Buying first home - pay cash or mortgage?

[use2betrix]

We are looking at buying our first home, and with current interest rates, debating taking out a mortgage or paying cash. We’ve rented our whole lives, and also lived in a 5th wheel for 5 years. We know this city won’t be our forever home, but will likely be somewhere in the next 4-7 years. I’ve spent much of my life ‘postponing for the future’ and there’s just a lot of reasons that we are past renting. We have a good rental and landlord, but it’s hard to really get “settled” into our current rental (of 3 years) knowing how temporary it is.

Background info:
DW - 30 years old
DD - 2 years old
Self - 35 years old
(Hope to have a future DD/DS in the next year or two)

Income -
Employment: about $250k/yr for myself. DW doesn’t work
Other income: around $500/mo from our high interest savings that we’d lose if we paid cash

Debt - none - paid off 2020 F250, 2023 Crosstrek, 2021 camping trailer

Assets:
$140k cash - 4.5% savings acct
$690k - after tax investments, primarily VTSAX
$426k - 401k/Roth/HSA

We are looking at a home that is $425k. If we put 20% down, our mortgage would be about $3300/mo. Current interest rates on a 30 year are around 6.9%. The house was built in 2015 and is a single owner household. The house is very close to where we rent, and like the neighborhood. The neighboring houses are mostly in the $550k-$650k range, so feel it’s a better investment. I’ve also been watching home prices in this neighborhood for 3 years, and this house genuinely is priced well with motivated sellers. It’s also nearly everything we want (would like a bigger garage and more room for the dedicated gym, but what’s there is plenty sufficient).

If we paid for the house in cash, we would pay about $1050/mo in property tax, interest, HOA, etc.

Looking for feedback on a mortgage vs cash. If we paid cash, we’d still have around $850k remaining, which is pretty good considering we’d have a paid off house. Losing the $500/mo in high interest savings income would suck, but we’d be saving a lot each month to compensate.

Also - if I sold $350k from my taxable investment fund, I know I only pay tax on the capital gains, can I choose from where I pull the money? I.e. from my initial investments, or from the gains? I have no idea how that works.

Based on my timeline and general uncertainty, it probably makes most sense to continue renting, but I also feel like I have made countless sacrifices in my life due to future uncertainty, and have really lost a lot in quality of life because of it. I have a pretty dang big stache to show for it, but am ready to gain some certainty in an area of our life that is causing some stress (lack of feeling settled). That aside, mostly looking for input from the financial aspect from this group, but any words of wisdom on the general rent vs. own portion is helpful.

[SmashYourSmartPhone]

We know this city won’t be our forever home, but will likely be somewhere in the next 4-7 years.

That's a short term window to buy, but I entirely understand your logic behind wanting a place you can do what you want with.

Debt - none - paid off 2020 F250, 2023 Crosstrek, 2021 camping trailer

Good for paid off, but... wow, that's an insanely recent set of vehicles.

Are you planning to sell the trailer when you buy a house?  I hear they're in high demand.

If we paid for the house in cash, we would pay about $1050/mo in property tax, interest, HOA, etc.

A month?  WTF!  That's almost my annual property tax bill, though I'm... not HOA compatible, and don't live in one.

Losing the $500/mo in high interest savings income would suck, but we’d be saving a lot each month to compensate.

I don't see what your current rent is.

That aside, mostly looking for input from the financial aspect from this group, but any words of wisdom on the general rent vs. own portion is helpful.

The wins of a mortgage in the past have partly faded with the interest rate, but it's also worth asking what you and your wife would prefer.  My wife and I do not like debt, and paid cash for a house, even if "suboptional" (that nobody wanted to loan us money also impacted the decision - as it turns out, "I'm between jobs as a result of moving but can pay cash for the house" means "nobody will give you a mortgage, but will try very hard to convince you to do a cash-out refinance").

I'd pay cash and not worry about the debt, but I'm sure some will come along to convince you that the more mortgage, the better, even at current rates.

[use2betrix]

@SmashYourSmartPhone - lots of great feedback, thanks! To answer a few of your questions:

Plan to keep the camping trailer. We’ve had them since 2013 and use them a ton. Sending this message right now from the tail end of a 2 week camping trip 1500 miles away visiting family and camping in the mountains on the way out and back. We sleep in it probably 40-50 nights a year. Certainly costly be worth it to us. Our location isn’t our “forever home”, or state.. it makes it easy to get away, especially with the dog. Our last trailer I bought for $17k in 2018 and sold for $35k this year (did a fair amount of work to it). Current trailer is one of the most well built and reliable one can buy.

Our property tax rates are 2.4%. The HOA is around $75/mo. We’ve lived in the same HOA for 3 years and in this case, are glad to be in one.

Our current rent is $2250 with a month to month lease. Definitely a bargain for our area. The house isn’t too bad but the garage could use some work and the outdoor isn’t well set to enjoy for the 8-9 hot months out of the year. The house is also pretty outdated in general. We don’t really want to spend any more money on improving a temporary living arrangement. We spend a fair amount on our landscaping and my wife with the flower beds to keep it presentable.

[mspym]

We paid cash for our place because we were overseas buyers and mortgages became so much more complicated if we didn’t. We do not know if this is our forever home or town but given the tight rental market and the interest rate we would be paying now if we had a mortgage*, I am glad of the certainty of owning a house free and clear.

Looking through your numbers, the assumed return from the market is roughly that of a mortgage right now. So that’s neutral. Is the cost of owning really $1k a month? I am assuming that you are counting the loss of $500 a month in interest, but that is only a temporary loss given that you can quickly rebuild your savings on your income. Feelings: as long as you avoid expensive upgrades to the house, it doesn’t have to set your finances on fire even if you sell again in 5-10 years.

*you can fix your rate here only for 1-2yrs and rates have doubled in the last year

[Freedomin5]

That house sounds like an amazing deal. And yes, having your own place definitely helps one feel more settled. With current interest rates, I don’t think it matters much whether you pay cash or get a mortgage. You could also split the difference and just put down a larger down payment so your mortgage is smaller. And consider refinancing when mortgage rates go down.

We have a similar income to yours and recently bought a house. 5.9% interest rate. We put down a 35% downpayment. Our mortgage payments are $2500/month. If we were to rent the same house, it would cost $2500-3000/month. So in that situation, I’d rather be paying off my own mortgage than paying off my landlord’s mortgage. Plus, I have a house.

[lhamo]

Are you intending to keep the current job/high income for a bit longer?  If so then I would go ahead and purchase with a mortgage now in order to avoid the tax hit/time out of market on your current investments.  With your salary you should easily be able to throw extra at the mortgage to pay it off quickly if that is a goal.  If you want to do it faster you can cash out portions of the investments to harvest capital gains in tax efficient ways in chunks over the next 2-3 years (could harvest 3 years of tax free LTCG in roughly 2 years by selling in smaller chunks now, in early 2024 and in early 2025)

[use2betrix]

Lots of helpful advice/encouragement, thanks!

@mspym - unfortunately that approx. $1k/mo for a ‘paid off house’ is only property tax, home owners insurance, & HOA. The property tax rate is 2.4%, so on a $425k house that comes to about $850/mo. Add in the HOA & home owners insurance, and it quickly surpasses $1k. The loss of $500/mo high interest savings is in addition. The state has high property taxes to offset lower taxes in other areas, and more reasonably priced housing than many other states. With my income, if I were to pay off the house, my savings would range from around $5k-$7k.mo. I’d imagine the first 6 months of homeowner ship would cost a bit more as we buy decent furniture and outfit the garage for proper storage for our tools/hobbies.

@Freedomin5 - good way to look at it! If we put the standard 20% down, even with the current interest rates, the rent on this home would easily be what our mortgage would be. Our home rental right now is much cheaper, but it’s significantly outdated and needs quite a bit of work. My income has been insanely high the last 6 years (much more than this year and going forward), so on the housing front, we’ve been incredibly frugal.

@lhamo - that is the exact type of info I am looking for. I have a general understanding of taxes for capital gains, but rather rudimentary. I did some searches regarding harvesting capital gains in efficient ways, and I don’t understand the strategies I could use to benefit? My understanding is that I would have to be in one of the 0% tax brackets (which appeared to be around $90k or less for married) to avoid the standard 15% of capital that I’m currently at.

Going back to my original question.. As a very generic number since I don’t have the actual off hand:
My after tax/VTSAX sits at $690k.
Let’s pretend that $500k is from my initial investments, and $190k are unrealized capital gains.
If I sell some of those investments, could I choose to sell from that “$500k bucket” and not pay taxes, since those are part of my initial investment? I don’t understand how that works.
Alternatively, when I FIRE or take sabbatical years, I could sell from that $190k, and with an income near zero that year, I would avoid capital gains?

[Radagast]

This is the calculator that has been recommended since the forum was young, but there are quite a few others out there too. From a strictly monetary perspective it makes no sense to buy the house, essentially ever depending on what assumptions you use. You have to think it is worth it from a life improvement perspective.
https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Here is a thread I made about cash versus mortgage. All indicators suggest you should pay 100% cash with no mortgage, particularly using that Money Market which we can say with certainty pays less than the mortgage especially after tax. The exception is if you plan to do some refinance trickery, which is unknown and honestly at 6.9% if you can pay cash then that seems smart. Paying cash also puts you in a better position to edge out other buyers or even get a lower price.
https://forum.mrmoneymustache.com/investor-alley/time-to-pay-off-recent-mortgages/?topicseen

Also - if I sold $350k from my taxable investment fund, I know I only pay tax on the capital gains, can I choose from where I pull the money? I.e. from my initial investments, or from the gains? I have no idea how that works.

Yes, there is a menu of options, which I don't have memorized but they are some combination of self explanatory, or at least you can google them. The two I remember are First In First Out (FIFO) which sells the shares you bought first, first, until you have sold your specified $ amount. The other is by tax lot. This option allows you to look at a big list of every VTSAX purchase you ever made, including reinvested dividends, and sell the ones with the lowest (or highest, or whatever) taxes until you get to the $ value you need. With a big fat money market to make up any difference it should be pretty easy to do it by tax lot. You can log in and do a practice sell right now, without actually selling anything at the end.

[Radagast]

Let’s pretend that $500k is from my initial investments, and $190k are unrealized capital gains.
If I sell some of those investments, could I choose to sell from that “$500k bucket” and not pay taxes, since those are part of my initial investment? I don’t understand how that works.
Alternatively, when I FIRE or take sabbatical years, I could sell from that $190k, and with an income near zero that year, I would avoid capital gains?

No, you need to pay taxes on what your shares are worth when you sell them. You can sell shares, but not the gains on the shares. You can sell the shares purchased at the highest price (lowest capital gains) to minimize taxes through.

Also my post above doesn't consider capital gains in the cash vs mortgage comparison. It would edge you a little towards mortgage, but IMO not enough to be a deciding factor. Particularly if the seller is motivated and not getting offers, you might be able to get a discount for cash which equals or outweighs the the taxes paid.

[lhamo]

Oops -- didn't realize that the capital gains rates are based on total income. So you will pay the 15% on gains regardless of when you cash out based on your high work income.

Sorry for the misleading info!

[Radagast]

Modified my posts for spelling and clarity. Also, please get more quotes for mortgage rates and insurance if you weren't just guessing those. You should be able to get closer to a 6.5% rate, and your insurance seems to be much higher than either of my two houses.

[iluvzbeach]

First off, I will say that I’m a firm believer in paying off your mortgage and it is what we typically do. However, this is not a situation where I’d pay all cash. I’d either do a combo of large down payment & financing or the standard 80/20. You will need to determine the tax cost on the LTCG and I suspect it will cost you as much, or more, than the mortgage interest. Plus, do you really want to miss time in the market? You’ve shown a strong aversion to debt, which is great, so why not get a mortgage and pay it off at a more rapid speed than the terms call for while preserving as much of your current savings/investments as you can? I also think it will be easier to re-fi a mortgage to a lower rate, when rates come down, than to do a cash out mortgage. Lenders seem to like lending at the time of purchase, more so than cash out at a later time.

[WayDownSouth]

Pay all cash, owe nothing. If you stay there 7 years (max length of time you said you'd be living there) you loose your $500 high interest return which means you miss out on $42k... How much interest will you pay on that $425k home over just 5 years???

Cash is king. You're making $250k a year. You can easily build up a nice amount of cash in the next 7 years. You also have other assets. This is a no-brainer IMO and most people are over-thinking it. If you can buy cash, buy cash. THis is not the time to play games with mortgages especially at these ridiculous rates.

BTW, yes, I understand COMPLETELY that a mortgage allows you "wiggle room" and allows you to keep your cash and use someone else's while paying interest. But it's a LOT of interest, and you make good $. The house will likely double in price over the next 7 years. Cash offer also creates the potential for a better price if you can eliminate the real estate agent and deal with owner directly.

Either way, good luck and I'd pull the trigger as fast as possible. Home prices are not going to drop soon as many people are expecting.

[neo von retorch]

Modified my posts for spelling and clarity. Also, please get more quotes for mortgage rates and insurance if you weren't just guessing those. You should be able to get closer to a 6.5% rate, and your insurance seems to be much higher than either of my two houses.

For what it's worth, I'm currently getting 5.49% on 15 year fixed, and 6.125% on 30 year fixed with 0 points.

(U.S. Excellent credit. 5-20% down payment. Same price range. e.g. $400-550k)

[Radagast]

Modified my posts for spelling and clarity. Also, please get more quotes for mortgage rates and insurance if you weren't just guessing those. You should be able to get closer to a 6.5% rate, and your insurance seems to be much higher than either of my two houses.

For what it's worth, I'm currently getting 5.49% on 15 year fixed, and 6.125% on 30 year fixed with 0 points.

(U.S. Excellent credit. 5-20% down payment. Same price range. e.g. $400-550k)

Where do you get such a low rate? I was referencing Mortgage News Daily which shows 6.63%, and in the past seems to have matched the best rates I could find. You are a full half point lower than MND.

[neo von retorch]

Modified my posts for spelling and clarity. Also, please get more quotes for mortgage rates and insurance if you weren't just guessing those. You should be able to get closer to a 6.5% rate, and your insurance seems to be much higher than either of my two houses.

For what it's worth, I'm currently getting 5.49% on 15 year fixed, and 6.125% on 30 year fixed with 0 points.

(U.S. Excellent credit. 5-20% down payment. Same price range. e.g. $400-550k)

Where do you get such a low rate? I was referencing Mortgage News Daily which shows 6.63%, and in the past seems to have matched the best rates I could find. You are a full half point lower than MND.

I went to bankrate.com, plugged in my criteria, got set up with 2-3 banks in a low range, and moved forward. One was way more responsive and so I've stuck with them. This started back in early October - at the time I was seeing 6.875% for a 15 year. But they've dropped rates since then, of course, so I've seen those lower rates on cost sheets when we've gone to make offers.

If I pop it open right now, it's not the same banks I saw earlier (they seem to come and go whenever I visit), but there's Aurora Financial showing 6.125% for a 30 year, 5.375% for a 15 year (with 0 points.)

https://www.bankrate.com/mortgages/mortgage-rates/?disablePre=1&mortgageType=Purchase&partnerId=br3&pid=br3&pointsChanged=false&purchaseDownPayment=128000&purchaseLoanTerms=30yr%2C5-1arm%2C5-6arm&purchasePoints=All&purchasePrice=640000&purchasePropertyType=SingleFamily&purchasePropertyUse=PrimaryResidence&searchChanged=false&ttcid&userCreditScore=780&userDebtToIncomeRatio=0&userFha=false&userVeteranStatus=NoMilitaryService

[Radagast]

Modified my posts for spelling and clarity. Also, please get more quotes for mortgage rates and insurance if you weren't just guessing those. You should be able to get closer to a 6.5% rate, and your insurance seems to be much higher than either of my two houses.

For what it's worth, I'm currently getting 5.49% on 15 year fixed, and 6.125% on 30 year fixed with 0 points.

(U.S. Excellent credit. 5-20% down payment. Same price range. e.g. $400-550k)

Where do you get such a low rate? I was referencing Mortgage News Daily which shows 6.63%, and in the past seems to have matched the best rates I could find. You are a full half point lower than MND.

I went to bankrate.com, plugged in my criteria, got set up with 2-3 banks in a low range, and moved forward. One was way more responsive and so I've stuck with them. This started back in early October - at the time I was seeing 6.875% for a 15 year. But they've dropped rates since then, of course, so I've seen those lower rates on cost sheets when we've gone to make offers.

If I pop it open right now, it's not the same banks I saw earlier (they seem to come and go whenever I visit), but there's Aurora Financial showing 6.125% for a 30 year, 5.375% for a 15 year (with 0 points.)

https://www.bankrate.com/mortgages/mortgage-rates/?disablePre=1&mortgageType=Purchase&partnerId=br3&pid=br3&pointsChanged=false&purchaseDownPayment=128000&purchaseLoanTerms=30yr%2C5-1arm%2C5-6arm&purchasePoints=All&purchasePrice=640000&purchasePropertyType=SingleFamily&purchasePropertyUse=PrimaryResidence&searchChanged=false&ttcid&userCreditScore=780&userDebtToIncomeRatio=0&userFha=false&userVeteranStatus=NoMilitaryService

Huh it must vary by ZIP code. The best I see is 6.375 with 0 points. Then I toyed around with purchase price and that changed the rates too, I got down to 6.125 for a $900,000 purchase price in another city I used to live in.

[clifp]

+1 on shopping around more, if you have time.

I'd also seriously consider getting an adjustable mortgage, since this isn't your forever home, and the long-term interest rate isn't that  big a deal. There is also a decent chance
that interest rates will drop, and rather than having to go through the hassles/expense of refi in 5 years, you'll just see lower mortgage payments.  I did this circa 1987 when interest rates were on their way down. Every year, my mortgage payments decreased. There was a cap of +/- 5% on the interest rate change, and when it hit the low cap, I sold the stock and paid off the mortgage.

Sometimes you can get a better rate if you put down 25-30%.  It is a pretty close call to sell stock and pay taxes vs get a mortgage. I'd lean toward the mortgage, but only if I could get a good APR. So consider out of the box things like 10 year mortgage, adjustable, high down etc.

[iluvzbeach]

I love @clifp's recommendations.  Spot on.

[use2betrix]

Thanks for all the great advice in this thread! Haven’t had reception to reply the last few days as we’ve been on a 2 week camping trip (putting the trailer to good use at least!).

We went and viewed the house yesterday and are planning to put in an offer today/tomorrow. This is, apparently, one offer that was also placed on the 30th that has not yet been accepted. We were very pleased with everything about the house. Two of the rooms we were concerned about size were pleasantly larger than expected when we actually measured them. The overall condition of the house was very good. The layout is exactly what we’re looking for, as a single level which is cheaper to cool in the hot southern months (although it has tall ceilings, which I can’t complain about). It’s on the end of a dead end street with neighbors that also clearly take care of their properties.

Down to the nitty gritty:
1. At this point I am intending to put 50% down and financing 50%. Not 100% set in stone but that gives us a monthly payment close to our monthly rent. It gives us a fair amount of equity and entrance into the real estate market. It limits the exposure to the higher interest rates by only financing 50%. I plan to put down approx. $100k from my vanguard high interest savings, and the remainder ($105k-$110k) from selling some VTSAX funds.

2. I’ve done a lot of digging, and here’s my understanding of how taxes will work when selling my VTSAX accounts. I found this description to be incredibly helpful, which is the same method that vanguard uses when you sell, unless you select otherwise (using average cost per share): https://www.janushenderson.com/en-us/investor/planning/calculate-average-cost/#:~:text=The%20average%20cost%20basis%20method%20considers%20the%20total%20cost%20of,purchase%20price%20of%20your%20shares.

VTSAX shares are currently $115.49. My average cost per share I’ve purchased is $76.81.
$105,000/$115.49=909.17 (total number of shares I need to sell)
909.17x$76.81=$69,833 (amount I paid for $105,000 of current value shares)
$105,000-$69,833=$35,167 (my capital gains)
$35,167x15%=$5,275 (amount of capital gains tax I will owe on the gains)

Can someone please double check this math/logic? This is assuming that these are all long term capital gains, which nearly all of it will be except for re-invested dividends in 2023 as I didn’t contribute to this account in 2023.

Seeing this number is actually fantastic. I was expecting more, but admittedly had never fully understood the process of how this is calculated. This does tempt me to potentially put an even larger down payment or pay cash, but we’ll see.

[jnw]

You want to buy a home to live in it only 4 to 7 years?  Repairs, realtor fees, closing costs, etc. eat a up a lot of the value of a home.   4 years passes in no time?  Wouldn't renting make more sense? Also personally I think home prices are way overvalued right now so I don't know how much you might lose there as well if you have to sell in 4 years.

[use2betrix]

You want to buy a home to live in it only 4 to 7 years?  Repairs, realtor fees, closing costs, etc. eat a up a lot of the value of a home.   4 years passes in no time?  Wouldn't renting make more sense? Also personally I think home prices are way overvalued right now so I don't know how much you might lose there as well if you have to sell in 4 years.

Yes, it’s crazy how time fly’s. I’ve been living a “temporary” lifestyle since I was 18. In the last decade alone I’ve lived in 7 states, 10+ cities and moved 15-20x. We even lived in a 40’ 5th wheel trailer full time for 5 years.

I’ve spent all this time sacrificing the quality of my living space worried about unknowns of the future. Yes, I could keep renting and save money. I could even quit renting, sell a ton of belongings, and move into our travel trailer full time.

I am at a point in my life where I am willing to sacrifice some $ for a greatly increased quality of life. I have saved $1.3MM on a single income with zero debt at 35 years old, and I don’t even have a college degree.. Even putting 50% down on this house, I’ll still have over $1MM in savings/investments, plus 50% equity in a home..

The 4-7 years is because we likely do not intend to make this part of the country our “forever” location, but I have a very good & stable job that I would be lucky to earn 50% of what I make now, anywhere that I’d “want” to live. We are hoping to have a 2nd child and enjoy my remote 3 days/wk, which I would have a very hard time getting anywhere else in my industry.

[Radagast]

OK I looked it up. The four methods Vanguard offers to sell shares are:
Minimum tax (MinTax)
Automatically chooses shares with the goal of minimizing tax impact of each transaction.

Specific identification (SpecID)
You select the shares (or lots) to sell.

Highest in, first out (HIFO)
Shares with the highest price are sold first regardless of how long you've held the security.

First in, first out (FIFO)
Shares with the oldest acquisition date are sold first.

Choose minimum tax. It's that easy.

[use2betrix]

OK I looked it up. The four methods Vanguard offers to sell shares are:
Minimum tax (MinTax)
Automatically chooses shares with the goal of minimizing tax impact of each transaction.

Specific identification (SpecID)
You select the shares (or lots) to sell.

Highest in, first out (HIFO)
Shares with the highest price are sold first regardless of how long you've held the security.

First in, first out (FIFO)
Shares with the oldest acquisition date are sold first.

Choose minimum tax. It's that easy.

What about average cost?

[Radagast]

OK I looked it up. The four methods Vanguard offers to sell shares are:
Minimum tax (MinTax)
Automatically chooses shares with the goal of minimizing tax impact of each transaction.

Specific identification (SpecID)
You select the shares (or lots) to sell.

Highest in, first out (HIFO)
Shares with the highest price are sold first regardless of how long you've held the security.

First in, first out (FIFO)
Shares with the oldest acquisition date are sold first.

Choose minimum tax. It's that easy.

What about average cost?

Suppose you purchased equal numbers of shares at $10, $15, and $20 and they are now worth $25. You need to sell 1/3 of them to buy a house. Their average cost is $15. Selling at $25, you pay taxes on $25-$15 = $10 worth of taxable gains. But suppose you only sell the shares purchased at $20? You pay taxes on 25-20 = $5 worth of taxable gains. You cut your taxes in half! So I am suggesting to cut your taxes in half by using the minimum tax option.

[WayDownSouth]

You want to buy a home to live in it only 4 to 7 years?  Repairs, realtor fees, closing costs, etc. eat a up a lot of the value of a home.   4 years passes in no time?  Wouldn't renting make more sense? Also personally I think home prices are way overvalued right now so I don't know how much you might lose there as well if you have to sell in 4 years.

Yes, it’s crazy how time fly’s. I’ve been living a “temporary” lifestyle since I was 18. In the last decade alone I’ve lived in 7 states, 10+ cities and moved 15-20x. We even lived in a 40’ 5th wheel trailer full time for 5 years.

I’ve spent all this time sacrificing the quality of my living space worried about unknowns of the future. Yes, I could keep renting and save money. I could even quit renting, sell a ton of belongings, and move into our travel trailer full time.

I am at a point in my life where I am willing to sacrifice some $ for a greatly increased quality of life. I have saved $1.3MM on a single income with zero debt at 35 years old, and I don’t even have a college degree.. Even putting 50% down on this house, I’ll still have over $1MM in savings/investments, plus 50% equity in a home..

The 4-7 years is because we likely do not intend to make this part of the country our “forever” location, but I have a very good & stable job that I would be lucky to earn 50% of what I make now, anywhere that I’d “want” to live. We are hoping to have a 2nd child and enjoy my remote 3 days/wk, which I would have a very hard time getting anywhere else in my industry.

I can't believe I'm the only one who said to buy cash. Do the math, consider the consequences and the potential. Even with a variable rate mortgage, you're gambling. I don't understand why so many are scared to separate with cash. You're trading it for something genuinely tangible.

Who says you'll be able to buy something else or make your move in only 4 to 7 years? That's considering ideal circumstances. Finance and the economy is whacked out of it's mind. Buy cash, case closed, home is yours (as long as you keep paying your taxes), deed is in your hands.  It's the cleanest, simplest, most sensible transaction. What actual reason would their be with the assets/investments/situation you mentioned for NOT buying in cash?

Also rental prices will continue exploding upwards, so if you don't sell you've got a great profit source if needed.

[lhamo]

What exactly do you think might go wrong with the OP's plan? 

I have purchased two houses for cash in the last 10 years.  Worked out well for me because not having to generate cash to pay the mortgage meant our expenses were very low, which reduced expenses in other key areas (health insurance, taxes, financial aid for college).  Owning a house free and clear once you are FIREd is still the choice I personally lean toward.  But in the OP's situation, I would advise taking out a reasonable mortage to avoid the tax hit/loss of compounding on the current investments.  He has plenty of income to pay off the mortgage within 2-3 years if that is something that is important to them.  In the meantime, they remain diversified in the market and if they needed to draw down those assets at some point in the future (say unexpected loss of income) that is still an option for them.

[Radagast]

I voted cash, but my suggestion is rate dependent. At or above the the 10-year treasury rate +3%, definitely pay cash even if you need to sell shares. (This is ~6.9% plus right now.) At or below the Vanguard High Yield Tax Exempt fund (VWALX) rate? Never pay it off or even make extra payments. (This is ~4.15% right now.) In between? Use your own judgement.

Selling $300,000 in VTSAX, using minimize taxes method, I guess would result in ~$100,000 gain which is $15,000 in taxes. Putting 50% down on a $425,000 house at an assumed low mortgage rate of 6% still gives an average monthly interest payment of $1,000 over the first seven years. I'd pay $15,000 in taxes to save $84,000 in interest over seven years or $48,000 over four years. The odds of the stock market exceeding 6% over the next 4-7 years are maybe 50/50. Also I think there is a good chance an all-cash buyer with a motivated seller could get a $15,000 discount on the house, canceling the extra paid in taxes. Plus you save a few thousand on origination fees, appraisal, etc.

You could even make a dual offer: tell the buyer you'll pay cash if they prefer, but only if they reduce their price by $15,000 :D. Otherwise you'll use a loan.

[swashbucklinstache]

I'll second specID via the minimum tax option but it depends on your exact numbers. It can be annoying to use average cost now and want to use specID later. SpecID is great for fine tuning in RE. In this case where your income has grown a lot and we just had a flat nominal several years I feel your most recent purchases might get you most of the way there with no taxes due at all. As a married high earner aiming for multiple kids and early retirement I'd be shocked if using average cost was a good choice for you.

Cash vs mortgage barely matters with your numbers and that is strictly a compliment. In your shoes I'd talk to the seller about making it neutral for you and if they won't maybe get an ARM? I wouldn't lose sleep over this.

High property taxes is the main source of LCOL myths especially in densely populated warm climates with low sticker price. The cost of a house is the monthly payment. Things get strange quickly as interest rates change and impact different areas really differently.

[WayDownSouth]

When you pay with cash, it's yours to do as you please - again, assuming you pay your property taxes on time. Those other investments aren't yours until they're realized unfortunately - until then they're digits on a screen. I'd not be willing to put 50% or even 10% down on a $425k house if I had the ability to buy it in all cash. The economy and markets are not on solid ground, regardless of where their numbers are at, regardless of ATHs, etc... That's the way I see it. Why pay more and risk more when you can secure the home 100%?

OP seemed to make smart-ish investments and the next smart move would be leverage that to buy the house cash. Jobs can slip away, market investments can slump down, money can change hands or disappear rapidly but the chance that you'll have a hard time acquiring the income to keep that home running is extremely minute. It's the most logical of all options if you think about it without overthinking it.

[use2betrix]

Lots of great arguments that could push the ‘right’ choice in either direction. The truth of the matter is that NO ONE has any idea what the markets will do in the next 5-7 years. Selling $300k of VTSAX to pay cash is a GREAT choice if markets return less than 6.375% (rate I was pre-approved for today with zero buy down). On the flip side, if they offer anything over that, it makes it the wrong choice. They could crash by 20% or soar by 40%.

While it’s very tempting to pay cash, I always have the ability to pay the loan off early (I confirmed no early payoff fees). From a purely mental aspect, it’s nice putting 50% down and still having around $1MM in savings/investments.

The great news is that I put in the offer today and it was accepted tonight! Looks like we will be home owners very soon, pending an acceptable inspection that has to be performed and accepted/findings negotiated in the next 7 days. Our closing day is one month from today.

I still have a little time to determine if I want to do something other than 50% down (I’ll actually finance $225k, put $200k down, and sell a bit extra to cover added costs and things for the new home).

Again, lots of good arguments on either side of the fence, at the end of the day no one can predict the market and with savings accts giving such high returns, and mortgage rates being high, it’s a time that certainly can lean more towards the “pay off your mortgage club” than years prior.

[Posthumane]

I think your approach is prudent. While nobody can predict with certainty which way markets will go (both stock and real estate), the best defence against big events is diversification, and if you sell off most of your investments to buy a single piece of real estate then you are reducing your diversification. WDS has an inherent distrust in long term stock investments, so his advice includes that bias, which you seem not to hold. Statistically you are more likely to come out ahead by holding more VTSAX even with a 6% mortgage, although I personally tend towards having less debt even at the cost of slightly lower returns.

[neo von retorch]

Congrats!!

I'll be in a similar boat, once we finally get an offer accepted. (We are 0/5.)

But plan to put 10-20% down (unsure yet) but then sell our current house, pay the new mortgage down some - but how much I'm undecided. Enough to get rid of PMI of course, and then recast it to reduce the payment amount. But I'm not sure if I'll pay it aggressively. Seeing sub-6% 30 year mortgages already so I may decide not to pay it off. At any rate, I've been selling some mutual funds to build up the down payment...

[WayDownSouth]

I think your approach is prudent. While nobody can predict with certainty which way markets will go (both stock and real estate), the best defence against big events is diversification, and if you sell off most of your investments to buy a single piece of real estate then you are reducing your diversification. WDS has an inherent distrust in long term stock investments, so his advice includes that bias, which you seem not to hold. Statistically you are more likely to come out ahead by holding more VTSAX even with a 6% mortgage, although I personally tend towards having less debt even at the cost of slightly lower returns.

You know me so well already! Hahahahha... It's more of a "just get it done now and know it's done" than distrust. But I'm okay with the label. You know I day trade for a reason, I don't have the patience to hold and hold and hold because..... well, probably uncertainty more than distrust but NOBODY can trust a long-term investment with complete certainty. I can trust my decision to cash out after my % gain has been hit. With that said, there's a lot of solid longer plays I've made but they eat at me daily. There's also a lot of times I could have hit jackpot if I stayed in a trade an extra 3 minutes but the opportunity arises again and again so it doesn't bother me. I'm happy with my choices for the most part.

All of us have our own approach and at the end of the day should do what we feel is best, especially when we have insight from both sides and enough time to think it through. OP will be happy I'm sure with his decision and it's his $ so that's what matters most.

To him, congrats on the rapid approval and I hope it's smooth sailing for you! Another step forward is the key. Cheers!

[Villanelle]

We will likely be buying a residence this summer after renting our homes for about 15 years.  We do still own a property--former residence--that will plan to sell to help make this happen, though we'd qualify without doing so.

How much we will spend depends largely on where we end up. But we plan to put down 40-50%, if we end up in a place where that's comfortably possible.  We won't have to sell any equities to do so.  We will likely put the rest of the proceeds from the house sale into equities.  I like the diversification.  I like hedging my bets.  I like, if "jobs slip away" like WDS says, that we will still have lots of money in the bank to buy groceries, pay the property taxes, and figure things out.  So the middle road feels like it makes most sense, with interest rates being okay, but not the low-lows of the last decade. 

[wcschenk]

First...you have more than 2 options  (30 year loan OR pay cash).

Second....a mortgage is 6.9% AFTER tax.   To PAY the mortgage....your investments need to earn 20% more (because that's the rate you pay in cap gains tax)....so investments need to make 8.3%. We will not factor in inflation because investments will be worth less because of inflation BUT home will be worth more. Well assume a wash for simplicity.

So it is close....investments could make 10%+ as that is the average return (not factoring in inflation). Or they could make less than average over the next 4-7 years as the market has been on a real tear the last few years (or any other number of reasons markets stall our for periods of time).

Third - what I propose considering.....meet in the middle.

WHAT IF.....you paid PART cash and did a 10 or 15 year loan on the rest? Maybe use $120k of your 140k cash savings and then do a 15 year loan AT A LOWER rate than 6.9...likely around 6-6.25 on the rest.

THEN...IF rates drop in the next 1-3 years AND you see yourself staying AT LEAST enough years to break even on the refi upfront costs....refi into a 10 year loan then.