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Second Home- All Cash, or HELOC?
Old 05-31-2015, 05:30 PM   #1
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Second Home- All Cash, or HELOC?

Hi--

I've recently received $250,000 from the sale of inherited land.

I have had it in my mind for awhile now I would use $170,000 of that money to buy a house that's a part of the same estate. Not to rent out or anything, just to keep it in the family and to hopefully use it as a summer home in future years. (I am well aware of the carrying costs, which look to be about $5,000 yearly, and potential headaches, and have made peace with that. Mostly. )

DH and I currently have $280,000 in taxable accounts (separate from this $170k) and about $1.3 million in our retirement holdings, as well as pensions awaiting both of us. I also own another piece of unimproved land that's worth about $200,000. HHI is about $220k.

Our 3.625% mortgage on our primary home is about $320,000, and the house just appraised at $866,000. We recently opened up a $370k 10 year-term HELOC at 3.625%, just to have in advance of any FIRE.

No other debts. We're in our late 40s/mid 50s, no kids, still working (though would love to change that before long). Also not intending to be the richest people in the graveyard when that time comes.

It suddenly just seems kind of dumb from a liquidity standpoint to tie up that whole $170k in the house. So we are wondering about using the HELOC to pay some or all of the cost of the house, while investing the remaining cash somewhat conservatively in Vanguard funds (50/50) in a way that, should the stars align, could throw off enough to pay the interest on the HELOC. And then, at the end of the 10-year HELOC term, pay the principal off from the invested amount. We could also get a three-year fixed-rate advance on the HELOC, lock in the current rate, and pay interest and a smidgen of principal for 36 months before the remaining would return to the main HELOC line.

We aren't dummies about the real risk of interest-rate rises, stock market corrections, etc., and are very much buy-and-hold types.

It certainly isn't a conservative maneuver, but it doesn't seem like a completely boneheaded idea either, given the rest of our holdings and given that, at any time, we could liquidate the invested money and pay off the HELOC (at a possible loss, sure, but not a $170k loss). And of course it's also possible we could decide that keeping the house isn't a great idea, either, and sell it. I don't expect this house, given its location, to skyrocket in appreciation.

Thoughts?
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Old 05-31-2015, 05:46 PM   #2
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You could also just use the heloc if there is a true immediate cash need.

Now if it were me i would strive to be completely debt free. No heloc and no mortgages.

I would not use debt for an asset that I would seldom use (summer home?).

In your shoes @ 55 and with no heirs to the throne, I would be looking to pick up the pace toward true FiRE and to me that's 1. getting primary residence paid off and being debt free and 2. developing income streams....not taking on more debt.

But that's just me...
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Old 05-31-2015, 05:51 PM   #3
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Thanks, papadad, though you remind me that I should add that we are not worried about carrying our mortgage into retirement. And aren't ones who are working solely toward being debt free. After all, we have the cash on hand this minute to pay off our mortgage, but aren't doing it.

But I still appreciate the reply, really!
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Old 05-31-2015, 06:05 PM   #4
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If you don't mind carrying the debt, wondering if a conventional mortgage would be a better bet to lock in a long-term rate vs. the HELOC. You'd have some closing costs but to me it would be worth avoiding a future rate increase.
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Old 05-31-2015, 09:09 PM   #5
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A couple thoughts. First, the cost of the summer home will be more than $5,000. If you pay cash it will be the opportunity cost of the $170,000, which at 8% would be $13,600 a year so your total costs would be $18,600 a year. Alternatively, if you finance 80% of the $170,000 then the annual cost would be opportunity cost on the 20% down ($2,700) plus mortgage payments (say $1,000/month based on a 15 year mortgage at 4%) plus the $5,000 for a total of $19,700. My point is that the true economic cost is more than just $5,000.

If you decide that it is still worth doing, I would get a conventional mortgage loan rather than use the HELOC.

What is HHI of $220k?
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Old 05-31-2015, 09:12 PM   #6
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A couple thoughts. First, the cost of the summer home will be more than $5,000. If you pay cash it will be the opportunity cost of the $170,000, which at 8% would be $13,600 a year so your total costs would be $18,600 a year. Alternatively, if you finance 80% of the $170,000 then the annual cost would be opportunity cost on the 20% down ($2,700) plus mortgage payments (say $1,000/month based on a 15 year mortgage at 4%) plus the $5,000 for a total of $19,700. My point is that the true economic cost is more than just $5,000.

If you decide that it is still worth doing, I would get a conventional mortgage loan rather than use the HELOC.

What is HHI of $220k?
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Old 05-31-2015, 10:28 PM   #7
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Old 05-31-2015, 10:35 PM   #8
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Quote:
Originally Posted by pb4uski View Post
A couple thoughts. First, the cost of the summer home will be more than $5,000. If you pay cash it will be the opportunity cost of the $170,000, which at 8% would be $13,600 a year so your total costs would be $18,600 a year. Alternatively, if you finance 80% of the $170,000 then the annual cost would be opportunity cost on the 20% down ($2,700) plus mortgage payments (say $1,000/month based on a 15 year mortgage at 4%) plus the $5,000 for a total of $19,700. My point is that the true economic cost is more than just $5,000.

If you decide that it is still worth doing, I would get a conventional mortgage loan rather than use the HELOC.

What is HHI of $220k?
HHI = HouseHold Income.

I've actually been paying the upkeep costs on the house for a year, and have known the numbers for a number of years, and that number really is $5,000 (less, actually) for the standard costs. Obviously, unexpected things come down the pike, but that's the basics. Cheap neck of the woods.

It's a house that was supposed to be willed to me, but due to how the estate was configured (against the owner's wishes), I received a different property. So now I want to do what was originally intended, and own the house, with the proceeds from the property that I received and then was able to sell.

So there never would really have been a mortgage if it had all happened according to plan--this, to me, is just a way to see about making the cash work a little since I have it. (and since I wouldn't have had this cash if the house had just come straight to me, and I still would have kept the house)

Also, since I'm buying it from the estate (and the trustee is a family member of mine), this transaction can be done with a minimum of costs, especially if there's no mortgage.
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Old 05-31-2015, 10:56 PM   #9
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You have the assets you need to do what you want....


The arguments here will be the normal take a mortgage or have not debt which will never be settled as both sides are 100% correct

If you REALLY want the property, then buy it... I would not take into account that it might have been willed to you or not... say it had been and you really did not want it.... you would have sold it and kept the money... if it had not been willed to you and you really want the property, you would buy it.... even if it were bought from someone you did not know..... take out all of the emotion attached to it and determine if you would buy it from a stranger or not.... answer that question and you know what to do...


(ps... I am on the side of getting a low cost mortgage... I mean, it is basically 'free' money... but I digress).....
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Old 05-31-2015, 11:10 PM   #10
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I think maybe I need to re-highlight what my real question is--it's not whether or not to buy the place, that is settled.

And it's not whether I should take money from the HELOC that I would then have to figure out how to repay, even if I didn't sell the house. I already have all the money! In cash! Completely separate from any savings I amassed up to now! And so can a conservative investing of that existing cash, with a draw from the HELOC used to pay for the house, return more proceeds than the interest due on the HELOC over the 10-year draw (also taking into account the tax deduction on the 1st $100k of the draw).

Obviously, I know where I'm leaning, I was just seeing if anyone out there has done anything similar, made a decision when you had enough money to buy something very large in cash, to just use a bit of "positive debt", with a little risk, to try to parlay into a little bit of profit.
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Old 06-01-2015, 06:28 AM   #11
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Originally Posted by googily View Post

And so can a conservative investing of that existing cash, with a draw from the HELOC used to pay for the house, return more proceeds than the interest due on the HELOC over the 10-year draw (also taking into account the tax deduction on the 1st $100k of the draw).

Just snipped the question....

Answer: Sure it can...

Caveat: Maybe it won't
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Old 06-01-2015, 07:03 AM   #12
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Quote:
Originally Posted by googily View Post
.....It's a house that was supposed to be willed to me, but due to how the estate was configured (against the owner's wishes), I received a different property. So now I want to do what was originally intended, and own the house, with the proceeds from the property that I received and then was able to sell.

So there never would really have been a mortgage if it had all happened according to plan--this, to me, is just a way to see about making the cash work a little since I have it. (and since I wouldn't have had this cash if the house had just come straight to me, and I still would have kept the house)...
The opportunity cost concept still applies whether you buy it or inherit it because even if you inherit it, you could sell it and invest the proceeds and earn, say, 8%, so the opportunity cost of owning the property is still $13,600 a year (8% of $170,000) plus the $5,000 per year operating costs for total ownership cost of $18,600.

Most people overlook the opportunity cost because it isn't a direct cash outlay, but it nonetheless exists. In theory, one could also reduce the cost by property appreciation but you indicate the appreciation potential is minimal so I haven't included anything for that.

So if you spend two months a year at this summer home, it costs you ~$9,300 a month.

You can afford to do whatever you want, just make sure your eyes are wide open.
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Old 06-01-2015, 07:11 AM   #13
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Quote:
Originally Posted by googily View Post
....Obviously, I know where I'm leaning, I was just seeing if anyone out there has done anything similar, made a decision when you had enough money to buy something very large in cash, to just use a bit of "positive debt", with a little risk, to try to parlay into a little bit of profit.
So it boils down to the old mortgage or not question and there are loads of threads in that topic. It is more likely than not that you would earn more than mortgage interest from a diversified portfolio, and some of that return would be tax preferred while the mortgage interest would get a tax benefit at ordinary rates if you usually itemize. I'm in the get a mortgage camp, but I'm comfortable with risk and believe that it is unlikely that the after-tax portfolio return will be lower than the after-tax mortgage interest cost over a 15 or 30 year period. OTOH, many people are very debt averse and sleep better at night being debt free.
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Old 06-01-2015, 08:20 AM   #14
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Just snipped the question....

Answer: Sure it can...

Caveat: Maybe it won't
+1...and maybe the real question is, what exactly is "conservative" investing to you personally...only you know the answer to that. if you are really conservative, just pay cash and be done with it.
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Old 06-02-2015, 09:24 PM   #15
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Yes, use debt. I have three houses with a total of two first mortgages and two HELOCs, one of which has a small balance and the other $0. I look at debt as just another part of the investment portfolio with certain tax advantages. Having a mix of terms and fixed vs. variable gives me choices. If I wanted to put the portfolio on autopilot and do nothing, I probably wouldn't, but I actively manage my portfolio and it pays very well.


Similarly, I maintain a varied "portfolio" of tax positions in the asset accounts. Some taxable, with different tax consequences on the earnings and capital gains, and some in various forms of tax-sheltered accounts (TIRA, Roth, HSA, 529, insurance).


Running a diversified portfolio of investments means looking at all the financial consequences of every factor that affects return and making sure that you aren't overly concentrated in one place. Having no debt and a limited portfolio of buy and hold stuff (even traditionally diversified) would scare the bejesus out of me and I wouldn't sleep at night.


Edit to add: I have no consumer debt (auto loans, leases, credit card balances). These are not "portfolio" type positions, just a means to make something you can't really afford look affordable.
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