Then take a little bigger mortgage on the new home (which you can afford) that is paid back in increasingly worthless future dollars.

Disclosure: I sold a beautifully updated condo in a high rise building (and thus was largely maintenance-free) when I bought my current house. I wish I would have kept it and rented it out for the past 15+ years, and carried a larger mortgage on my current home.

[DiMAn0684]

Are you sure you need to sell a nicely updated, desirable and affordable home that has no mortgage, instead of renting it? I'd consider doing that instead of maintaining three years of expenses in reserves. Then take a little bigger mortgage on the new home (which you can afford) that is paid back in increasingly worthless future dollars.

Disclosure: I sold a beautifully updated condo in a high rise building (and thus was largely maintenance-free) when I bought my current house. I wish I would have kept it and rented it out for the past 15+ years, and carried a larger mortgage on my current home.

Not the OP, but as a parent of kids same age as OP's getting another job as a landlord is the last thing I'd want right now.

[tashnewbie]

The new home price is $410k, 20% down $82k. We are planning to pull out $200k equity from the sale of our current home and do a recast, which should take the new mortgage payment down to around $1450/m for PITI pretty conservatively with a high estimate for T&I.

...

Once the funds are out of this house and the recast is done, even with a VERY conservative $250k selling price we'll be left with plenty of cash and taxable reserves (close to 3 years of expenses) to feel comfortable.

So you're planning to put essentially ~$280k on the new home, with $200k being equity in your current home? So your total mortgage on the new home will be ~$130k?

And you'll still have "plenty of cash" and 3 years of expenses in taxable after that?

[guitarguy]

Are you sure you need to sell a nicely updated, desirable and affordable home that has no mortgage, instead of renting it? I'd consider doing that instead of maintaining three years of expenses in reserves. Then take a little bigger mortgage on the new home (which you can afford) that is paid back in increasingly worthless future dollars.

Disclosure: I sold a beautifully updated condo in a high rise building (and thus was largely maintenance-free) when I bought my current house. I wish I would have kept it and rented it out for the past 15+ years, and carried a larger mortgage on my current home.

Not the OP, but as a parent of kids same age as OP's getting another job as a landlord is the last thing I'd want right now.

Yeah...with two little kids, a day job, and a quite successful side business...I don't really have room to be a landlord right now. On top of that:

1. This house would likely fail every real estate rental metric and rule of thumb (bad cap rate, wouldn't meet 1% rule, etc).
2. We bought the house for $100k. It would take a LONG time to make up for pushing $200k of tax free profit from the sale.

[Triple digit golfer]

So you're putting down $200k and mortgage will be $210k?

Sounds fine to me. Congratulations.

[guitarguy]

The new home price is $410k, 20% down $82k. We are planning to pull out $200k equity from the sale of our current home and do a recast, which should take the new mortgage payment down to around $1450/m for PITI pretty conservatively with a high estimate for T&I.

...

Once the funds are out of this house and the recast is done, even with a VERY conservative $250k selling price we'll be left with plenty of cash and taxable reserves (close to 3 years of expenses) to feel comfortable.

So you're planning to put essentially ~$280k on the new home, with $200k being equity in your current home? So your total mortgage on the new home will be ~$130k?

Yes. $128k would be the new mortgage after we sell and do the recast with $200k profit from the sale.

And you'll still have "plenty of cash" and 3 years of expenses in taxable after that?

Yes and no. The cash and iBonds are included in the 3 years of expenses calculation, not in addition to it.

Assuming we walk away with a pretty conservative $225k from the sale and use $200k for the recast, we'll be left with $25k to replenish our cash savings. That, along with our iBonds, is about 9 ish months expenses including the mortgage payment on $128k. Combine that with our taxable account, and we have a little under 3 years expenses.

[TheHiker]

Looks like a reasonable plan. Congrats!

[guitarguy]

So you're putting down $200k and mortgage will be $210k?

Sounds fine to me. Congratulations.

Well, actually putting down $82k, and then recasting with another $200k.

So the mortgage in the end would only be $128k with our current plan.

Thanks!!

[Triple digit golfer]

So you're putting down $200k and mortgage will be $210k?

Sounds fine to me. Congratulations.

Well, actually putting down $82k, and then recasting with another $200k.

So the mortgage in the end would only be $128k with our current plan.

Thanks!!

Where's the $82k coming from? The $112k Cash + I bonds? Will this leave only $30k in that bucket?

[guitarguy]

So you're putting down $200k and mortgage will be $210k?

Sounds fine to me. Congratulations.

Well, actually putting down $82k, and then recasting with another $200k.

So the mortgage in the end would only be $128k with our current plan.

Thanks!!

Where's the $82k coming from? The $112k Cash + I bonds? Will this leave only $30k in that bucket?

Correct, but:

We will close in mid-Feb. On Feb 28 I should be getting around a $10k bonus (after taxes) to bolster cash which I know will be very low for a short while (but only a period of a couple weeks).

When we sell our current home, we also replenish cash funds with $25k, conservatively.

[spickups09]

If you're planning to do a mortgage recast anyway, why are you putting 20% down on the initial purchase/mortgage? Just do a lower percentage down payment, so your cash reserves are higher while you wait for your old house to sell and a recast on the new house to be completed.

Sorry if I read something wrong.

[guitarguy]

If you're planning to do a mortgage recast anyway, why are you putting 20% down on the initial purchase/mortgage? Just do a lower percentage down payment, so your cash reserves are higher while you wait for your old house to sell and a recast on the new house to be completed.

Sorry if I read something wrong.

Honestly, hadn’t thought of that! Ha. That’s a a good idea.

Hadn’t really considered putting anything other than the 20% down because we want to for sure opt of out escrow and we wanted to get the best rate we could because the recast obviously isn’t a refi. So just was thinking 20% down out of the gate.

But - it’s a good thing we did go with conventional. The house we got had 3 offers, ours was the lowest but by far the cleanest. Conventional loan so nothing funny there, they were able to waive the appraisal, and no contingency for us selling our current home. By the end ours was basically a cash offer…just has to pass inspection which is normal again now haha.

I know our cash reserves will be low for a couple weeks…but honestly I can’t imagine a situation where we’d need that much cash that we couldn’t get by with a credit card or whatever the case until the end of the month. In a crazy dire situation we could pull from taxable too, or take a distribution from our inherited IRA which we plan to do this year anyway (just later).

So I do think we’ll be fine.

[lakpr]

Are you sure you need to sell a nicely updated, desirable and affordable home that has no mortgage, instead of renting it? I'd consider doing that instead of maintaining three years of expenses in reserves. Then take a little bigger mortgage on the new home (which you can afford) that is paid back in increasingly worthless future dollars.

Disclosure: I sold a beautifully updated condo in a high rise building (and thus was largely maintenance-free) when I bought my current house. I wish I would have kept it and rented it out for the past 15+ years, and carried a larger mortgage on my current home.

Not the OP, but as a parent of kids same age as OP's getting another job as a landlord is the last thing I'd want right now.

Not the OP either, but if you turn previous home to a rental, you would lose out on the $500k capital gains tax exclusion. To be very technical, that capital gains exclusion is available if you had owned the home as your primary residence, at least three of the past five years. So there is a small 2 year window where you probably can turn it to a rental briefly, but sell before that 2 years are up.

Why bother?

[retireIn2020]

Are you sure you need to sell a nicely updated, desirable and affordable home that has no mortgage, instead of renting it? I'd consider doing that instead of maintaining three years of expenses in reserves. Then take a little bigger mortgage on the new home (which you can afford) that is paid back in increasingly worthless future dollars.

Disclosure: I sold a beautifully updated condo in a high rise building (and thus was largely maintenance-free) when I bought my current house. I wish I would have kept it and rented it out for the past 15+ years, and carried a larger mortgage on my current home.

Not the OP, but as a parent of kids same age as OP's getting another job as a landlord is the last thing I'd want right now.

Not the OP either, but if you turn previous home to a rental, you would lose out on the $500k capital gains tax exclusion. To be very technical, that capital gains exclusion is available if you had owned the home as your primary residence, at least three of the past five years. So there is a small 2 year window where you probably can turn it to a rental briefly, but sell before that 2 years are up.

Why bother?

Yep, I have a friend scrambling to move into some of his rental properties for a year as his main residence to capitalize on the recent increase in property values. When you consider taxes and headache it's not worth it to me anyway.

[pindevil]

You didn't specify where you are getting the mortgage but typically you would use a broker to find the lowest rate. In which case you may not know who is servicing the loan to begin with and the servicer could change by the time you sell the old house. Loan servicers are not required to offer recasting. That being said, a refinance is always an option.

[guitarguy]

Are you sure you need to sell a nicely updated, desirable and affordable home that has no mortgage, instead of renting it? I'd consider doing that instead of maintaining three years of expenses in reserves. Then take a little bigger mortgage on the new home (which you can afford) that is paid back in increasingly worthless future dollars.

Disclosure: I sold a beautifully updated condo in a high rise building (and thus was largely maintenance-free) when I bought my current house. I wish I would have kept it and rented it out for the past 15+ years, and carried a larger mortgage on my current home.

Not the OP, but as a parent of kids same age as OP's getting another job as a landlord is the last thing I'd want right now.

Not the OP either, but if you turn previous home to a rental, you would lose out on the $500k capital gains tax exclusion. To be very technical, that capital gains exclusion is available if you had owned the home as your primary residence, at least three of the past five years. So there is a small 2 year window where you probably can turn it to a rental briefly, but sell before that 2 years are up.

Why bother?

Yep, I have a friend scrambling to move into some of his rental properties for a year as his main residence to capitalize on the recent increase in property values. When you consider taxes and headache it's not worth it to me anyway.

Exactly. See my post above too. We are sitting on almost $200k of tax free profit from a sale, and this home would fail pretty much all real estate metrics.

I actually have thought hard about getting into a rental property at some point, but this isn’t the time nor the property. I’d be much better suited taking the profit from this sale and buying a duplex or something…which might be in my future at some point but who knows.

[guitarguy]

You didn't specify where you are getting the mortgage but typically you would use a broker to find the lowest rate. In which case you may not know who is servicing the loan to begin with and the servicer could change by the time you sell the old house. Loan servicers are not required to offer recasting. That being said, a refinance is always an option.

I went with Chase. I’ve got a great personal and business banking relationship with them, and we have a private client hook up bc of my mom (before she passed) as well. So they treat us very well.

Chase not only beat the best rate quote I could find (PenFed, where we had our last mortgage), but they give $1000 towards closing costs (benefit from my employer), granted an appraisal waiver, and although they use Fannie/Freddy for the money, I’ve been assured that they keep the loan for its life and I always will be dealing with Chase and the Chase portal for payments and everything related to the mortgage.

I suppose anything could happen with that last part…but hopefully they hold true to their word.

Oh, and they, unlike most places, charge no fee for recasting either.

[novelbogle]

Hey all,

Well it all happened kinda quickly...but barring everything falling apart at the home inspection...we bought a house!

This won't really be a "can we afford this" thread because I'm confident and comfortable with the move we're making...but I suppose if anyone thinks this will put us in financial ruin let me know. I'm sure we can find something at the inspection to derail things haha.

Here are some financial details:

Ages 38 with kids 1 and 3
Income = $150k per year
Net worth = $1.1m
Current Home Value = $280k
Current Debt = None
Investments (401k, Roth IRA x2, HSA, Taxable, Inherited IRA, 529) = $705k
Cash + iBonds = $112k (iBonds are part of e-fund)

The new home price is $410k, 20% down $82k. AFTER the new house purchase, we are planning to pull out $200k equity from the sale of our current home and do a recast, which should take the new mortgage payment down to $128k and around $1450/m for PITI pretty conservatively with a high estimate for T&I.

Through the transitional period we'll be on the lower end for cash reserves, but I have a bonus coming in Feb that will bolster that, and we always have taxable to lean on if needed in the very short term. We should be able to cash flow moving expenses, and aren't planning to buy any big ticket items like furniture or anything right away in the new house. Just some paint - turning two "pink" bedrooms to "blue" - is literally all it needs for us to move in!

Our current home we expect to sell very quickly. Our neighbors sold about a month ago (and had a bidding war) in 3 days. Our home is directly across the street and just as nicely updated and desirable. Once the funds are out of this house and the recast is done, even with a VERY conservative $250k selling price we'll be left with plenty of cash and taxable reserves (close to 3 years of expenses) to feel comfortable.

Any issues with this plan or things to consider doing differently?

Edited to clarify the amount down on the new mortgage and the plan for pulling equity out of the old house.

How does the rate on the mortgage compare to the expected annual returns at your AA? Are you maxing other tax-advantaged investments? If, for example, you're not planning to max your Roth IRAs or your 401k this year, it may make sense to reduce the portion that you pay to the mortgage for the recast and use those funds to contribute to tax-advantaged accounts. (This would be more likely also if you itemize.)

I assume you have considered this but if not it's worth a thought.

[6bquick]

Are you sure you need to sell a nicely updated, desirable and affordable home that has no mortgage, instead of renting it? I'd consider doing that instead of maintaining three years of expenses in reserves. Then take a little bigger mortgage on the new home (which you can afford) that is paid back in increasingly worthless future dollars.

Disclosure: I sold a beautifully updated condo in a high rise building (and thus was largely maintenance-free) when I bought my current house. I wish I would have kept it and rented it out for the past 15+ years, and carried a larger mortgage on my current home.

Yeah...with two little kids, a day job, and a quite successful side business...I don't really have room to be a landlord right now. On top of that:

1. This house would likely fail every real estate rental metric and rule of thumb (bad cap rate, wouldn't meet 1% rule, etc).
2. We bought the house for $100k. It would take a LONG time to make up for pushing $200k of tax free profit from the sale.

We had this same 'problem'? (good one to have). Our old house would have made a decent rental, too, however, the ridiculous appreciation it was too good to pass up. a tax free bird in the hand is worth a fair number of cash-flowing birds in the bush. At least in the accumulation phase of life.

the only thing we did differently, buying over a year ago, we only put enough on the new mortgage to get rid of PMI and invested the rest. different story when mortgage rates are double what they were then. Congrats on the new home purchase.

[guitarguy]

Hey all,

Well it all happened kinda quickly...but barring everything falling apart at the home inspection...we bought a house!

This won't really be a "can we afford this" thread because I'm confident and comfortable with the move we're making...but I suppose if anyone thinks this will put us in financial ruin let me know. I'm sure we can find something at the inspection to derail things haha.

Here are some financial details:

Ages 38 with kids 1 and 3
Income = $150k per year
Net worth = $1.1m
Current Home Value = $280k
Current Debt = None
Investments (401k, Roth IRA x2, HSA, Taxable, Inherited IRA, 529) = $705k
Cash + iBonds = $112k (iBonds are part of e-fund)

The new home price is $410k, 20% down $82k. AFTER the new house purchase, we are planning to pull out $200k equity from the sale of our current home and do a recast, which should take the new mortgage payment down to $128k and around $1450/m for PITI pretty conservatively with a high estimate for T&I.

Through the transitional period we'll be on the lower end for cash reserves, but I have a bonus coming in Feb that will bolster that, and we always have taxable to lean on if needed in the very short term. We should be able to cash flow moving expenses, and aren't planning to buy any big ticket items like furniture or anything right away in the new house. Just some paint - turning two "pink" bedrooms to "blue" - is literally all it needs for us to move in!

Our current home we expect to sell very quickly. Our neighbors sold about a month ago (and had a bidding war) in 3 days. Our home is directly across the street and just as nicely updated and desirable. Once the funds are out of this house and the recast is done, even with a VERY conservative $250k selling price we'll be left with plenty of cash and taxable reserves (close to 3 years of expenses) to feel comfortable.

Any issues with this plan or things to consider doing differently?

Edited to clarify the amount down on the new mortgage and the plan for pulling equity out of the old house.

How does the rate on the mortgage compare to the expected annual returns at your AA? Are you maxing other tax-advantaged investments? If, for example, you're not planning to max your Roth IRAs or your 401k this year, it may make sense to reduce the portion that you pay to the mortgage for the recast and use those funds to contribute to tax-advantaged accounts. (This would be more likely also if you itemize.)

I assume you have considered this but if not it's worth a thought.

Thanks for the thought! Probably should’ve noted this in the OP since obviously this is BHs. Ha!

We plan to continue with max contributions to 401k, 2x Roth IRA, HSA, and 529 ($10k for the state tax deduction). Roth and 529 are done (lumped a couple weeks ago) for 2023 already, 401k and HSA are via payroll.

The only thing we will pause, at least through the transitional phase and until our cash cushion is back up a bit, are taxable contributions.

We had this same 'problem'? (good one to have). Our old house would have made a decent rental, too, however, the ridiculous appreciation it was too good to pass up. a tax free bird in the hand is worth a fair number of cash-flowing birds in the bush. At least in the accumulation phase of life.

the only thing we did differently, buying over a year ago, we only put enough on the new mortgage to get rid of PMI and invested the rest. different story when mortgage rates are double what they were then. Congrats on the new home purchase.

Yeah…if we could have 2.x% like on the last mortgage…we would probably have a different plan haha.

We are at 5.625% on this one. It’s a tougher call. We decided to go with the recast. The rate is high enough for us that it makes sense, and we really don’t want to “feel” house poor with the bloated mortgage. With good cash flow each month we can decide what to do as time goes by…more aggressive with the mortgage, more into taxable, etc.

Thank you!