At a crossroad....need some advice

[Byb747]

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.

 

[lhamo]

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?

 

[The Onceler]

Hi welcome. I’m a newbie. Your first post might have skipped the usual intro but it has some info. If it were me I’d 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 I’d 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 I’m sure more advice will follow.

 

[FlaGator]

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?

 

[BeachOrCity]

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....

 

[DrRoy]

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.

 

[NH Hiker]

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.

 

[Red Badger]

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.

 

[Onward]

Never touch retirement accounts.

 

[joeea]

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?

 

[Jerry1]

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.

 

[target2019]

Never borrow against your 401k accounts.

 

[pb4uski]

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.

 

[Aerides]

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.

 

[CaliKid]

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.

 

[VanWinkle]

^^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)

 

[IMATERP]

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

 

[Byb747]

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.

 

[Katiek]

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).

 

[Byb747]

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.

 

[Bamaman]

I'm sorry, but I am one retiree that prefers a house be paid off or or close to be paid off prior to retirement. Cash flow is not as good after retirement usually and increased healthcare expenses don't help.

I would hate to think bad health would take one of us away and leave the other spouse to have to sell out and downsize. Not having a house payment was considered our ace in the hole to not making lifestyle compromises in retiring 8 years early.

 

[Scrapr]

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.

You lose the compounding of the account. If it was in stock last year it would be 20% +/-. Say average 7-8%. Over 5 years that is close to 40% increase. You aren't paying back that @ 4.5%

Also if you lose your job I "think" it becomes due and payable. So right when you need cash (layoff) your money is tied up in your house.

 

[growing_older]

With a 401k loan, you are exposed to more downside if the unexpected occurs - job loss, economic hardship, medical issues, etc. With the middle of the road approach of big down payment, 15 year loan and aggressive pay down, you retain flexibility and better options at negligible cost. Not only is that what I'd do, it's what I actually did and I'm glad that's the approach I took.

 

[FlaGator]

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.

For me, it's risk and return.

I never believed my job was "secure", so borrowing from my 401k meant I faced the possibility of having to pay that money back immediately if I were terminated or left the company. If you or your wife were to have a terminal illness and separate from your employer, there could be consequences arising from the unpaid loan. You need to look at the plan agreements to understand the details from a situation like that. That's the risk side, may not apply to you.

As to the return side, my poorest performing investments have done 6%+ over the past 10 years (most ~8+%), so "paying it back" at 4.5% wouldn't be attractive to me. I don't know if that interest would be deductible as it would with a conventional mortgage. Related to that, the return on the money you withdraw is capped at 4.5%. That return would have looked good in some eras, not so good in others.

Considering the alternative you proposed, you'll pay 15% on the CG if you sell stock. What is your basis in that - how much tax do you really have to pay? Not likely it's $15,000 on $100K of stock sales. Suggest you look at that, and after tax implications of your preferred scenarios.

All that said, it's not solely a financial decision, though. Have to be able to sleep at night as well.

 

[Onward]

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.

Not dumb questions.

You don't borrow from your 401k (unless you're dying, literally) because it's mortgaging your future for the transient needs of today. Yes, that includes a house. Retirement accounts are for retirement.

Loans (even to yourself) have a way of not being paid back.

If you borrow from your 401k and then quit or are fired, you have to pay the entire amount back immediately. Otherwise it's considered a highly-penalized distribution if you're under 59.5 yrs old.

BTW, by federal law the max you can borrow from your 401k is $50k.