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Need some help
Old 05-20-2013, 01:33 PM   #1
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Need some help

Our house is under contract and we close next Tuesday. We own the house that we are selling. We will be receiving approximately $245K at closing. The problem is that we don't know what to do with the money (seriously).

The house that we purchased is valued at $575-$600K. We owe approximately $267K on that house. Our mortgage rate is 3.25% fixed.

Other assets:

Retirement and non-retirment: $780K (mostly Vanguard Index funds)
529 Plan: $49K

I am 37 years old with three children and a wife at home. Part of me wants to take the safe route and roll it into our new mortgage and pay it off as soon as possible. The other part of me thinks that would be stupid because I would be missing out on the tax write off and that I could get more than a 3.25% rate of return.

If I decide to invest it, how do I dollar cost average the equivalent of 20%+ of my net worth?

What would you do?

Any help would be much appreciated.
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Old 05-20-2013, 01:36 PM   #2
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If by selling the house your total real estate investments drop below your intended allocation, purchase a substitute. I think Vanguard has a few real estate funds that you could dollar cost average into.
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Old 05-20-2013, 01:38 PM   #3
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Quote:
Originally Posted by Meddevice View Post
Our house is under contract and we close next Tuesday. We own the house that we are selling. We will be receiving approximately $245K at closing. The problem is that we don't know what to do with the money (seriously).

The house that we purchased is valued at $575-$600K. We owe approximately $267K on that house. Our mortgage rate is 3.25% fixed.

Other assets:

Retirement and non-retirment: $780K (mostly Vanguard Index funds)
529 Plan: $49K

I am 37 years old with three children and a wife at home. Part of me wants to take the safe route and roll it into our new mortgage and pay it off as soon as possible. The other part of me thinks that would be stupid because I would be missing out on the tax write off and that I could get more than a 3.25% rate of return.

If I decide to invest it, how do I dollar cost average the equivalent of 20%+ of my net worth?

What would you do?

Any help would be much appreciated.
Pay down the loan.
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Old 05-20-2013, 01:38 PM   #4
Confused about dryer sheets
 
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I apologize, but I realized that I made a mistake. The total value of retirement and non-retirment funds is $680K, not $780K.
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Old 05-20-2013, 01:39 PM   #5
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Congratulations on selling your house. The proceeds would almost enable you to pay off the mortgage on your new house. Let's say you do that within a year. You can then direct all the money which would previously have fed the mortgage towards savings, and you will be debt free, which is appealing to most of us. A second option would be to pay off a significant chunk of the mortgage (say 50%) and invest the rest. It's really a matter of preference.
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Old 05-20-2013, 01:40 PM   #6
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What a great problem to have. Congratulations on accumulating so much so early in life. It makes sense to keep the mortgage and invest the money.
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OK, here's some more information.
Old 05-20-2013, 01:53 PM   #7
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OK, here's some more information.

Like I said before, I have a wife and 3 kids at home. Kids are 5, 2, and 5 months. I want her to stay at home until they all are in at least elementary school. Our expenses with the new house are $4500/month. I make approximately 12-14K/month. However, what I am a commission based employee. With that information, which one of the options below would you prefer:

Option A (stick it in investments)
Investments: 925,000
529 Plan: 49,000
Home: 308,000
Mortgage: -$267,000

Option B (put it towards the house)
Investments: 680,000
529 Plan: 49,000
Home: 553,000
Mortgage: -$22,000
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Old 05-20-2013, 02:02 PM   #8
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I would choose option B and make sure you have an emergency fund for 6 months' expenses ($27K).

You "want" your wife to stay at home until the kids are in elementary school. What does she want?
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Old 05-20-2013, 02:46 PM   #9
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If it were me I would pay off the mortgage. I don't like having any debt and that is more important than maximizing my returns.

I'd also re-evaluate my "emergency money" and if I felt it wasn't big enough I'd set aside some of that money in cash, cds, or a short-term bond fund.

Whatever is left over after all of that would go into stocks.
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Old 05-20-2013, 02:53 PM   #10
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Although our mortgage is now paid off, having entered the garden of ER, I would go with plan A considering your age and your children's ages. You never know when you might need cash and the investments would be liquid vs. the house. Once they're all grown up and you kiss them at their college graduations or weddings, you can decided whether to liquidate the investments and pour the proceeds into whatever mortgage you might have them.

But kudos to you for your financial situation and having this "problem"!
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Old 05-20-2013, 02:57 PM   #11
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Since this is the FIRE message board, Option A is the clear choice to get you there faster.
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Old 05-20-2013, 02:59 PM   #12
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If you have a paid off mortgage, you have to be very disciplined about investing money before you can get a chance to spend it. Make sure you have money automatically invested and equal to what your mortgage would have been.

If you can't guarantee you won't cheat and spend the money, then keep the mortgage and invest the money.
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Old 05-20-2013, 05:42 PM   #13
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Go here: Bogleheads Investing Advice and Info
Read 4 of the recommend books from that site.
Read the messages there for 4 weeks.
Then decide what to do.
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Old 05-20-2013, 05:45 PM   #14
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If you can't guarantee you won't cheat and spend the money, then keep the mortgage and invest the money.
Agreed. Fixed 30 year mortgage. You will sing a happy song for 30 years as you pay that small mortgage payment (interest rates have nowhere to go but up), and you get the tax write off. What you're looking at is "borrowing money at 3.5%" and investing it long term at, say, around 7% once you get over all the bumps.

As to dollar cost averaging, you just can't get there from here; lump sums don't dollar cost average. As indicated in an earlier post, your best bet is to just spread it into your asset allocation plan. Not sure if you're familiar with asset allocation, but one example might be 15% bonds, 65% stock (each of those split half and half domestic and foreign) and 15% REIT/hard assets, and 5% cash. Just split the windfall into those categories to maintain those percentages and call it a day.

Now, the other option, and this is what I did with my house sale windfall back in the days before I was thinking too hard about these things, I put it all into two 529 accounts, one for each daughter. They were 4 and 1 at the time. One of the accounts is running on empty now (that's what 3 years of private university will do), but the other one hasn't been touched, and in 4 years will have mucho left over (that's what public university will do).

--Dale--
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Old 05-20-2013, 05:50 PM   #15
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Option A. With a good portion of it (12 months of mortgage payments) in very liquid assets since you have a commission based job with a varied salary.

Re-evaluate in a few years when you have enough to pay off the entire mortgage at one time. Hopefully you'll be earning enough in investments that the 3.25% mortgage will be easily beatable, and you can keep that money working for you.
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Old 05-20-2013, 06:09 PM   #16
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I would pick A particularly with young kids a spouse at home.

If you chose to do B though I would not put the money into the house unless you could pay off the entire mortgage first.
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Old 05-20-2013, 06:19 PM   #17
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I would go with Option A as well. 3.25% is a loan rate you are likely never to see in your lifetime again. You retain the tax write off from the mortgage interest and you can invest the proceeds from the sale of the prior house and likely have better returns than the cost of the loan.

A lot of people here prefer no house payments but that is mostly because they are retired and just prefer the piece of mind that comes with knowing the house is paid off.

I would bulk up your emergency accounts, open 529 College plans for the kiddies and if you really want to make the mortgage go away make extra payments of principal monthly to your lender.
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