Building New Home - Income About to Drop. Sell Investments? (xpost)

[LivingTheory]

I'm looking to discuss our housing situation as we're scheduled to close later this month. Our city is growing rapidly and house values are up 12-15% yoy for the last few years. We'll already have equity above our down payment when we get to the closing table.

Details
Purchase Price: $373k
Cash Available: $75k (after closing costs and E-fund)
Roth IRA: $40k
Brokerage: $15k

Mortgage
Term: 15 years
Interest Rate: 3.375%
PITI: $2451 (HOA: $35/month)

We are about to have our first kid and found out after we started the building process. Walking away from the house would cost us $7500. Our combined income will drop from $120k to $95k once the kid shows up since my SO will need to go part time. My earning potential is on an upward trajectory but it'll likely take another two or three years until we can get back to $120k combined. I could always churn out OT to get there sooner but that's not sustainable.

Our other monthly expenses total about $1500. This could fluctuate a bit as we move into home ownership from renting. Let's bump it to $1800 to be safe.

This means our total monthly output would be about $4300, or $51k per year. There is still breathing room in the budget to save a decent amount each year (on top of ~$16k in principal repaid) but I am debating pulling out investments from our Roth IRA and Brokerage to bump the down payment from $75k to $130k. Taking the loan from $298k to $243k and our monthly output to $3950.

Going this route would give us a little more breathing room in the first few years and we could attack it more once our income rises. We have other investments worth over $150k. The Roth amount shown above is only withdrawing contributions.

I know some people like to slowly pay off mortgages to invest instead but I think we could use the extra cash flow when starting out. What do you guys think? Would you add the investments to the down payment or stick with 20% up front? Or would you go another route entirely?

Thanks!

[Scortius]

A few things here...

If you're talking about breathing room, you're going about it the wrong way.  If you want to have liquidity in the case of an emergency scenario, you're better off going for less money down than more.  It's much easier to liquidate money from your Roth than your house.

Further, I agree with the previous poster, you'll possibly be in better shape with the 30 year as compared to the 15. It's great that you can do a 15, but if you are willing to invest the difference, the 30 year comes out ahead assuming normal-ish returns over those 30 years.

If you really want 'cash-flow', then just put down the minimum 20% on a 30 year and keep the difference in cash.  You'll have way more cash to work with.  My guess is that you don't really want cash-flow but rather you like the idea of lower monthly payments (who wouldn't).  Just think about what you're paying up front to get those payments down, and what that money could buy you if you invested it instead.  There is a significant opportunity cost to any dollar put into your down payment beyond the 20%.

[golden1]

Yeah, just switch to a 30 year and pay down extra when you can.

[Mustache ride]

Maybe I'm not quite understanding your situation. If you are worried about not having enough cash flow, why would you increase your down payment and also have a 15yr mortgage instead of a 30yr? Doing it this way is the exact opposite of what you are trying to accomplish. Pay the absolute minimum down payment and stretch your mortgage out if you are worried about not having enough money. Keep your investments growing and only pull if you run into extreme issues.

[LuckyOwl]

If you are trying to keep options open, I would not put down a larger down payment than is needed. It's not worth tying up the substantial extra amount needed in the non-liquid house just to lower your monthly payments by a few hundred dollars.

As others have pointed out, if you want to improve cash flow, you should definitely consider a 30 year mortgage. It will give you much more flexibility. You can always choose to pay it off in a shorter timeframe if that makes sense for your situation.

Personally, I would do a 30 year mortgage with 20% down, don't touch your Roth or brokerage account, and invest additional house payoff money. Then down the line you can lump sum the house payoff if you want, or keep that money invested if it makes sense.

How carefully have you explored increased expenses related to your soon to be in the world child? There will be  a lot of extra expenses:
- Diapers & wipes
- Food
- Clothes
- Bottles, nipples, pacifiers
- Crib
- Playpen, bouncy chair, swing, etc
- Books, toys
- Childcare

Daycare is by far the biggest expense unless you have a family situation that you can consistently rely on to look after your little one.