What to do with home equity after sale? Roll to next home, pay debts, invest?

[Nick_Miller]

Rough numbers.

I expect us to clear between $65,000 and $70,000 from upcoming home sale. New mortgage rate is expected to be around 3.5% or 3.75%

Assuming we buy a $180K home, we'll need to roll at least $36,000 of that equity into the new home to avoid PMI. That leaves roughly $29,000 to $34,000 to account for.

Options:
1) We could just roll the rest of that into the new house to lower the mortgage amount.
2) We could use that to chop my student loans (currently around $64,000) roughly in half. The student loans are at 4.5%
3) We could use $11,000 of it to fully fund our 2017 Roth IRAs and then put the rest into option 1) or option 2)
4) We could use $11,000 of it to fully fund our 2017 Roth IRAs and then invest the rest in a taxable account (my wife's 401k is already on auto pilot to be maxed and I don't have one available)

I don't feel like there's a huge difference in these options but I thought I might be missing something. Any feedback? I am leaning towards maybe Option 2 (if my wife agrees) because my student loan % rate is higher and I'm a little nervous about the market with Trump coming in. That being said, even if we don't use this money to fund our Roth IRAs, we do anticipate maxing those sometime in 2017, but not necessarily doing that in January/February...maybe sprinkling some deposits in throughout the year as a hedge.

 
 

[ketchup]

I'd pay off the student loans, but only after maximizing all tax-advantaged space for 2017.  And taxable after tax-advantaged and student loans are gone.  I'd leave the new mortgage as-is at that rate.

[NoNonsenseLandlord]

Roth and any IRAs first.  Then student loans.

I assume you do not have any credit card debt...

[Nick_Miller]

Roth and any IRAs first.  Then student loans.

I assume you do not have any credit card debt...

Correct. No credit card debt. We do have a car payment, but it will be paid off in 2 years and it's at 1% so I'm not sweating that. The car note, student loans, and mortgage are our three debts.

[sokoloff]

Assuming you have a sufficient emergency fund (or equivalent sure access to cash), I'd do 3 then 2.

If you don't, I'd be more inclined towards 4.

I don't see any reason to do #1 under any circumstance, given that you're asking the question. (If you were the extraordinarily nervous type, you would have already just done #1 and never asked about it... :) )

[Nick_Miller]

Assuming you have a sufficient emergency fund (or equivalent sure access to cash), I'd do 3 then 2.

If you don't, I'd be more inclined towards 4.

I don't see any reason to do #1 under any circumstance, given that you're asking the question. (If you were the extraordinarily nervous type, you would have already just done #1 and never asked about it... :) )

I'm conservative (compared to most others on these boards) but not uber conservative. But I think my wife will want to roll it all into the new house. We'll have to see. My main goal in the process is to cap our new purchase at under $200K. Too many people buy too much house.

[sokoloff]

I think my wife will want to roll it all into the new house. We'll have to see.

Better it end up there than in a new car, new furniture, or a vacation, so that's not a terrible outcome if that's what really makes her happy.

It's almost certainly not financially optimal, but you don't need to live your life on the knife edge of perfectly optimal all the time either... :)

[robartsd]

I'm conservative (compared to most others on these boards) but not uber conservative. But I think my wife will want to roll it all into the new house. We'll have to see. My main goal in the process is to cap our new purchase at under $200K. Too many people buy too much house.

I'm in the max IRA then attack student loan camp. It wouldn't be hard to convince my wife that reducing the student loan is just as conservative and more optimal than reducing the mortgage. I could see it being more difficult to discourage the idea that the budget for the new house could be expanded by ~$20k.

[sokoloff]

I could see it being more difficult to discourage the idea that the budget for the new house could be expanded by ~$20k.

Or $100K (because of 20% down)!

[Nick_Miller]

I could see it being more difficult to discourage the idea that the budget for the new house could be expanded by ~$20k.

Or $100K (because of 20% down)!

It is surprising that there are some pretty nice homes in our $170K-$180K range! Some have 4 bedrooms. Most have 2-car garages. Many have basements. Now you do have to trade off space for newness (lots of 1990s homes with 1600 sq feet versus 1970s homes with 2200+ square feet) but you always have to trade off something. Plus I actually WANT less grass to cut, so a slightly smaller lot (especially if it's more functional) is a plus for me. We currently have a corner lot that includes a LOT of grass I never step foot on but to cut.

Plus it helps that my wife is not a high maintenance woman. I would say she is "regular maintenance." :) 

[Metric Mouse]

I always refer to MDM when this question comes up.  Invest order

[CDP45]

Hi folks, I'm thinking about plunging myself into a similar situation, except my equity above the 20% down is equal to like 4 years of living expenses.

I'm very sympathetic to the argument of "would you take a home equity loan out for the same amount to invest?" But maybe I would given the advantages

1) Locking a 30yr loan being at nearly the lowest rates in history in a rising rate environment, that's non-callable.
2) I hate to say house pricing won't go down, but what I'm looking to buy is just 25% above the median, and the incomes of the city and employment outlook seem to support the prices, so the more leveraged I am, the more upside.
3) I'm totally satisfied if I could live for 10 years and sell at the same price, this is my residence not a speculative investment.
4) The higher mortgage payments yield a greater deduction to put me in a lower tax bracket.
5) I am maxed for additional tax advantaged investing, basically could only do another $10K in wife's 401k, so this money would either sit in no yield or taxable investing... (though I'm ignorant of what a back-door roth is..)

Yea or nay?

[robartsd]

5) I am maxed for additional tax advantaged investing, basically could only do another $10K in wife's 401k, so this money would either sit in no yield or taxable investing... (though I'm ignorant of what a back-door roth is..)

A back-door Roth is making non-deductible contributions to a tax-deferred account, then immediately doing a Roth conversion on that account. Usually this is used by people who have high enough income that their traditional IRA contributions are non-deductible and they are disqualified from directly contributing to a Roth IRA. Because the traditional IRA contributions are non-deductible, they are not taxed again on Roth conversion. The conversion is done immediately to avoid generating investment returns in the traditional account which would be subject to taxation upon conversion to Roth.