Financing 2nd Home with 401K

[doneat54]

But wouldn't you be better off to only put 25% down rather than 40% and use the 15% that you would have otherwise used down to cover the first 3 years of mortgage payments without having to dip into your DW's 401k for mortgage payments? Then replenish cash with 401k withdrawls once your DW stops working and you are in a lower tax bracket.

You and runningbum both have suggested the same thing. Interesting idea, thanks.



I ran some numbers 45% down which is what we are modelling now, and a 26% down model. In the 26% model, we will pay about $8500 more interest in 3 years but will have cash to pay that mortgage for 3.5 years. And of course we would not have touched DWs 401k.


In the 45% down model the incremental 10% tax burden (paying 22% instead of 12% as we would hopefully after DW retires) is about $6100. We would have removed 13% of DWs 401k balance today (which as I said in total is only 20% of our overall portfolio).

That, and with only DW working now, we may hit a limit on how big of a 2nd mortgage the bank will give us..

Thoughts?

 

[pb4uski]

^^^ Have you considered interest earnings on the cash not being used for the down payment and reserved for that 3 years of mortgage payments.... VMMXX is paying 2.47% currently so your true cost is your mortgage rate less 2.47% for that pot of funds.

 

[ivinsfan]

And I'm positive nothing bad will happen for the next 3 years that would cause his cash flow, equity or investments to tank.

You still have no idea if the OP can or cannot afford this house. Saying he can't afford it is really not your call or mine either.

 

[doneat54]

Now this. DW just comes into the office and says "What about my Roth IRA?". She has one that is in the "noise level" in terms of % of portfolio, but some Googling and it looks like she can withdraw from it penalty AND tax free. It would pay for the 45% down model for almost 28 months.

 

[corn18]

You still have no idea if the OP can or cannot afford this house. Saying he can't afford it is really not your call or mine either.

He's raiding a 401k to pay for a house. How many people have to say that is a bad idea? I guess the fact that we don't know makes that ok.

 

[pb4uski]

Now this. DW just comes into the office and says "What about my Roth IRA?". She has one that is in the "noise level" in terms of % of portfolio, but some Googling and it looks like she can withdraw from it penalty AND tax free. It would pay for the 45% down model for almost 28 months.

But then that money is no longer tax-free for life like it is in the Roth. That Roth may be small now but once you are in ER in a low tax bracket before SS starts you may ne adding to with with Roth conversions from the 401k or a tIRA.

But tapping the Roth is not a bad relief value if the SHTF.

I'm not sure if all these financial gymnastics are because you are scared of having another mortgage or whether you are stretching too much for this purchase.

 

[copyright1997reloaded]

Here's what I would do:
1) Not buy it if I had any thought that it would put my future retirement at risk
- OK, moving beyond that:
Remember - when you have money and income and the economy is good, it is easy to borrow. If things turn bad, and/or you don't have a job, then it is very difficult to borrow. Given that:
1) Borrow as much as you can while still keeping the payments under control
2) Use the money that you would have used for a down payment as a fund for loan repayment over time.

As time progresses, if you think that you have too much cash and/or want to pay it down quicker, do so....

ETA: Think of it as a relatively inexpensive option/hedge.

 

[RunningBum]

Now this. DW just comes into the office and says "What about my Roth IRA?". She has one that is in the "noise level" in terms of % of portfolio, but some Googling and it looks like she can withdraw from it penalty AND tax free. It would pay for the 45% down model for almost 28 months.

I'd be running a spreadsheet on the various scenarios, being sure to include all factors like being able to invest money you have earmarked for future mortgage payments, the loss of tax free growth if using the Roth, and the higher tax rate if using 401K money for mortgage payments or the down payment. You have to run your own numbers, but I'm guessing that taking out a larger mortgage works out best.

I'm not sure if all these financial gymnastics are because you are scared of having another mortgage or whether you are stretching too much for this purchase.

I wonder that too. There seems to be a very negative bias against a mortgage for some reason, but at today's rates I still view it as a great leverage tool, when needed. This situation seems to be one of those times to me. Why so reluctant to use it? Do you really favor paying extra in taxes over using a mortgage? To me the T word is worse than the M word.

 

[gauss]

He's raiding a 401k to pay for a house. How many people have to say that is a bad idea? I guess the fact that we don't know makes that ok.

I am with corn.

I hope it works out for OP, but he seems to be confusing assets with consumption/lifestyle (see quote about unlike vintage cars, you can't drive mutual funds on a sunny day).

Probably many more in our culture view things this way and I am the oddball.

I guess following the likes of The Millionaire Next Door, has me on a heightened awareness for this sort of thing.

We all have different values/motivations. We could all look at OP's results 10 years down the line and all come up with very different conclusions on whether it was a good deal or not.

OP -- In all seriousness, thank you for sharing and not getting outwardly annoyed with the comments. I do find it interesting. It helps me to expand my thinking and understand, at a deeper level, the thinking of others.


-gauss
"I, personally, would not have eaten the marshmallow"

 

[doneat54]

There is no reluctance to getting a mortgage (now), and I see your point about low rates, use it and make avoiding diminishing the 401K a priority. And for the Roth, the loss of tax free growth, but that whole account is less than 2% of portfolio.


Relative to the mortgage, I am struggling with biggest mortgage and save all cash/pay mortgage with cash and burn all cash as down payment, smallest mortgage and start pulling from the 401k and/or Roth day one to pay mortgage. And as usually is the case with me, I am settling somewhere in the middle. I could keep a good pile of cash, and pay the mort costs with a combination of all three; cash, 401K and Roth and reduce the monthly hit on each as opposed to using just one.

As for re-investing the cash that sits to pay the mortgage, it really isn't all that much $$ and having it in a 1.99% Savings account is good enough for me. Again, we are looking at everything across a 3 year time frame.


Thanks again for all the insights....

 

[doneat54]

I am with corn.

I hope it works out for OP, but he seems to be confusing assets with consumption/lifestyle (see quote about unlike vintage cars, you can't drive mutual funds on a sunny day).

If you can't comprehend vintage cars as assets, you probably never will. Whether I drive it or not, and the end of the day it's all still just math.

Probably much many more in our culture view things this way and I am the oddball.

I guess following the likes of The Millionaire Next Door, has me on a heightened awareness of this sort of thing.

We all have different values/motivations. We could all look at OP's results 10 years down the line and all come up with very different conclusions on whether it was a good deal or not.

True. Read that book too BTW.

 

[ivinsfan]

I am with corn.

I hope it works out for OP, but he seems to be confusing assets with consumption/lifestyle (see quote about unlike vintage cars, you can't drive mutual funds on a sunny day).

Probably many more in our culture view things this way and I am the oddball.

I guess following the likes of The Millionaire Next Door, has me on a heightened awareness for this sort of thing.

We all have different values/motivations. We could all look at OP's results 10 years down the line and all come up with very different conclusions on whether it was a good deal or not.

OP -- In all seriousness, thank you for sharing and not getting outwardly annoyed with the comments. I do find it interesting. It helps me to expand my thinking and understand, at a deeper level, the thinking of others.


-gauss
"I, personally, would not have eaten the marshmallow"

I'm kind of curious about the OP's purpose in asking the original question. He had to be pretty certain most of the answers would be on the "don't do it" side.

Do either corn or I know if he can actually afford this house? No we don't, because he hasn't shared any numbers, which is his right.

The dithering about the mortgage and the amount of the down payment is nothing in the grand scheme of can I actually afford this place. Comparing a vintage car to a house, is apples to oranges. In one post he says it's the forever home and then he says it could be the forever home and implies it might be a unique opportunity.

Basically they cannot afford two house payments on his DW's salary. They don't have extra cash to make the down payment he is comfortable with. His DW has to work at least 3 more years to even make this possible. He wants to raid money set aside for a 40 year retirement but his biggest concern is not wanting to pay extra taxes on it. There is no mention of the DW still putting money into her 401K, if she is would she just put in the match amount perhaps freeing up some money.

Right now to me it looks like a case of "one more year" for the OP would have made this a bit easier but he pulled the plug at 54. Now it's all about some hard choices. Good Luck

 

[joeprintz]

If you have significant non retirement(non tax deferred) accounts a margin type loan has no closing costs- and would work short term. Rates are usually higher than a mortgage but it is far easier to obtain. (can usually margin 50% of an account balance). May sure you have enough in account not to have it called if the market turns south.

 

[doneat54]

I'm kind of curious about the OP's purpose in asking the original question. He had to be pretty certain most of the answers would be on the "don't do it" side.

I wasn't. At all. Nor does that really matter. At the end of the day I go by my gut. That being said, again, I got some great insight here that helped guide my decision, numbers. Thank you, it's been fun. And while I am not interested in trying to convince anyone here that this is a good or bad idea, to put it in overall $$ perspective the 2nd home cost represents just under 19% of portfolio and just under 14% of NW. The 2nd mortgage amount will be 11.3%/8.35% I am comfortable with being able to "afford" that.

OP -- In all seriousness, thank you for sharing and not getting outwardly annoyed with the comments. I do find it interesting. It helps me to expand my thinking and understand, at a deeper level, the thinking of others.

No problem at all. Not my first rodeo on forums by any means. Always some people with stronger opinions than others (myself included). We all have different risk/reward tolerances. Yes, this is going to be a leap, but after week of trying to convince myself that it is a bad idea, and/or that there aren't "outs".... and failing, we are moving ahead. Just got off the phone with an attorney... time for lunch yet??

 

[corn18]

To answer the actual question, I would get a mortgage with 20% down and a 5/1 ARM. I did that just this year when I moved for my job. I haven't sold my current house yet and bought a new house with a 20% down 5/1 ARM. I could have raided my taxable and Roth accounts to put a lot more down, but that did not make sense to me.

As it sits right now, we have a contract to sell our old house and it should close in June. We also have a lot of stock vesting soon. Between the house proceeds and the stock vesting, we should have enough to pay off our current mortgage. Maybe we will, maybe we won't. A lot could change between now and August. Having a mortgage @ 2.7% net (37% marginal tax rate) and a boatload of cash in FZDXX earning 2.3% seems like a great position to be in vs. having a small mortgage and strapped for cash.

You should do the same. Keep all of your retirement savings intact. Get the biggest mortgage you can. When everything settles down, re-evaluate. Worst case is you're out a few grand in arbitrage. But if the SHTF, you have a lot of options with a lot of cash.

 

[Cassius King]

Great read. Thanks for sharing and updating.

 

[doneat54]

Great read. Thanks for sharing and updating.

Thanks, I hope I will be updating with some pics in mid July.


We are getting a 7/1 ARM BTW. 3.75% IR.

 

[ivinsfan]

Don't forget the pics, we're all curious now.

Good Luck the purchase and closing go smoothly...

 

[doneat54]

Closing tomorrow AM.

 

[NW-Bound]

It looks like the home needs a boatdock if it does not have one.

And then, a boat for the boatdock.

 

[pb4uski]

^^^ And so it starts....

 

[DINKFIRE]

I'd caution on borrowing and buying a property first then try to sell your existing property later and counting on that proceeds to pay back the loan on the first purchase, only do that if you can afford to carry both properties. Although housing market had been going crazy for several years, there is visible softening since last summer in many markets. I personally know someone purchased a home with short-term loan expecting to pay it back quickly after the old home is sold, because the market was so hot a year ago. Guess what, the old home has been on the market nearly 3 months now and the price has been cut by more than $100K, and still no offer.

 

[jIMOh]

Closing tomorrow AM.

Is the Helicopter needed to get there?

 

[LightningDawg]

Closing tomorrow AM.

Wow. That's beautiful. Where is it located?

 

[doneat54]

Is the Helicopter needed to get there?

LOL, no. A pleasant, never any traffic hour and 5 minute drive from our primary home. It is located on Harvey lake in Northwood NH.

A few months in now, and I am really enjoying the place, BUT, still on the fence about it being a suitable long term, warm season home after DW retires. Nonetheless, I am still confident that it was sound investment and we could sell it and get (at least) our investment back if we decide it is not for us.


I have been spending about half my days there with our two dogs. We hike at the state park next door almost every day after lunch. I built a woodshop on the main level of the barn that allows me to build things for the property. $25 craigslist table saw, $20 miter saw, etc. Stripped old a partition boards from the barn basement, pressure washed them, let them dry in the sun, and made some tables out of them.


Also, lots of time clearing, pruning and opening up the view on a badly overgrown property. Bought a wood chipper and am slowly clearing woody growth and using the chips for ground cover.



We gave ourselves a $10k cash budget to buy things we needed to make the place usable. About $7k of that is gone now, but we have it set up nicely. We bought all new mattresses and bedding for each room, but beyond that, dirt cheap, or free furnishings found on Craigslist of Facebook Marketplace. It is amazing what you can get for near nothing, especially in rural NH.

I splurged a little bit and bought another tractor just like the one I have at home. Unfortunately a LOT of grass to mow there but a) I never mow it all at once, b) I let it go 3-4 weeks between mowing and c) I don't bag clippings, fertilize, water, weed control, etc. etc. My motto is "if it grows, it mows".


Have found some really interesting artifacts going through that barn a little at a time. Old photos, tools, a junior high diploma from 1966. Nail keg barrels (made a nightstand out of one for one of the bedrooms) The person we bought it from was only there a year (she bought an Inn for sale on the other side of town and is living there). Prior to that it was owned by the Johnson's for God knows how long, and was probably rented in recent years. There is a 91 year old town historian that intend to contact. The Johnsons have a long history in the town, dating back to it's inception.

I spend a lot of time clearing and cleaning out the barn main level and we hosted an "open barn" cookout party in Sept. I have had great fun finding old furnishings to put in there, wiring new lighting, hanging old signs. And then end of the barn facing the lake with a 12 foot wide rolling door is a splendid place for morning coffee, a cold beer and sunsets. The barn is also great fun for my wannabe photographer in me. Even that rug was found in the upper level of the barn.... pressure washed and sun dried.... then put in front of the couch.

That Victorian couch was a Craigslist find and was in the lobby of a well known Inn and Restaurant in Bedford NH for decades. I just had to have it (but probably paid too much for it).



Lastly, the barn sign, M E Johnson. In old listing pics from the previous sale, it was over the barn door on the road end. Sadly, it was gone when we bought the place, or so I thought. One day sitting in my "barn chair" having coffee, I looked at a huge stack of firewood stored inside the barn that I was slowly relocating... ans saw a board roped to the end of the stack with some lettering on it. Lo and behold, there it was. I mounted it inside the barn over a side door as I didn't want it to weather further.

I made the Edison bulb, iron pipe wall sconces myself after finding a pic of them on line.

Anyway, thought I would post some pics in this thread as s follow up ....