Mortgage or Taxable

[Steeze]

Aright so I am familiar with the investment order and all, and am not prepared for a full on case study, but given the high mortgage rates currently, looking for a “what would you do?”

Income $140-250k, but assume $140k (depends if 1-2 people working)
No other debt, Max 401ks, IRAs, etc.
Age 35, married + 1 healthy 2 yo.
Invested assets ~ 650k, $200k is taxable
$300k equity to be used for new house
Current expenses run around $5000/mo average, about $3500 is overhead.

I’m looking at building a new house and will be about $400k short.

Option a. 400k 30yr mortgage, keep my taxable invested, higher payment
Option b. Cash out taxable, 15 yr mortgage, lower payment, lower rate

Mortgage rates are about 6.5% on a 30yr and 5.5% on a 15

Either way need a mortgage, I’ll still be able to save $3k - $7k+ a month depending on if we are both working. If I cash out the taxable I’ll be able to invest about $1000/mo more. Not a significant amount of capital gains in the taxable currently.

I’m guessing we are 7-10 years from FI regardless.

EDIT: the taxable is my only emergency fund besides a HELOC / credit cards and a few grand in a checking.

[travel2020]

Personally, I would keep the taxable invested and go with the bigger mortgage amount. Cashing out your taxable will require you to pay taxes on any gains and you would miss out on any potential market appreciation + home equity is not as liquid.

[ATtiny85]

I don’t like any debt, but love having a super fat taxable account even more. We have no mortgage, but given the data you laid out, I’d go for the 15 year one.

No matter what, I would not sell anything in taxable.

I am a big fan of rolling equity into new home, with the very large qualifier that we max everything out and put almost a full year of expenses into our taxable account each year. Provides us a lot of balance and flexibility as we look towards the future.

[406MtnFire]

If you think you're going to refi in the future if rates drop, then maybe do the higher mortgage now and hopefully rates drop within a few years and you can refi your rate and keep your taxable earning more % than your mortgage. Your guess is as good as mine if rates will drop, when, how much, etc.

[MustacheAndaHalf]

Option a. 400k 30yr mortgage, keep my taxable invested, higher payment
Option b. Cash out taxable, 15 yr mortgage, lower payment, lower rate

Mortgage rates are about 6.5% on a 30yr and 5.5% on a 15

Option c. Can you take the maximum 15y mortgage and the rest as a 30y mortgage?  This isn't something I've tried, and it is more complex.

Option d.  ARM mortgages cost more than fixed, but those rates are expected to fall.  Over the life of the loan, an ARM mortgage might be a better deal.  (This from someone who has never considered adjustable rate mortgages before, but with the highest inflation in 40 years, they suddenly make sense)

[Steeze]

Thanks for your thoughts -

Seems like the general feedback is to take the bigger mortgage and leave the taxable invested.

This gives me the largest margin of safety keeping the taxable as an emergency fund. My overhead would be much higher due to the higher mortgage, but I would be able to cover expenses for at least 24 months with the taxable. More than enough time to get a job or two.

Not sure about having two different loans, I would have to pay closing costs twice I would imagine. ARM is an interesting thought provided we think we are at the top of the interest rate cycle. Just checked the local savings bank, and the 5/1, 7/1, 10/1 ARM products have rates in the 6+% APR range. Actually worst than the 10, 15, 20 yr fixed rates. A 5/1 ARM has the same rate as a 30yr fixed. I guess that means they are expecting rates to go down in the short term. I will be applying for this loan this time next year, so maybe we will be in better shape by then.

I think the play is to sell the current place, use those funds as the down on a interest only construction loan, and then just roll with the 30yr mortgage after it is done. If rates drop 1-2% I would refi.

[VanillaGorilla]

There's no way to know what the right answer is. If the market does well you'll kick yourself cashing out equities. If the market stagnates for a decade you'll kick yourself with a big loan.

If you lose your job after cashing out your taxable you'll be in really rough shape.

Personally I tend to take a balanced approach - big mortgage until you have a ton of money invested, then start paying down the mortgage. What that looked like for my current house was I paid the minimum until I hit my (then) leanFI target of equities, then I started paying down the mortgage. It wasn't a bad call in retrospect, though I wish I had kept the loan.

By my standards you're real light on taxable assets. I see taxable equities as a big fat emergency fund, which can't be easily recouped if you stuff it into a house. I'd keep a big mortgage and really focus on building up that taxable account. My two cents.

PS I'm fine with ARMs and sort of hate 15 year loans. Worst of all worlds in my opinion - locks you into a higher payment that you can't scale back if you want; negligibly lower rates. I'd rather have a 30 year loan and pay extra principle if desired. 15 year loans are for people who aren't comfortable investing in the market.

[Must_ache]

15 year loans. Worst of all worlds in my opinion - locks you into a higher payment that you can't scale back if you want; negligibly lower rates. I'd rather have a 30 year loan and pay extra principle if desired. 15 year loans are for people who aren't comfortable investing in the market.

A 1% difference is not negligible; you're talking about paying almost $4,000 extra in interest during the first year on the loan.  Personally I favor the 15-year mortgage here because the couple has lots of assets and may want to pay their house off within the 7-10 year FI window.  A 30-yr mortgage is for someone that needs a house but also has kids, a car payment, etc. and can only afford so much payment and that is clearly not the case with this couple.  A mortgage is like a negative interest rate; why would we let it go any higher than it needs to?  Also if I were getting close to FI I would think that a 5.5% rate of return on some portion of my portfolio is a decent return.