Author Topic: downpayment or investing the money  (Read 3490 times)

TheBeeKeeper

  • 5 O'Clock Shadow
  • *
  • Posts: 80
downpayment or investing the money
« on: March 27, 2015, 11:33:25 AM »
we are about to build a house, and plan to keep our current home as rental property.

We have about 60K$ mortgage on our home, with 8 years remaining at 2.75% fixed.

The new house will cost 240K$, and we can take the entire amount as mortgage 3% for 15 years (we own the building lot, and the bank will let us use its value instead of cash downpayment). so if we wanted to we don't have to pay a single dollar for the new house, and put it all into the new mortgage.

We have about 60K$ available that we could either invest in a taxable account (would go into VTSAX and stay there for many years) or use to lower the new mortgage. Most of the interest was already paid on the 60K$ mortgage, so I would not pay that one. Also at this point we will not be selling the current house because it's in good shape and rent goes very high here, higher than mortgage payment.

I'm not happy about taking a big mortgage, but I would like to keep some reserves and invest long term. What would you sugest in this situation? How much for downpayment and how much if any for investing?


dsmexpat

  • Stubble
  • **
  • Posts: 223
  • Age: 31
  • Location: New Mexico
Re: downpayment or investing the money
« Reply #1 on: March 27, 2015, 11:39:13 AM »
I'm no expert but it seems to be that this is a situation which depends mostly upon how you feel about exposure to additional risk to yield greater gains. If what you're asking is "can I expect to make greater returns on the investment than the 3% I'm paying on the mortgage?" then the answer is yes. If you're asking if that can be guaranteed then the answer is no. The mortgage offers a guaranteed 3% return and a shorter road to the comfort and assurance of a sheet of paper that says the house belongs to you and only you. Weigh that up against the expected yield of the stocks, consider the value you place on both additional returns (once you've won stop playing?) and the amount you'd sacrifice for greater security. It's a subjective decision based on your personal finances, tolerance for risk and needs for increased net worth.

GGNoob

  • Pencil Stache
  • ****
  • Posts: 726
  • Age: 33
  • Location: Colorado
Re: downpayment or investing the money
« Reply #2 on: March 27, 2015, 11:41:21 AM »
Personally, I'd invest and take the full mortgage out.

Gin1984

  • Magnum Stache
  • ******
  • Posts: 4838
Re: downpayment or investing the money
« Reply #3 on: March 27, 2015, 11:45:01 AM »
Personally, I'd invest and take the full mortgage out.
Me too.  But I am in accumulation mode, no where near retirement.  Do you want to slow down soon?

KCM5

  • Pencil Stache
  • ****
  • Posts: 876
Re: downpayment or investing the money
« Reply #4 on: March 27, 2015, 11:50:53 AM »
we are about to build a house, and plan to keep our current home as rental property.

We have about 60K$ mortgage on our home, with 8 years remaining at 2.75% fixed.

The new house will cost 240K$, and we can take the entire amount as mortgage 3% for 15 years (we own the building lot, and the bank will let us use its value instead of cash downpayment). so if we wanted to we don't have to pay a single dollar for the new house, and put it all into the new mortgage.

We have about 60K$ available that we could either invest in a taxable account (would go into VTSAX and stay there for many years) or use to lower the new mortgage. Most of the interest was already paid on the 60K$ mortgage, so I would not pay that one. Also at this point we will not be selling the current house because it's in good shape and rent goes very high here, higher than mortgage payment.

I'm not happy about taking a big mortgage, but I would like to keep some reserves and invest long term. What would you sugest in this situation? How much for downpayment and how much if any for investing?

If it were me I would take out a mortgage for the full amount. But I'm okay with that risk. I second that it's really about to you about how you feel about having that large mortgage.

Also, I'd like to point out that you're misunderstanding how mortgage interest works. Most of the interest is not paid on the 60k mortgage if its a traditional american mortgage. The reason you pay more interest in the beginning of the mortgage is because you're paying on a larger amount of money. So 60k put into your current mortgage would be worth the same as 60k put into a new mortgage as long as the interest rates are the same (discounting PMI or something weird like that, of course).

Edited to add: I just noticed that your interest rate is .25% lower for the old mortgage than the new. This would make the 60k worth more being put into the new mortgage.

forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: downpayment or investing the money
« Reply #5 on: March 27, 2015, 11:53:10 AM »
Personally, I'd invest and take the full mortgage out.
Me too.  But I am in accumulation mode, no where near retirement.  Do you want to slow down soon?

Me 3. Assuming you don't have to pay PMI. Liquidity, especially at 2.75% fixed for 15 years, is really valuable. Even though the market seems overvalued right now, it still should return more than 2.75% over that time period.

But it's a personal preference, obviously.

Gin1984

  • Magnum Stache
  • ******
  • Posts: 4838
Re: downpayment or investing the money
« Reply #6 on: March 27, 2015, 11:53:54 AM »
But if her options are pre-paying the 2.75% mortgage, in which she will be able deduct the interest against the rent or the 3% loan which only gets deducted if it is more than the standard mortgage, the clear one to pay down is the 3%.  But that is only if she does not want to invest.

TheBeeKeeper

  • 5 O'Clock Shadow
  • *
  • Posts: 80
Re: downpayment or investing the money
« Reply #7 on: March 27, 2015, 11:58:03 AM »
yeah , if any money goes towards the mortgage it would be the new 3% one, and not for the 60K 2.75%.

Tough choice, at this point I'm thinking 50% of the money for investing and the other half for the downpayment..


forummm

  • Walrus Stache
  • *******
  • Posts: 7389
  • Senior Mustachian
Re: downpayment or investing the money
« Reply #8 on: March 27, 2015, 12:32:07 PM »
But if her options are pre-paying the 2.75% mortgage, in which she will be able deduct the interest against the rent or the 3% loan which only gets deducted if it is more than the standard mortgage, the clear one to pay down is the 3%.  But that is only if she does not want to invest.

For me, an extra 0.25% decrease in interest (of which about 1/3 would be essentially paid by the government through the tax deduction) isn't enough to change my personal decision to invest.

Doulos

  • Stubble
  • **
  • Posts: 116
  • Age: 42
Re: downpayment or investing the money
« Reply #9 on: March 27, 2015, 05:25:39 PM »
My personal advice is to pay down debts.
In my opinion Debt risk is too high to to justify investing off of debt.  Even with the spectacular deals available these days in the US.

The commonly accepted math based profitable answer is to take that low % debt and invest as long as their is a reasonable differential.
- ie.  You can assume the safe withdraw rate of 4%. and assume any debt x<4% = awesome.
Thus, you should take as much debt as you possibly can for as long a term as you can on anything under 4%.  5% is probably still great.

But there are risks.  It is really a question of how comfortable are you with each kind of risk.
For example.  Can you float all of your properties continuously on your income even if you cannot find tenants for some reason?