Mortgage dilemma

[camberiu]

So...I am about to buy my first home. Although I am quite happy about it, it does gives a bit of trepidation to be in debt for the first time in my life. You see, I have never had credit card debt, car debt, student loans or any other kind of debt. So, unlike most people who had chance to deal with smaller types of debt (maybe not in this forum), I was never psychologically prepared to have this "sword of Damocles" called mortgage hanging over my head and I feel as insecure as an ugly teen going to a first prom party So I am coming to this forum in order to tap your collective wisdom.
I am 33 years old, debt free and currently have a low six figure yearly income. I'll be buying a place for $290K on a 30 year mortgage. I am planning on putting down $100K and borrowing the other $190K at around 6.25% a year.
Now, here is my dilemma: I have about $30K invested in gold (at Kitco) which I bought for a little over $400 an ounce about 4 years ago (it is now at $650 an ounce). I also have about $50K in a MM overseas which has a yield of about 12% a year.
Now, should I liquidate those two and use the cash to reduce my mortgage? Please be aware that I do have a 401K, a Roth IRA and a Vanguard account that I WILL NOT touch. I will also keep my $20K cash reserves for emergency. My rationale is that those two investments (gold and the overseas MM) are high risk and therefore I might be better off simply putting those assets into the home. Does anyone sees it differently? Am I missing something? Any advice would be most welcomed.

 

[Alex]

I'd put 20% down (60K) and keep your remaining 40K cash in a liquid money market fund at Vanguard. IMHO, your fear of mortgage debt is irrational. There is 'good' debt and 'bad 'debt. Besides the tax advantages of deductible mortgage interest, if you sink all of your liquid capital into a home and you lose your job you are screwed. Banks do not lend money based on equity, but on income. IF you have no job, you cannot get a loan. You might be forced into selling into a soft market or worse.

As for your risky bets - I'd liquidate them immediately and put the money into a tax efficient mutual fund like Vanguard's Total Stock Market index or similar offerings that fit your Asset allocation plan. You do have an asset allocation plan, right ? If not, you need to set one, and then stick to it. You can get help with that HERE
or HERE
Whatever you decide, best of luck to you!

 

[Spanky]

I would not shift any more money to reduce the mortgage so long as other investments return greater than 6.25%.

 

[Darryl]

Alex, makes some great points. Given your emotions over this large commitment (yes it is good debt, But $190,000 is real money). I think getting out of the risky investments makes sense. Move it someplace safe (Vanguard MM etc..) Move in to your new home live there six months or a year encounter unexpected expenses or wants with a larger than normal cash cushion and then decide if you want to move that risky money back in to the market or pay down the mortgage etc... P.S I did not just say that last part as you should just search previous threads for that debate. I don't want to be the one to start that one here. IMHO if your investments are causing you anxiety rather than relieving anxiety you're not doing it right. You have to be able to sleep at night.

 

[Brat]

I am no financial guru but I would liquidate the gold. Permanent Portfolio might be an appropriate substitute. Hard to know about your foreign MM funds.. ETFs? I don't disagree about having investments in other currencies but have you considered investing in those countries equities rather than currency?

I am with others, decrease your down payment so long as you can keep the interest rate on the mortgage. Build a reserve fund for the same reason others have mentioned.

 

[cute fuzzy bunny]

I would not shift any more money to reduce the mortgage so long as other investments return greater than 6.25%.

Gosh if it were only that easy...

If it was my scenario, I'd dump the gold and 'overseas money market' paying double digits and either find some less 'exciting' investments or pay down the mortgage.

Your risk profile just changed considerably...

I should probably point out, to the scorn of goldbugs everywhere, that gold returned zero percent for several decades.

Its also worth noting that I'd consider the chances for total default on a foreign double digit returning money market to be extreeeeemely high.

 

[FinanceDude]

Gosh if it were only that easy...

If it was my scenario, I'd dump the gold and 'overseas money market' paying double digits and either find some less 'exciting' investments or pay down the mortgage.

Your risk profile just changed considerably...

I should probably point out, to the scorn of goldbugs everywhere, that gold returned zero percent for several decades.

Its also worth noting that I'd consider the chances for total default on a foreign double digit returning money market to be extreeeeemely high.

Well, if you hate debt, pay off the mortgage as quickly as you can. Mortgage debt could be considered a "good debt", but I for one am a big proponent of paying off all debt ASAP.

Liquidate the gold and MMF, and pay down the mortgage even lower. Put a HELOC on it that you will never use. Make sure your bank will do the HELOC WITHOUT an annual fee.

You're on the right path.........

 

[cute fuzzy bunny]

I dont hate debt, I just hate stupid debt.

An accumulator with a good asset allocation and a low mortgage rate can consider the debt good.

6.25% is a little over my line of "good" debt, particularly if the OP has a bunch of bonds or cash paying under 5%.

And that monthly mortgage payment and underlying risk changes the risk profile considerably. Speculating on gold and foreign money markets might no longer be a good idea.

 

[SecondCor521]

Personally I would only put down 20%.

However, if you choose to put down more than that on your home, it would make a little more sense to liquidate whatever funds you're going to use and increase your downpayment amount rather than get the mortgage and then pay it down right after you get it.

The reason for this is that you might have closing costs that depend on the size of the initial mortgage. No reason to pay more than you have to on those.

2Cor521

 

[brewer12345]

I would only put down 20%. The more unencumbered assets you maintain, the lower your chance of defaulting and the greater flexibility you maintain. If you later change your mind, just use the assets to wipe out the mortgage. In the meantime, you preserve more options.

 

[camberiu]

Tahnks to everyone who replied. Now, a few of you suggested only putting down 20%. Considering that my net take home pay (after taxes, 401K, etc...) is around $4,000 a month, do you think that a monthly mortage of $1,428.46 + $700 of coop montly fees might be cutting a little too close? Is it normal for someone to spend 50% of their take home pay on housing costs alone?

 

[brewer12345]

Tahnks to everyone who replied. Now, a few of you suggested only putting down 20%. Considering that my net take home pay (after taxes, 401K, etc...) is around $4,000 a month, do you think that a monthly mortage of $1,428.46 + $700 of coop montly fees might be cutting a little too close? Is it normal for someone to spend 50% of their take home pay on housing costs alone?

But you have a big pile of assets, right? So servicing the debt doesn't actually depend solely on your income. Also keep in mind that your tax burden will be lower, so your net take-home will be higher, assuming you adjust withholding.

 

[Brat]

... Is it normal for someone to spend 50% of their take home pay on housing costs alone?

Oh ya, particulary when the co-op fees include many of the expenses paid for single family residences.

The advantage of owing your residence is that you can make it your own (within limits since you are in a co-op) and not negotiate with the building owner. However we didn't say it was cheaper, assuming you can deploy the difference efficiently.

 

[Zathras]

Camberiu, you mentioned never having debt before. Have you used credit cards before?
If not, you may have virtually no credit history. If this is the case the 6.25% may be optimistic. Which may change how much down you want on the house to start with.
Getting preaproval (if you haven't already that is) may give you a better idea of where you stand.

 

[jIMOh]

So...I am about to buy my first home. Although I am quite happy about it, it does gives a bit of trepidation to be in debt for the first time in my life. You see, I have never had credit card debt, car debt, student loans or any other kind of debt. So, unlike most people who had chance to deal with smaller types of debt (maybe not in this forum), I was never psychologically prepared to have this "sword of Damocles" called mortgage hanging over my head and I feel as insecure as an ugly teen going to a first prom party So I am coming to this forum in order to tap your collective wisdom.
I am 33 years old, debt free and currently have a low six figure yearly income. I'll be buying a place for $290K on a 30 year mortgage. I am planning on putting down $100K and borrowing the other $190K at around 6.25% a year.
Now, here is my dilemma: I have about $30K invested in gold (at Kitco) which I bought for a little over $400 an ounce about 4 years ago (it is now at $650 an ounce). I also have about $50K in a MM overseas which has a yield of about 12% a year.
Now, should I liquidate those two and use the cash to reduce my mortgage? Please be aware that I do have a 401K, a Roth IRA and a Vanguard account that I WILL NOT touch. I will also keep my $20K cash reserves for emergency. My rationale is that those two investments (gold and the overseas MM) are high risk and therefore I might be better off simply putting those assets into the home. Does anyone sees it differently? Am I missing something? Any advice would be most welcomed.

I would not liquidate anything (to pay down mortgage) and I would not reduce the down payment either.

I would look at 2-3 factors.

6.25% for 30 yr fixed. What is apr for 15 yr fixed?
What is payment for 30 yr fixed? What is payment for 15 yr fixed?

You might find for another $500/month you can pay off house in 15 years less.

The gold is "permanent"- it should hold it's value through most market cycles. I cannot say the same about your house value... and I would think gold is more liquid than your house... if you need the money, it's easier to sell gold.

I do understand you have other assets... but it's possible the gold will appreciate faster than 6.25%/year, so I would not liquidate it now.

 

[camberiu]

Camberiu, you mentioned never having debt before. Have you used credit cards before?

Hello Zathras, I should have mentioned that I do use credit cards very often, but ALWAYS pay the ballane in full at the end of the month. I don't think I have ever paid a finance charge in my life. So my credit score right now is near 800 and I am already pre-approved for the 6.25% mortgage.

At first I was thinking about holding on to the gold, but it seems that over the past few months, the gold has very much followed the general stock market, which pretty much cancels its value as a diversified asset, so I feel more inclined to sell it.

 

[FinanceDude]

Hello Zathras, I should have mentioned that I do use credit cards very often, but ALWAYS pay the ballane in full at the end of the month. I don't think I have ever paid a finance charge in my life. So my credit score right now is near 800 and I am already pre-approved for the 6.25% mortgage.

At first I was thinking about holding on to the gold, but it seems that over the past few months, the gold has very much followed the general stock market, which pretty much cancels its value as a diversified asset, so I feel more inclined to sell it.

I'd put down the amount you KNOW you can make monthly NO matter what. Usually it's a BIG move from renting to owning........costs are higher.........

 

[camberiu]

I'd put down the amount you KNOW you can make monthly NO matter what. Usually it's a BIG move from renting to owning........costs are higher.........

Yeah, that was my original idea, to pay down as much as possible to ensure a smaller monthly mortgage payment. The logic behind it was that if I lost my job and had to settle for a lower paying one, I'd still have no problems making the monthly payments. However, it seems that some people think that the best approach is to pay down only 20% and keep a more liquid reserve (in exchange for a higher monthly payment). I think about approaches have merits and drawbacks. The problem is determining which approach has more more mertis than drawbacks

 

[FinanceDude]

Yeah, that was my original idea, to pay down as much as possible to ensure a smaller monthly mortgage payment. The logic behind it was that if I lost my job and had to settle for a lower paying one, I'd still have no problems making the monthly payments. However, it seems that some people think that the best approach is to pay down only 20% and keep a more liquid reserve (in exchange for a higher monthly payment). I think about approaches have merits and drawbacks. The problem is determining which approach has more more mertis than drawbacks

Either idea has merit, it's what make YOU comfortable. I have NEVER heard anyone say: "I wish my mortgage was a LOT bigger"................

 

[TromboneAl]

Apart from the financial aspects of having a smaller or no mortgage, there's also the psychological aspect. Even if mortgage debt is good debt, your aversion to debt (like mine), might indicate that you'd enjoy having a smaller mortgage, and paying it off early.

Also, I haven't looked at mortgage stuff for years, but don't you get a lower interest rate if you choose a 15-year mortgage instead of a 30? If you're going to pay off early anyway, you might look into that.

 

[donheff]

I would look at your tax situation and compare what you end up paying in real dollars for the mortgage versus what you can reasonably expect from the excess funds if you put them in a conservative portfolio. If the later looks good, invest the excess money in a "pay of the mortgage before I retire" account. Add a little to it each month and before you know it you will have a nice little account that you can use to liquidate your mortgage at will. That is what I did. I paid off my primary mortgage ($270k) a couple of years ago and will pay off my weekend place when DW stops working next year and our tax bracket drops. By the way, when I approached the payoff point I moved the payoff account funds into CDs.