How much down paynent?

[charlie]

Hi gang,

I just got off the phone with my daughter. She
wanted to know if it would be better to roll
all of her gain ($40k) into the down payment
of a new house or put it into a money market
and pay the increased monthly payment out of
the money market for the next 3 years. She is
married with a girl (5) and a boy (3). The kids
share a bedroom now but that won't work much
longer. They are on a real tight budget and the
move would increase their monthly payment by
about $500. My daughter's thinking is that her
husband's salary should increase by $500 within
3 years to make up the difference. In the meantime
they would use the money market.

I am a little rusty on the tax law but I think the old
rule of a one-time tax free sale has been changed to
allow any number of sales. That might be a deal
breaker if not true.

I am thinking that they should put 1 year of payments
in Vanguard's Prime MM fund and the rest in Short
Term Corporate. They could then move money to the
MM when necessary.

They want to buy in Frisco Texas which is a small
town north of Dallas in one of the fastest growing
areas of the nation. She is a bright girl but an artist
and is a little vague on the concept of leverage. I
explained as best I could that she should put the
least down possible and invest the rest.

When they get more comfortable paying the mortgage
out of current income I will introduce them to the
wonders of balanced index investing.

Let me know if Dad got it right (or wrong).

Cheers,

Charlie

 

[John Galt]

You can't go wrong with Frisco, Texas, or anywhere
in that area really. It does not seem to matter what the
DJIA or anything else is doing. The growth just
continues.

John Galt

 

[dory36]

I expect John Galt is right -- my son just moved to Frisco. Looks like a serious boom town!

 

[malakito]

...

I am a little rusty on the tax law but I think the old
rule of a one-time tax free sale has been changed to
allow any number of sales.  That might be a deal
breaker if not true.  

...

Let me know if Dad got it right (or wrong).

Cheers,

Charlie

You're correct on the above point. The law was changed several years ago.

If your daughter is married and has lived in and owned her house for any 2 of the last 5 years prior to the sale, she and her husband can realize up to $500,000 of profit on the sale of their house. This rule can be invoked any number of times, but is effectively limited to once every two years as you can only live in one house at a time.

malakito

 

[wabmester]

They are on a real tight budget and the
move would increase their monthly payment by
about $500.

This seems like it should be the driving factor for them.   If things are tight, that sounds to me like they should take the sure thing -- reduce their debt rather than trying to leverage unknown future gains or invest the money at some unknown return.

I seem to recall that parts of Texas suffered a nasty real estate bust in the late 80's.   I don't know much about Texas, but if the local economy is less diverse than other places or if their property taxes are higher than other places (as I suspect), then watch out below when things go south.

 

[cute fuzzy bunny]

You could see the discussion on mortgages in the "hi i'm new section".

On this one, in short its a trade between paying 5.something% interest on the money, tax deductable, in exchange for receiving 1-3% taxable return in those MM and short term bond funds.

What they might want to do is put the full amount down on the house, take the smaller mortgage payments, and arrange for a Home Equity Line Of Credit on the residual value of the home. HELOC's can usually go to 100% of the owned equity.

A good HELOC (Ing direct has one, and if she's referred she gets $100 bonus and the referrer gets $25) will have no closing costs or fee's to use it, not use it or cancel it. I have mine through my credit union, my girlfriend has one with Ing.

That way if something happens and they NEED the money, they can tap the HELOC and pay that, or if they want a loan for home repairs or a car, the HELOC interest should be tax deductable and a very competitive rate. Both me and my girlfriend would pay prime+0 on ours, roughly 4%.

 

[zuki]

can't you use a 401k for a home buy without a penalty ?

then turn around and pull the money out and do what you want ?

1st time home buyer 401k down or something i read.

not sure though

 

[BigMoneyJim]

can't you use a 401k for a home buy without a penalty ?

then turn around and pull the money out and do what you want ?

1st time home buyer 401k down or something i read.

not sure though

Off the top of my head, I believe you may borrow from a 401(k) to purchase a house. But if you default on the 401(k) loan or if indeed you can withdraw for a home purchase then you have to consider that all the money taken out is taxed as income and may well bump you into another tax bracket. With IRAs I believe you can withdraw for purchasing a house without the 10% penalty but you still pay income tax on the withdrawn amount.

I'm sure others know better and will post soon.

 

[dory36]

Not sure about 401k, but the IRA rules had a no-penalty withdrawal of $10k for buying a home. I saw this when reading up on SEPPs a few years ago, so the rules may have changed.

 

[Nords]

Re:  "It depends"

First, you should try to obtain low-interest financing from a credit union. Navy Federal Credit Union (the 800-pound gorilla of credit unions) is very good at bringing in family members if there's any kind of military connection, but other community FCUs can be just as accomodating. Although NFCU's 30-year rate spiked up a bit last week, it was at 5.00% on a 20% down payment. My spouse had to physically restrain me from starting our fourth refinance in four years.

Credit unions typically have lower closing/financing costs as well. Points are generally not a good deal, either, unless she has a specific monthly payment in mind.

Second, try to avoid PMI. This may require as high as a 20% down payment, although some financiers are taking the riskier step (for them!) of foregoing PMI if you take out a home-equity line of credit.

Third, a 30-year mortgage pays more interest (but with inflation-eroded dollars) at lower payments than a 15-year mortgage. I'd go for 30 years just to avoid concerns about job security, financial blissful ignorance, and liquidity. She can always accelerate payments on a 15-year schedule on her own.

For the same reason, I'd avoid biweekly payments. They'll reduce a 30-year mortgage to about 24 years but again that can always be done voluntarily.

Within the above constraints, put down as little money as possible and invest the difference. Perhaps the MM funds could be built up into a ladder of five-year CDs, which are returning very close to the current mortgage rates. It could also serve as an emergency fund since early-withdrawal penalties are pretty low.

Except for a brief period at the height of the tech bubble, we've carried mortgages since 1984 and plan to do so until 2033...

 

[charlie]

dory36,

I am having trouble posting again. I am registered
under the name "charlie". When I log on to the
first page of your forum I get the welcoming message
addressed to "charlie". However, when I go to one
level down, the message changes to something
like "welcome guest, please register or login". When
I try to post I get a message saying that I need to
enter my name, etc. When I enter "charlie" and my
registered email I get "sorry, that name is aready
in use" or somesuch. Thinking it might have something
to do with cookies, I turned off my firewall .... same
result. I have also used the logoff button and then
re-logged on..... same result.

It must be the phase of the moon. Surely it isn't
senility creep. I do confess to a certain amount
ineptitude with computers. At this rate my dryer
sheet status will never progress beyond confused.

Could you please flush "charlie" and let me start over
again? I will mail you my collection of antique dryer
sheets if you do.

Regards,

Charlie

 

[earlyout]

Charlie,

The monthly expense and tight budget indicates they should probably stay where they are and eliminate any debt. Save their money for 3 years and then move.

If they are set on moving, then I would have them set aside 6-12 months of expenses (probably 12 months), pay off any other debt (cars, charge cards, etc). Then, with the remaining amount put it all on the down payment. That way they would have zero debts, except mortgage, 12 months of expenses covered in bank account and would be a good start for them.

best wishes in whatever is decided.

earlyout

 

[Adventuregirl]

Hello! I've been lurking for quite a while but when I saw the post about Capital Gains I thought I'd ask a question....
Does the two-year rule apply even if the gains are being used to purchase another primary residence?
My SO and I would like to purchase a home together but he hasn't has the one he owns now for two years yet...do we need to wait until the two years are up before he could sell without paying the capital gains?
Thanks!

 

[Adventuregirl]

Thanks Ronin, that was my interpretaion of the exemptions too (unfortunately)...Big step for us towards ER is consolidating our living spaces. We should be able to sell it in July then. I guess we'll just have to be patient :-/....

Adventuregirl

 

[Adventuregirl]

My thoughts exactly, I'm sure that's what he'll end up doing. I also own a home which I've had for 10 years that will need to be sold too. I really can't sell mine now and live in his because his is a condo and they don't allow dogs (which I have, one). So it will probably end up being his first and then mine... we can't wait to eliminate having two mortgages so we can start putting the extra into ER investments...
We're both 36 and have our financial houses pretty much in order. No consumer debt and maxing out 401K's. The next big step is the houses....hoping to ER when we are 50-55....

Adventuregirl

 

[John Galt]

Hello Adventuregirl! Yeah, those pesky dogs
(we have 4). The
trouble is they are like kids. Once they are here you
can't shoot 'em

John Galt

 

[cute fuzzy bunny]

You could bring the illegal dogs to the condo with you.

That might spice up your ER life and keep things lively.

 

[Adventuregirl]

John, You are so right, once you've got them they control your life and dictatate where you are going to live! LOL

TH, You know I do love to buck the system and moving into the condo with the dog, two cats, and the parrot, would certainly add an element of fun! Of course to really live on the edge, I could bring the horse along too! I'm sure the contract doesn't say anything about horses...

I'm working on teaching the dog to meow... 8)

Adventuregirl

 

[unclemick]

It's okay to feed your favorite alligator at the boat condo up the road BUT you can't bring them upstairs- they're very strict about that.

 

[John Galt]

Re. dogs and relocation, I am actually considering buying a piece of land near our recenty acquired Texas condo, just to
build a barn for dogs and livestock. You can keep a
dog in our condo but we have 4. We already own a nice ranchette, but it was bought to build on and
that idea is scratched now. Trouble is, that property is
over 20 miles away from the condo (I know, not much by Texas standards). I suppose we could keep the "ranch"
and the condo if we sold the house up north.
Decisions, decisions..............My point (yes I almost
always have one) is that a lot of these issues
could be avoided except for the dogs.

John Galt

 

[Adventuregirl]

Yup John, we're victims of self-imposed slavery to the canine species...

Jeez...I can't believe they'd impose such restrictions on people and their alligators...where is the love?

Adventuregirl

 

[cute fuzzy bunny]

I taught one of our dogs to meow once. Actually it was closer to a moo. The other one occasionally makes monkey sounds.

The cats were not amused.

 

[dory36]

A friend once dog-sat for another friend for a month. He spent 4 weeks training the dog that "DOWN! DOWN! DOWN, DAMMIT!" wold be rewarded with dog treats if the dog would jump up on the couch...

 

[cute fuzzy bunny]

John - live at the ranch in a tent with the dogs (who generally find tents fascinating) and keep photos of the condo.