doopstr

I'm in the process of selling my home and buying a new one.

When I walk away from my house I'm going to have about $175k in my pocket (after all fees, commissions, etc).

The house I am purchasing is 430k.

Which of the following should I do?
Put 20% down (86k) and stick 89k somewhere and make some money with the hopes of getting anywhere from 6-10% a year return or just stick the whole 175k into the new house?

Here are a few reason I see for keeping the 89k.
1. Can make some money (hopefully)
2. If I get fired from my job I have a hell of a long time to pay the mortgage with that fund.

The reason I can see for putting the whole 175k into the house is a lower mortgage payment.

Also, if I keep the 89k I probably wouldn't have to dip into that to pay the mortgage but my monthly savings will be fairly low. But hopefully the interest I make on the 89k will supplement that.

Comments from anyone who has gone through a decision like this would be appreciated.

CrockPot

This is truly selfless and heartfelt advice...go with option 3, it's your best move.

JPL530i

i would put 20% down and use the rest for investment. there's no sense of putting the whole 175G down. it's good to have cash reserve in case shit hits the wall or when a perfect opportunity arises. just my 2 cents, mate

SDCGTSX

20% down and keep the rest for investments and cash reserves. Everyone should have 6 months of living expense cash reserves in stocks or CDs or something that you can get your hands on immediately. Get CDs that you can get at w/o penalties, most are nowadays.

Also, if your mortgage rate is 5.6% (30 y fixed these days I think) then you're only making 3.92 (at 30% tax bracket) after the interest write-off benefit. Not worth sinking your money into it for that.

Scrib

Putting only 20% down on a $430K home will leave you a hefty monthy payment.

While that's obvious, is that something you're willing to live with for many years to come? Are you comfortable on having that type of recurring payment monthly?

I look at it this way... If you're already diversified in your 401K, IRAs and side investments, home equity is another great way to diversify your porfolio.

I don't know your financial situation, but if it were me... I'd put it all in. But I'm content with where I am outside of my home equity.

SDCGTSX

Point is that everyone needs a cushion cash pool somewhere. People live month to month without any reserves to dip into when something happens. That's why people are stuck at jobs they don't like. If you REALLLLLY want to pay down the loan, you can do it after the fact since 99.99% of loans today don't have prepayment penalty.

Slimey

I was just in a very similar boat. We did pretty well on our sale, and got a good deal on the new home.

We put 20% down to keep out of PMI and got an 80% LTV loan. This way I got to maximize both my cash-in-hand and loan product.

The remainder of the money is making a temporary stop in the bank before my wife does her part to improve the local economy.

It's like I'm hemorrhaging money.

(I complain but actually we knew about the planned purchases when we bought the home and it's only going to be $30 or $40K...)

It'll be nice, but between the new fence, water softener, iron filter, interior complete repaint, granite countertops, sink, fridge, lighting fixtues, furniture, miscellaneous hardware, etc it gets old!

At least the kitchen upgrades and paint will improve the home value a bit.

SDCGTSX

PMI? Who has PMI on their loans these days? Ever heard of the 2nd loan? But I still think 20% is good just to avoid the higher rate 2nd loans.

Davediego

if it were me, and assuming i didnt need large amounts of extra cash around, id put it all into the new house. why create more debt for yourself if you dont need to? you should compare total cost of the mortgage with and without that extra money and then decide whats worth it to you

doopstr

Thanks for the input (please keep it coming). Seems pretty split down the middle.

I still don't know what I want to do. I did some simple computations.

175k down
255k mortgage
interest 5.75 (good guess, hopefully get lower )
payment $1488.11/month

86k down (put 89k in funds/etc)
344k mortgage
interest 5.75
payment $2007.49/month

$519.38 difference that needs to be made up.

89k@8%=$593/month
89k@7%=$519/month
89k@6%=$445/month
89k@5%=$370/month

If I manage to get 8% then I am making money. If I get 7% I come out even and in 30 years I still have $89k in the bank. That's 89k I wouldn't have if I sunk it all into the house.

I have to fire up a spreadsheet to see when/if I run out of money if I only get 5-6%.

If there is something wrong with my calculations that I'm not seeing, let me know. I haven't yet figured out how to compute this including the tax I need to pay on the interest income and the tax break I get with the interest paid on the loan.

Slimey

Don't forget issues including:

you'll need significant cash-on-hand with the move as your wife will want to change shit in the house (it's inevitable)

you'll need some cash-on-hand to pay for the kids swimming lessions, music classes, etc (this stuff adds up and it's good to have cash for this stuff liquid)

loan interest is tax deductible and helps those of us in higher tax brackets

almost no one keeps a loan product for 30 years



hence my reasoning for 80% LTV. I didn't focus so much on monthly payments, but the whole package.

BigPimp

The real question becomes, what are you going to do with the money to make sure they are giving you a proper return. By investing somewhere else you are also taking a risk. If you need the money, keep it, otherwise, put into the home, open up a home equity line against it and if you need it, you can always draw it out.

Also, look at the monthly payment difference between putting the money down vs not putting the money down. Compare the difference to what you expect to get from your investment.

fdl

my

Put as much as you can in towards the house. Every penny you can, while leaving 3-6 months cash reserves for emergencies. You are paying 5.75% on your borrowed money, so you have to make at least that much in your investments but there is no guarentee that you will. Dont forget as well that anything you make on your investments will be taxed, so you will have to have to make that much more to make it worthwhile.

amisconception

You can do a lot with 89k. You can leverage that into a few of properties if you were ballsy.

zamo

I will put it in as down payment. Better to have a lower monthly payment. Plus in case of depreciation, you will have a big time equity still.

SDCGTSX

Yes, I view everything given the investment opportunity. I'm 28 and much more aggressive than 99.9% here so take that in view. I have a lot of investments in real estate right now that are slated to return 40-60%. I know that sounds crazy but I've been doing these for a while and historically have returned over 100%. Markets are slightly down so I'm assuming less. So.... I believe in leveraging a good investment while having the means to deal with the "oh shit" situations that arise in life such as sickness, accident, etc. With a 20% downpayment, he ALWAYS has the option to pay a little more each month if he wants to "invest" into his home at the mortgage rate. That will give him time to do something else if they should arise. Also with $89k, you can probably buy yourself a 4 plex in NJ (don't know). You need about 20% down for a 4 plex as a 2nd home investment so you can buy something and probably make enough to pay the mortgage and the bills and keep a little if he buys right.

SDCGTSX

Finally, a little tax advice from someone clearly NOT CERTIFIED! Anyhow, you get to keep using the 2 year / 5 year tax benefit for your first home over and over. So it's worth it to most to sell the home to reap the appreciation tax free over and over again, given that there is appreciation. Taxes on a sale is going to be around 25% for fed & state capital gains. I currently have a downpayment for another downtown condo to be done built in 2008. I'm planning to sell my current condo by around 2007 when I anticipate having the $250,000 limit built in to my appreciation (modest 5% appreciation assumption). Think of the taxes also when trading in and out of real estate.

Doom878

I'd do as little down as possible if you can afford it. There are programs where with LTV's higher than 80% you can still avoid Mort. Insurance. Just make sure the interest rates aren't adjusted to this higher "risk". In other words make sure it's worth the extra interest you pay to avoid paying the worthless MI. Then invest whatever you have left over per your investment beliefs. I do like the new construction route. Small deposit, wait a year or two for the property to be built, flip it for a higher price that what you locked in at. Just read those builder contracts carefully. They're scamless bastards. All this assuming you can swing the payments.

VTEC11

A 4 plex in NJ for $400k (assuming 20% using the 89k)? Good luck finding one. I just called up for a 2 family house in my town this morning that was for sale by owner. Price: $575k, house is around 75 years old (built in 1930's)

SDCGTSX

I don't know NJ. I figured everyone still drives Trans Ams listening to either the Boss or Bon Jovi with bandanas. Who knew NJ was so expensive and people wanted to live there?

Doom878

Dude, Jersey is one of the most expensive places to live. It seems that Texas is still affordable but I don't plan on moving out of south FL.

GreenMonster

Having cash on hand to spend on the new house is important, as is having some savings incase you run into trouble (lose job, boiler dies, roof needs replacing, etc, etc).

Take 45K and put it into the house, take the other 45K and use it as a rainy day fund.

I'm never comfortable unless I've got at least 9 months of mortgage payments saved somewhere (doesn't need to be cash, but in some sort of investment that can be easily cashed out).

I hate having one loan, so I'm sure I would hate having a 2nd loan twice as much

VTEC11

That's for sure it would suck, but not as bad as having to pay PMI.