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At a crossroad....need some advice
Old 01-26-2018, 07:02 PM   #1
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At a crossroad....need some advice

Hello everyone, I am a new joiner to the forums but a long time subscriber to the goal of FIRE!

I am a little unsure on how to proceed and so I am seeking guidance and opinions.

DW and I are looking to buy a home sometime this year. The price point of the home is about $600k (we live in NY, so the home isn't anything spectacular).

My choices are:

Choice A:
Put 20% down and get a mortgage and pay it off over 30 years (likely sooner with some extra payments and such)
Positive: Keep savings intact
Negative: Will have a sizable expense even after we both retire (me in 5 years DW in 15 years)
Negative: Savings are exposed to the stock market, which has appreciated nicely. Maybe we should harvest some of the gains?

Choice B:
Purchase home with cash. We have $310k in cash, will raise $100k by borrowing from our 401ks ($50k for each, which we will pay back) and will sell about $190k in investments in our taxable account, which will incur long-term capital gains tax.
Positive: We will not have a mortgage payment when we stop working
Positive: Without the mortgage payment, we will be able to save more while we are both working to recover some of the savings/investments we sold.
Positive: We are taking some money off the table from the stock market and "pocketing some of the gains".
Negative: Our savings will be depleted by roughly 20%.
Negative: We will be taxed at long term capital gains.

Hopefully this is enough information to solicit some opinions. Thank you all in advance and best of luck in the pursuit of FIRE.
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Old 01-26-2018, 07:42 PM   #2
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I would not borrow from retirement accounts to purchase a house, especially not while still working. Why not get a 15 year mortgage (which typically have lower rates) and then pay it off aggressively over the next 5-10 years?
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Old 01-26-2018, 07:49 PM   #3
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Hi welcome. Im a newbie. Your first post might have skipped the usual intro but it has some info. If it were me Id stay put or buy a cheaper house. But you might be a lot younger. Much depends on whether you expect to live there forever or sell in retirement. And one cannot assume endless real estate growth.

On balance Id never ever borrow from my 401k but some people do it. I want mine to grow and grow but of course realize markets go down too.

Good luck Im sure more advice will follow.
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Old 01-26-2018, 08:02 PM   #4
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Quote:
Originally Posted by Byb747 View Post
Hello everyone, I am a new joiner to the forums but a long time subscriber to the goal of FIRE!

I am a little unsure on how to proceed and so I am seeking guidance and opinions.

DW and I are looking to buy a home sometime this year. The price point of the home is about $600k (we live in NY, so the home isn't anything spectacular).

My choices are:

Choice A:
Put 20% down and get a mortgage and pay it off over 30 years (likely sooner with some extra payments and such)
Positive: Keep savings intact
Negative: Will have a sizable expense even after we both retire (me in 5 years DW in 15 years)
Negative: Savings are exposed to the stock market, which has appreciated nicely. Maybe we should harvest some of the gains?

Choice B:
Purchase home with cash. We have $310k in cash, will raise $100k by borrowing from our 401ks ($50k for each, which we will pay back) and will sell about $190k in investments in our taxable account, which will incur long-term capital gains tax.
Positive: We will not have a mortgage payment when we stop working
Positive: Without the mortgage payment, we will be able to save more while we are both working to recover some of the savings/investments we sold.
Positive: We are taking some money off the table from the stock market and "pocketing some of the gains".
Negative: Our savings will be depleted by roughly 20%.
Negative: We will be taxed at long term capital gains.

Hopefully this is enough information to solicit some opinions. Thank you all in advance and best of luck in the pursuit of FIRE.
Faced this same decision 2 years ago, and went with a mortgage at 80% LTV. It has worked out better than I expected with the rising market, but I made my decision in order to preserve liquidity for living expenses and other investment opportunities.

I would not take money out of 401ks to buy a house. You have 5 years to go, DW has 15. As long as the loans are outstanding, your money is not invested. With your 5 year window, less of an issue, but DW at 15 years is a different deal. Money that I don't need for that long is invested 100% in equities.

For me, the decision about selling stock and paying the CG taxes would hinge on if my asset allocation was out of line.

Owner-occupied real estate is not an "investment" in my experience, it's been a place to live, and there are good reasons to keep the ongoing occupancy costs reasonable, many of which don't change, mortgage or not. Just wouldn't raid my 401k to be able to say my house was free and clear.

How about Option C - put down 30-40%, preserve some of your cash and not raid the 401ks?
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Old 01-27-2018, 02:53 AM   #5
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I am with the folks who say dont cash out retirement accounts to have no mortgage or smaller mortgage. With the new tax laws few people see a real mortgage tax benefit because of the large standard deduction.
In general i would go with your 20% down and 15 year mort. Option.
You should compare the after tax rate of return on your investments to the cost of capital in a mortgage. If the mortgage is 3.5% and you get 5.5% plus on your investments you are better taking the mortgage (depends on your actual tax rates). Note that the risk profiles of your investments vs a mortgage are totally different.

Dont know if this helps or not....
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Old 01-27-2018, 04:17 AM   #6
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How about Option C - put down 30-40%, preserve some of your cash and not raid the 401ks?
+1. I also say go for a middle option, and the 15 yr mortgage.
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Old 01-27-2018, 04:53 AM   #7
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For choice B, how are you going to ensure you actually save more money? It is much easier to skip putting money away vs skipping a mortgage payment.
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Old 01-27-2018, 05:07 AM   #8
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Originally Posted by lhamo View Post
I would not borrow from retirement accounts to purchase a house, especially not while still working. Why not get a 15 year mortgage (which typically have lower rates) and then pay it off aggressively over the next 5-10 years?
+1.
Don't raid the 401K and consider 15 year note.
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Old 01-27-2018, 05:31 AM   #9
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Never touch retirement accounts.
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Old 01-27-2018, 05:57 AM   #10
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Originally Posted by Byb747 View Post
Choice A:
Positive: Keep savings intact

Choice B:
Negative: Our savings will be depleted by roughly 20%.
These two points would make the choice clear for me.

Unless the remaining 80% of your savings is a lot more than you could need to live a long happy life and still leave the kind of legacy you choose, I'd recommend Choice A.

You haven't indicated your age, the mortgage rate, your income, how much you and DW save each year, nor any of your goals in retirement. Those are important factors too.
And why would you want to pay more toward your 30 year mortgage (with extra payments and such) in retirement than required?
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Old 01-27-2018, 07:26 AM   #11
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Originally Posted by FlaGator View Post
I would not take money out of 401ks to buy a house.

How about Option C - put down 30-40%, preserve some of your cash and not raid the 401ks?
^^This^^

To lock in some of your stock gains, rebalance your asset allocation (after you put more money down).

Money is cheap right now. Stay a bit more liquid and don't worry too much about paying off the mortgage early. As has been said, maybe look into a 15 year. Personally, I'd do a 30 and commit to paying it off sooner - more flexibility.
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Old 01-27-2018, 07:29 AM   #12
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Never borrow against your 401k accounts.
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Old 01-27-2018, 07:40 AM   #13
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While you outlined two extremes, you could always take a middle position if you want to. I agree with others to look at 15 year mortgages... rates are lower and it will be paid off when your DW retires. Also, you can put more than 20% down if you wish to.. though with today's low rates it seems likely that balanced investment returns will exceed your mortgage interest but you never know.


Also, being taxed at capital gains rates is an advantage in my view, not a disadvantage... usually 0% or 15% depending on your tax bracket... or perhaps more if your income is really high.
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Old 01-27-2018, 08:15 AM   #14
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Mortgage for sure, especially now since rates won't get lower any time soon.

If the 15 year doesn't look appealing, get a 30, and pay it like it's 20.
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Old 01-27-2018, 08:19 AM   #15
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I like having a mortgage, in your situation, because it's way better flexibility. Always nice to have cash on hand so put $150k down, do a 30 year mortgage, but pay an extra $500 or $1,000 a month. Again, I prefer the flexibility of 30 so you can slow down payments if you want or pay more if you want. The rate difference between 15 and 30 is usually not that great.
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Old 01-27-2018, 10:08 AM   #16
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Originally Posted by Jerry1 View Post
^^This^^

To lock in some of your stock gains, rebalance your asset allocation (after you put more money down).

Money is cheap right now. Stay a bit more liquid and don't worry too much about paying off the mortgage early. As has been said, maybe look into a 15 year. Personally, I'd do a 30 and commit to paying it off sooner - more flexibility.
I agree with Jerry1. This makes the most sense in your situation. I would probably go 15 years, but agree the flexibility might be nice(as long as it is not taken advantage of for lifestyle creep)
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Old 01-27-2018, 10:19 AM   #17
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Originally Posted by lhamo View Post
I would not borrow from retirement accounts to purchase a house, especially not while still working. Why not get a 15 year mortgage (which typically have lower rates) and then pay it off aggressively over the next 5-10 years?
+1

That's what we did...

I
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Old 01-27-2018, 12:31 PM   #18
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Wow, thanks to everyone that commented, I truly appreciate it. Here are some of my thoughts to help flesh out the situation.

If we take borrow money from our 401ks, we will likely pay it back in 5 years or less. We would be paying ourselves 4.5% in interest while the loans were outstanding.

If paying cash for the home, I will still keep liquidity of roughly 1 year of expenses and that will grow as the DW and I get our paychecks. We are conscious of our spending, so the $2,500 or so that we are not paying for a mortgage will go right into our savings.

Based on some of the advice, I am considering taking a mortgage and try to have it paid off by the time DW stops working.... Will likely opt for 30 year mortgage for more flexibility, I can always pay more to speed up payments.

One of the things I was looking to accomplish is to harvest some stock appreciation. No one knows how long this market will keep making new highs, it will end at some point... I feel we should take some money off the table and put it to a good cause, our home which we do plan on staying for ever...or at least a very long time.

Thanks again for all of the comments and if there are additional comments thanks in advance.
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Old 01-27-2018, 08:37 PM   #19
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Another vote for not touching the 401(k)s and considering a middle ground on a 15 year note or a larger doenpayment (but not full cash purchase price).
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Old 01-27-2018, 10:09 PM   #20
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Why is everyone so against using 401k, especially if the goal is to pay it back in less than 5 years? I want to make sure i understand the negative aspect.

Also, if I wanted to raise $100k I can borrow from 401k and pay myself 4.5% or sell some appreciated stock and pay CG of 15%. Sorry all if these are dumb questions.
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