Ideas about the 2nd home purchase

[wanaberetiree]

Hello and Happy Holidays!

I am thinking about buying a second house and have some thoughts to run by smart people.

First - how to finance.

Based on my adviser suggestion this is a no-brainer if in the current environment with interest rates of 2-3% it makes sense to leverage mortgage loans instead of paying ca$h

Then how to raise cash to pay for it on monthly basis. Say hypothetically you have substantial assets ~5-10M, AA 63/35%, some equities significantly appreciated, so tax liability is a major consideration.

Possible sources of cash:

- Selling stocks/bonds
- Stop contributing to 401K
- Selling parts of I-Bonds position
- Cash-out ROTH accounts
- stop reinvesting in stocks

What would be your plan to raise cash for monthly payments and sequence of use of the abovementioned sources?

Thx

 

[Brat]

As you appear to have more than adequate funds in your 401K I would stop contributions. None of us knows your tax situation but because the stock market has been very strong now would be the time to take profits or sell those with weak prospects.

 

[levindb]

With low interest rates, you may be able to fund the down payment with Home Equity Loan on your primary residence.

Since rates are really low, financing for 30 years allows the rate to be locked in, and you can always pay more each month if you want to.

Assuming it may be 10 years on the Home Equity and 30 years on the 2nd home mortgage, you will need to develop a long term monthly funding plan including withdrawals from you retirement funds, as well as pension, SSA, and brokerage accounts while keeping you AA at a comfortable level. Also, decide whether you want to rent the 2nd home for additional income and/or tax benefits.

 

[OldShooter]

We're building a new vacation home, digging starts in March. We bought the lot and will pay some of the construction with a cash-out mortgage on our current place, which will be sold when we move and the mortgage paid off.

We will not have a mortgage on the new place. I get that rates are low, but we are not interested in unnecessary debt or on playing interest rate arbitrage against market returns.

Don't forget that your advisor is probably in a conflict of interest re giving advice on this, as simply paying for the house will reduce his AUM, hence his fees. He makes more money if you borrow for the purchase.

 

[njhowie]

Based on my adviser suggestion this is a no-brainer if in the current environment with interest rates of 2-3% it makes sense to leverage mortgage loans instead of paying ca$h

Then how to raise cash to pay for it on monthly basis. Say hypothetically you have substantial assets ~5-10M, AA 63/35%, some equities significantly appreciated, so tax liability is a major consideration.

You are asking two questions that have the same answer, in my view.

Where was the money going to come from if you were to pay cash and not take a mortgage?

If you were to raise cash by selling equities, you'd have an even bigger tax liability as opposed to taking some monthly to pay the mortgage, no?

I would come up with a plan to liquidate some of your holdings monthly to pay the mortgage. Maybe you decide to do one liquidation at the beginning of the year to have enough to pay the entire coming year and then withdraw that amount monthly. Maybe you decide to liquidate enough to cover the mortgage towards the middle of each month? Whatever. Make a plan and go with it.

If you decide to stop contributing to 401k, be sure to continue contributing the minimum to get maximum employer match, assuming
they provide one. No reason to throw away free money.

I would not sell any I Bonds at this time - you're just now beginning to see the payoff for your patience in waiting. Why sell when you have a guaranteed 7.12% yield coming over the next 6 months? Wait for rates to go back down before liquidating any I Bonds.

I also would not cash out any Roth money unless you absolutely need to. Money in there continues to get you tax free growth - that money is never going to be taxed, so you want it to grow the most.

Stop reinvesting in stocks looks good to me - kind of the flip side of liquidating and taking the tax hit.

Lastly, you indicate that you're thinking about buying a second home...implying the decision is not set in stone at this time. If you are on the fence, then don't buy. Continue saving, and buy after you've saved more and are sure of your decision to buy. What is the need/desire to buy the 2nd home now? It's obviously not the best time to be buying. Why isn't one home enough?

 

[pb4uski]

...Possible sources of cash:

- Selling stocks/bonds
- Stop contributing to 401K
- Selling parts of I-Bonds position
- Cash-out ROTH accounts
- stop reinvesting in stocks ...

Hard to know without knowing more about your situation, but yes, yes, hard no, hard no and yes.

I'm asuming that you have significant tax deferred balances and a potential tax torpedo come RMD time and are in a high tax bracket.

 

[wanaberetiree]

Thanks all,

Very useful and helped me move closer to understanding a possible path.
A takeaway:

- Selling stocks/bonds - yes
- Stop contributing to 401K - yes
- Selling parts of I-Bonds position - no
- Cash-out ROTH accounts - no
- stop reinvesting in stocks ... - yes

Regarding “Home Equity Loan on your primary residence”, I need to see if mortgage for a second house (2.125-2.875% is being discussed now) better or worth then this option.

 

[MarieIG]

- Selling stocks/bonds (maybe, can you triage the sale of stocks without capital gains?)
- Stop contributing to 401K (yes, after getting match)
- Selling parts of I-Bonds position (no)
- Cash-out ROTH accounts (NO!!!)
- stop reinvesting in stocks (yes)