Author Topic: Debt vs More Down Payment  (Read 2306 times)

jdhaines

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Debt vs More Down Payment
« on: February 24, 2017, 12:05:32 PM »
Hi all, newish to the site.  I'll try to keep it short.

Background
: My wife and I are selling our house to relocate for a job.  We were about to buy another giant stupid house and found you guys in the nick of time.  We're all in on this new lifestyle and looking to make the best use of our situation (relocation paying closing costs both ways and moving our stuff)  .

Background Data
:
  • 31 & 32 years old
  • Earnings: $153k/yr gross combined
  • We'll have $70k cash after selling our other house.
  • No consumer debt (Credit Cards)
  • $48k debt in (2) car loans at around 3% interest, keeping both cars for the time being.
  • Buying a house around $120k at around 4% interest
  • ~$100k in retirement accounts

Question: Should we put as much money as possible down on the house to minimize our mortgage, and have more cash-flow for the car debts?  Or should we pay off the auto loans and only put down the minimum on the house to avoid PMI?  This seems more complicated than simply seeing the slight difference in interest rates.

We plan to live in this little house for 2 years while we sell off all the stuff from our 4k sq ft house that we don't need.  Pay off the cars and house in as few years as possible (2-3?) then look for a nice piece of land and eventually build a small house (dome, prefab, etc) and keep the current paid off small house as a rental.  We don't want to be in a neighborhood long term but it makes sense for the moment.

Thanks for any help.  Wealthfront says we're 30% to retirement now, but our savings rate last year was less than 8%...hope to stop being dumb and join you all in the future.

Heroes821

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Re: Debt vs More Down Payment
« Reply #1 on: February 24, 2017, 12:19:32 PM »
Welcome to the forum and to MMM!

I'm going to post probably the most reposted quote on this forum: 


+1. Sticky is http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

Generic investment order rules of thumb:
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b.
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   

Bogleheads has a similar list.

Basically if you are all in on MMM you might want to rent for a year in your new location see if you like it or can shop around for a more affordable house/area.

I would say that paying off debts by interest rate is the best option but there are dozens of threads on this forum that argue over paying a house off early or not.

jdhaines

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Re: Debt vs More Down Payment
« Reply #2 on: February 24, 2017, 12:48:35 PM »
I accidentally stumbled on that post in another thread and it's awesome.  Thanks for that.

Regarding area, it's really the only area that works for us at the moment.  It's minimizing drive time to our offices while also minimizing time to visit family.  With a 3 year old and grandparents who always want to see her it's the best spot.  I guess I wasn't sure if a mortgage plays by the same rules as far as interest rate.  With the extra money we'll be saving we'll definitely work through this list.

JustGettingStarted1980

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Re: Debt vs More Down Payment
« Reply #3 on: February 24, 2017, 12:58:29 PM »
Your mortgage interest is deductible, your car loan interest is not. In addition, you can LEVERAGE your home purchase, but leveraging stock investments is generally not recommended.  I'd put enough down to not get PMI in the home, + 10% if you want a lower monthly payment. I would then pay off both cars and simplify my life.

I would then save 6 months in an Emergency Fund, followed by maxing out both our 401K's, followed by two backdoor roths.

You seem debt averse, which is why I recommend the above.