Big purchase, how to pay?

[Finance Dave]

Don't have a specific purchase in mind at this time, but getting ready for a potential BTD moment in the next 1-2 years. For now, let's pretend I'm buying a $150k car or that we're moving to a new state and the new house costs $800k vs. our $500k house that we live in.

What would be the smartest way to pay for these?

We do have enough in our taxable FIDO account to pay for the car, so perhaps that's the way to go unless we can get a very low interest loan and pay over time by arbitraging the interest rate. One issue might be liquidity...we have lots of CDs in that account and may need to wait a few months for some things to mature.

Some options here...add your own ideas:
1) Use what cash is liquid in our taxable account to put down, and borrow the remainder on our HELOC...paying that off over a few months as CDs mature.

2) Sell CDs on secondary market prior to maturity and pay all cash

However, the house scenario would provide more challenges. Depending on how the move went, we may not be able to sell our current house until after we closed on the new house...so would need to bridge the financing. Don't have enough in taxable to simply pay for the new house, even if we sold all CDs in that account. Also not sure I'd want to do that since that would limit our flexibility in terms of managing TIRA withdrawals to minimize future taxes.

Could get a traditional mortgage and pay it off over a short few years as we can free up funds in a tax-efficient way from various accounts.

Thoughts? Any issues on banks giving a mortgage given that we are FIREd?

Just to give you an idea where we are...

$600k taxable accounts (mostly in CDs)
$1.7M in TIRAs (mostly CDs, bonds, TIPS, etc)
$500k in Roth IRAs (about 2/3 in equities, rest in various stocks/commodities/etc.)
$100k in HSAs
$50k in checking

 

[LateToFIRE]

Not sure I have much by way of answers, but have certainly been thinking about the questions. I'm not yet FIRE'd but on a glidepath. So, I've been thinking, as there are a couple of big ticket items on my BTD menu: new car, boat, kitchen renovation, pool house, home addition, sunbird condo (in order of $$$ magnitude). I wouldn't be doing all of that at once, and maybe none of it really, but its stuff I've been thinking about depending on how various 2024/2025 liquidity events shape up.

Question on my mind is how much I should try to finance now while I can still show some income, as I'm assuming that will be difficult to get any kind of financing (other than credit cards) once I have no earned income and will be banished to credit Siberia (assuming I stay FIRE'd which in and of itself is a bold assumption given my not particularly healthy attachment to w*rk but that's a a whole other topic).

As with you, NW is not really the issue, liquidity and avoidance of triggering unpleasant tax liabilities is.

Anyhow, some thoughts:

1) A buddy of mine is a big fan of pledged asset lines of credit - basically your portfolio is used as collateral for the loan. I'm not sure I see a big difference between PAL's and margin loans, except that maybe the advance rate on PAL's can be higher. [adding that a margin loan can be used to buy add'l securities, while a PAL cannot be used for this purpose].

2) I've read elsewhere on this forum and others that if you establish regular deposits into your bank account from your TIRA's that some lenders will view that is equivalent to income in terms of qualifying for credit/loans. I'm sure someone else could elaborate on that.

3) I've thought of establishing a HELOC (home equity line) before FIRE-ing, but there are origination fees associated with that, and they are cancellable (for example if the bank discovers no longer employed).

4) Oh, and adding, at some point SS/pension will create some income to qualify for financing, but I'm still a few years from that.

5) And the other thing just thought of is that was planning to repay my current home mortgage from the sale of other r.e., but might just make sense to hold onto some of that very low rate mortgage debt and keep a higher cash balance until dust has settled on the BTD thinking - in my case, this might be the best option (though was really liking the idea of being mortgage-free).

At current interest rates, new borrowing does not seem very attractive, but as you noted, you never know when you might want to bridge incoming and outgoing funds for some short period of time.

 

[UpQuark]

...Could get a traditional mortgage and pay it off over a short few years as we can free up funds in a tax-efficient way from various accounts.

Thoughts?....

I retired in 2022 and then the stock market went down so much that when I bought a condo at the end of 2022 I got a small mortgage, which I paid off within 8 months.

Personally I really regretted that I didn't just sell my bonds on the secondary market and avoid the mortgage, because I used them up as they matured to pay off the mortgage anyway, so all the cost of getting a mortgage and the interest was just a waste.

My thought process had been that the economy might have stayed down and I might need cash to avoid selling stock, but then my living expenses were covered by using up excess money in my bank account (bank was not paying competitive rate).

Other than my experience I don't have any particular thoughts, though I watched a YouTube once that recommended doing car purchases in January and taking the money out half in December and half in January to smooth out the tax burden.

 

[DrRoy]

I like to compare the cost of credit to what I am getting on the funds that I would use to pay something off. If current after tax return is higher than the credit rate, borrow. If not, pay off.

 

[Badger]

I don't like debt so for the past few decades I have paid cash for everything including a couple of used cars, 3 new cars, and 1 new truck. I also built a house in the mountains by paying for building materials as I worked on it. All other expenses have also been cash. I was taught at an early age the difference between "Need and Want" and patience. I can afford a $150k car but for me that would be a "Want" not a "Need".
Without the expertise of so many here I was still able to establish a nest egg that will see us through with inheritance left over. It most likely is not the way the experts would have done but it worked for us.
To answer your questions 1. I would not BTD to buy a $150k car unless I had the disposable cash. 2. I would not buy a house before I sold the present house. That could come around to bite you in the caboose. You have plenty to cover the difference.
You could take the estimated payments of a loan to replace the cash used.
But that is me and your POV may be different.

 

[Midpack]

I keep about 5% of our AA in cash. I’ve paid cash for boats, cars, last home and it was always planned so I made sure I had cash on hand. If our cash isn’t adequate I’d accumulate dividends (mostly), or sell mutual funds (rare)The only tricky one is buying a house before the old house sold, but we managed that last time. That might be a case where I’d take a mortgage on the new house, and then pay in full once the proceeds from the old house came through - obviously you’d have to make sure the terms allowed that without penalties.

 

[Andre1969]

When it comes to something like a car, it depends on what the prevailing interest rate is. I've only financed three in my life. The first was a 2000 Intrepid. Back then, it was only 0.9%, so it was a no brainer to keep the loan for its duration.

The second was a 2012 Ram. I think the interest rate was 3.99% at the time, which was probably good, but I had been spoiled by that 0.9%, I guess, and just wasn't accustomed to paying interest, other than mortgage/HELOC interest. At the time, I think my HELOC was around 3.75%. So, I made a few payments on the Ram, but used my HELOC to pay for most of it.

In the long run, that wasn't in my best interest, as the HELOC's draw period ran out at the beginning of 2015, and it converted to a fixed-rate mortgage, 10 year term, at 4.99%. However, I still got the interest writeoff. And I paid that mortgage down aggressively, and it was gone by early 2018.

My last purchase was a 2023 Charger. I went into the dealer planning to put $10K down, and figured I'd be able to bargain a bit on the price, and I'd get a good interest rate because of my credit. Well, because of it being a bit of a desirable model, they didn't bargain much. Although to be fair, they had already knocked something like $6-7K off the MSRP, so maybe I was hoping for too much. As for the interest rate, it was 72 months at 8.04%. Oddly, the shorter terms were actually a higher APR! Anyway, if I'd know this going in, I would have simply paid cash for the car, right then and there, but I didn't have enough in checking. So, I let them finance it, and then just paid it down aggressively, with MMA funds.

I'm guessing I could have done something different, where I didn't have to finance at all, but at the time, I just wanted the car, and wanted to get it over with.

 

[freedomatlast]

There's no 'one size fits all' answer to the question. It all depends on what interest rate you're earning on the cash you'd spend vs. the interest rate on a loan for the same amount of money, including the tax implications of each scenario.

Also, I'm going to respectfully disagree with Badger about not buying another house before the present one is sold. You're in a much better position of power in negotiating without contingencies in the offer of the new home, and being able to take your time moving takes a ton of stress out of the whole ordeal.

I always try to keep a decent chunk of AA in fixed income cash for big purchases so I can move quickly if needed. I always plan on paying cash unless financing options are more advantageous in any specific situation. The answer becomes nothing more than a solved math problem including opportunity cost and taxes.

 

[Aerides]

Pre Medicare, another factor maybe ACA income brackets for subsidies. This may not be avoided if you have to take capital gains for a large purchase (ie, the house), but can be at least contained and planned for if you time it within one tax-year vs. spreading it. IE, take the hit for one year of subsidies, then return to normal. Or just know you're going full freight if the purchases are spread out. Either way, the cost difference should factor into your calculations if you have to create large amounts of taxable income to fund your purchases.

As others have said, it's very individual. As far as getting a mortgage, you can set up scheduled withdrawals from one account into a deposit account, over a period of time, to show regular deposits akin to income. Some banks like this. Some might not care.

similarly, if you don't already have a HELOC, that might be harder once FIRE'd. It will become fully due if you use it and then sell the house, regardless of normal payment schedules. So a bridge loan, or sell first buy second, use rental/storage as a bridge. I know for me I have a couple of areas targeted for my future home, so when the right time/property is available, I'm going to want to jump on it vs. selling and waiting for the right home to list. There are costs, but there is risk in being out of the RE market as well.

 

[Finance Dave]

Thanks everyone for good comments! To add some info…

1) we DO have enough for the car in cash, but as I said…using that would affect our ability to manage taxable income and thus increase our tax liability going forward.

2) We have been unable to do Roth conversions during the last 3 years due to selling rentals, but in 2024 we may be able to start again….although we likely will start DW’s SS so that will also be limited going forward. Roth conversions would get more in accounts that we could use to tax-efficiently manage income and would make everything easier.

3) We do have a HELOC that we opened 12 years ago with a limit of $200k. We borrow $100 against it about once a year and immediately repay it…as our bank has an “inactivity” clause. However, that floating rate is quite high at the moment so we want to only use that as a last resort.

4) For the car….I can estimate the timing as 1-2 years…so we can plan for it. However, for the house it’s more complicated. My MIL is 91 and lives on her own 10 minutes from us. We won’t move until either she passes or she gets to a point where she’d have to go in a facility and we could relocate her with us….so that could be next year or 15 years from now.

We have not had any debt for many years. We paid off our mortgage in 12 years at my age 40, and not had a car loan except for a 0% loan 15 years ago for DW’s Nissan Sentra. We paid cash for the final 4 of our 5 rentals. I don’t like debt but if the rate is low enough I’m ok using it for short periods…maybe 2-3 years for a bridge mortgage loan.


I’m going to start modeling income with DW’s SS and trying to do Roth conversions…hopefully we can get a bit more in after-tax accounts to help with all this.

 

[Montecfo]

I like to compare the cost of credit to what I am getting on the funds that I would use to pay something off. If current after tax return is higher than the credit rate, borrow. If not, pay off.

I see this as the key question. And all the costs of the financing need to be considered as part of the cost.

I kind doubt that the loan would be cheaper than selling CDs.

As far as getting financing, having an HELOC in place when you retire is wise I think.

Also. If getting a loan post -FIRE, some banks do look at 401k or IRA withdrawals as "income" so that can help. But all the better to have a HELOC since no closing costs .

 

[Ian S]

Regarding the home purchase, we moved in 2019 before our paid-off hose was sold. We were able to get a mortgage on the new home by putting 20% down and financing the rest. DH was still working and I was on SS. But in order to get our total income up, I had to start distributions from a TIRA. These distributions were only continued until we got the mortgage loan. The old house was paid off five months later and we were then able to pay off the mortgage loan. We were offered two loan versions: one with a lower interest rate and one with a higher interest rate but cash back at closing. Obviously we took the higher interest rate because we'd only need it for a few months before paying it off but got the benefit of the cash back.

 

[Finance Dave]

One thing I can easily do is make sure all NEW CDs I buy in the taxable account are 3 mo or less maturity…that will ensure max liquidity, but will sacrifice some return

 

[4legsgood]

There is that little loop hole with a tight timeline, if you transfer money out of an IRA and have your brokerage cut a check to you, you have 60 days to put the money into another IRA without taxable repercussions. That's my understanding anyways.

 

[Aerides]

One thing I can easily do is make sure all NEW CDs I buy in the taxable account are 3 mo or less maturity…that will ensure max liquidity, but will sacrifice some return

I haven't priced them lately, but the no-penalty Ally CD might be a better bet, and rolls over at 11 months, but is basically liquid al the time.

 

[FiveDriver]

I can't speak to the Home Purchase aspect. But we just bought my DW a new car, and we got down to a better Sales Price by using Dealer Financing.

With excellent FICO scores and a substantial Down Payment, we financed the rest thru Lexus. The monthly payment is auto-drafted from our bank, and the Loan is in her name only, so she's is building her individual credit score, just in case she needs this in the future.

The car loan is the same amount as DW's former Medical Insurance.....now that she's on Medicare.....it's net Zero to our monthly budget. We'll probably pay the car loan off a year or two early.

As far as a Home Purchase in a new locale, the same large down payment and pre-qualified mortgage would make you an attractive Buyer. Carrying a small Mortgage until all aspects of both sales are settled.....wouldn't be the worst scenario.

 

[CRLLS]

It looks like you're not making any immediate purchases, you are just looking down the road a bit. I would only pay cash for a car, PROVIDED it did not affect my retirement finances or near-future plans. A big move up is a near future plan.

What happens to your retirement plan if you can only do one? Could you be buying a car in a year or two and the next week be searching for that new home? Who knows what cost the home you will find will be or what the cost to sell, buy and move will be then.

The only way I would take a loan on a $150K car is if they were offering tremendous incentives for that loan. And then, I would pay it off a couple of weeks later. If I couldn't afford to pay cash without affecting other plans, I would forgo that car or chose a different one. Who knows what loans and mortgages will be like in a couple of years?

The bottom line is that you have time before you trigger either of these purchases. If I were you, I would be "Steady as she goes. Full steam ahead" until I get closer to needing.

 

[pb4uski]

We may have a similiar issue in the near future if we decide to buy a home in Texas before we sell our home in Florida.

I'm thinking taxable funds first, then loans and Roth's as a last resort.

I suspect that we'll put 20% down, get a ARM mortgage, sell Florida and then used the proceeds from the sale of Florida to pay down or pay off the ARM.

 

[Finance Dave]

There is that little loop hole with a tight timeline, if you transfer money out of an IRA and have your brokerage cut a check to you, you have 60 days to put the money into another IRA without taxable repercussions. That's my understanding anyways.

Good thought! I’m familiar with that rule.

 

[Finance Dave]

I haven't priced them lately, but the no-penalty Ally CD might be a better bet, and rolls over at 11 months, but is basically liquid al the time.

Tks!

 

[pb4uski]

One thing I can easily do is make sure all NEW CDs I buy in the taxable account are 3 mo or less maturity…that will ensure max liquidity, but will sacrifice some return

Many money market funds are paying about the same as 3 month CDs. SWVXX is yielding 5.27% today and it totally liquid.

 

[Dash man]

Purchases like that are too risky for my blood considering the assets he listed. With that said, we don’t finance anything unless the deal is better using finance and my cash is ready and available to pay it off as soon as we can.

 

[HI Bill]

I was planning to buy a car just after the first of January 2024. Then my wife surprised me with a request to visit the town where the exact model I wanted was located. So I showed up at the dealer eight days ago with a check for half the down, and put the rest of the down on a credit card. I financed 88% of the value of the $63K car at 8.99%!!!. I have excellent credit scores, and a stated income high enough that getting approved without proof of income was a breeze [I've been making monthly scheduled deposits to my checking account just in case]. Will pay off the loan this month, incurring ~$200 in interest. Loving the car!

 

[ivinsfan]

HI Bill, some dealers have started limiting the amount you can put on a CC. We got lucky and found exactly the car we had been looking for a dealer near my DD's house. This was in late 21.



It was a new car in the lot and the dealer let my hubby look it over in the lot. All the rest of the purchase discussion was over text. We agreed on the terms and paid the down required to start the paperwork over the phone. But they did have a max amount you could put on a CC. That's nice you didn't run into that issue.

 

[Koolau]

Could get a traditional mortgage and pay it off over a short few years as we can free up funds in a tax-efficient way from various accounts.

Thoughts? Any issues on banks giving a mortgage given that we are FIREd?

Banks seem not to be interested in your assets - only income. We had a hard time getting a loan for our current condo several years ago because we hadn't sold our old place. At the time, my only income was a modest pension. They said that wasn't enough for a $400K loan. They asked to see our 1040s for 3 years. When they looked at them, they said "You have all kinds of income!!" I said "Say what??" We had converted several tIRAs to Roths and that was 1040 income! Don't ask how converting tIRAs to Roths would satisfy a banker's requirement for income - but it did. Heh, heh, in fact, converting to Roths meant we had less money because we had to pay the taxes! Go figure.


BUT, to answer your questions, unless things have changed, banks want you to have income; A lot of it.