Sell VTSAX to avoid 6.5% Mortgage?

[cbr shadow]

I have a taxable brokerage account with Vanguard with a balance high enough to cover the purchase of a house that I will be buying in a few months. It's currently invested 100% in VTSAX. I'm wondering if it makes sense for me to avoid mortgage and buy the house in cash.
I spoke to several lenders and even with my outstanding credit score the best loan I can get is 6.6% right now.

When mortgages were 2.5% it was pretty clear that you should take a mortgage and keep your money invested - how about now that mortgages are 6.6%?

Just a few other facts that may be relevant:
1) My wife and I are both 37y.o.
2) The house cost is roughly 30% of our net worth
3) Our household income is about $400k and is pretty stable

[rmorris50]

On the surface the answer would seem to be yes, pay all cash. But you could get the mortgage with the intent to refinance should rates drop and meanwhile maintain liquidity, depending how much you value/need the money for other purposes. Also if you paid all cash then want to do a cash out mortgage later my understanding is those rates aren’t as favorable as a refinance. Also HELOCs are very expensive right now if you pay all cash and want to open a HELOC.

I’d probably put down the 20% and take the mortgage with the hope of refinancing. But I admit the answer isn’t clear cut here.

What about a 15 year mortgage? Is that a better rate, and it seems you can financially handle it?


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[FIRE 20/20]

I haven't looked at rates at all, but it seems like you might be a great candidate for an Adjustable Rate Mortgage (ARM).  ARMs are usually quite a bit lower than fixed, which can be a risk if rates are higher when the ARM runs out.  But since you should be able to pay it off at any time, there's no risk for you.  I just don't know what ARM rates are like now. 

[nereo]

Oof!  Have you examined what kind of tax burden you will trigger by selling off shares in your taxable account in order to pay cash?  I would definitely advise against, especially given your $400k income

As rmorris50 said - avoiding a mortgage now complicates obtaining one at lower rates down the road

A mortgage is your friend here!

[YttriumNitrate]

When mortgages were 2.5% it was pretty clear that you should take a mortgage and keep your money invested - how about now that mortgages are 6.6%?

You can get a mortgage for roughly the current inflation rate [1]. That's still a pretty good deal.

[2sk22]

I haven't looked at rates at all, but it seems like you might be a great candidate for an Adjustable Rate Mortgage (ARM).  ARMs are usually quite a bit lower than fixed, which can be a risk if rates are higher when the ARM runs out.  But since you should be able to pay it off at any time, there's no risk for you.  I just don't know what ARM rates are like now.

I agree with this suggestion. We bought our current house in 1996 when mortgage rates were even higher than they are today although home prices were very low back then. We took out a five year ARM and as things happened, the mortgage adjusted to a lower rate after the initial period - although we had no way of knowing that when we took out the mortgage. We stayed with this lower rate until 2010 when we finally refinanced into a fixed mortgage.

[Dicey]

Piling on to Advise Against.

In your shoes, I'd shop for the best adjustable rate 30 year mortgage and plan on refinancing if/when rates drop. That will allow you to keep squirrelling money into investments, which will continue to g-r-o-w in your favor.

[rmorris50]

Oof!  Have you examined what kind of tax burden you will trigger by selling off shares in your taxable account in order to pay cash?  I would definitely advise against, especially given your $400k income

As rmorris50 said - avoiding a mortgage now complicates obtaining one at lower rates down the road

A mortgage is your friend here!

Great point on the potential tax of selling! The adjustable ARM is also a great idea given how solid your finances are. Chances you can favorably refinance I would think would be good.


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[ATtiny85]

Between the responses here and over on BH, it seems like you have your answer. $30k in tax….no thanks. And I don’t really like mortgages too much, but in this case, no way I’d touch my precious shares of VTSAX.

[cbr shadow]

Between the responses here and over on BH, it seems like you have your answer. $30k in tax….no thanks. And I don’t really like mortgages too much, but in this case, no way I’d touch my precious shares of VTSAX.

I figured there would be some overlap between the two forums :-)
Thanks for the responses everyone!

[ChpBstrd]

The all-time average annual return for VTSAX is 9.81%.
https://ycharts.com/mutual_funds/M:VTSAX/performance

That's about 3% higher than the 6.6% (plus closing costs and fees - be sure to account for these) you'll have to pay to borrow money, but that gap is the difference between a return which is 100% certain and a return that fluctuates +/- 40% every once in a while.

In the next year, I'd personally rather own a 6.6% yielding bond than VTSAX because I anticipate a correction and recession. Over the next 20 years, I'd rather own VTSAX. So it depends a lot on your timeframe.

I suspect lower rates will be here in 2 years, so if you plan/hope to refinance in that timeframe, consider what the additional set of closing costs does to the overall cost of that 2 year loan! I.e. add the CCs to the interest you pay for those 2 years and see what it amounts to as an overall cost of borrowing that cash. You may find it more appealing to pay cash now, and refi in a couple of years after the SHTF and the Fed starts cutting rates again.

I do not recommend an ARM because we cannot know how high rates could go. An ARM in a high-inflation, rising-rate environment is a blank check that could turn toxic quickly. If another 2008 housing meltdown were to occur, ARMs forcing people out of their homes might be a key suspect.

[grantmeaname]

An ARM makes a ton of sense on paper. Unfortunately, when I bought in the fall they were nearly the same price as a 30y fixed, and whrn I checked today they were even more expensive! So practically, maybe not an amazing idea.

How expensive is the house in comparison to your $400k income? Could you just get a 15y loan and pay it off fast, having little time that the 6.6% cost is around but no $30k tax bill?

[nereo]

An ARM makes a ton of sense on paper. Unfortunately, when I bought in the fall they were nearly the same price as a 30y fixed, and whrn I checked today they were even more expensive! So practically, maybe not an amazing idea.

How expensive is the house in comparison to your $400k income? Could you just get a 15y loan and pay it off fast, having little time that the 6.6% cost is around but no $30k tax bill?

Yeah, I was a bit shocked when we got our mortgage and the ARMs were actually *more* expensive than a 15y fixed.  It’s not common, but it does happen.

[grantmeaname]

It makes little sense to me. If I was a mortgage bondholder, I would think that my 7.55% fixed mortgages were certain to get refinanced next year or the year after. The 7.6% ARMs might actually stick around and have some life on them, and gradually step down giving many more years of high yields.

[Dicey]

The all-time average annual return for VTSAX is 9.81%.
https://ycharts.com/mutual_funds/M:VTSAX/performance

That's about 3% higher than the 6.6% (plus closing costs and fees - be sure to account for these) you'll have to pay to borrow money, but that gap is the difference between a return which is 100% certain and a return that fluctuates +/- 40% every once in a while.

In the next year, I'd personally rather own a 6.6% yielding bond than VTSAX because I anticipate a correction and recession. Over the next 20 years, I'd rather own VTSAX. So it depends a lot on your timeframe.

I suspect lower rates will be here in 2 years, so if you plan/hope to refinance in that timeframe, consider what the additional set of closing costs does to the overall cost of that 2 year loan! I.e. add the CCs to the interest you pay for those 2 years and see what it amounts to as an overall cost of borrowing that cash. You may find it more appealing to pay cash now, and refi in a couple of years after the SHTF and the Fed starts cutting rates again.

I do not recommend an ARM because we cannot know how high rates could go. An ARM in a high-inflation, rising-rate environment is a blank check that could turn toxic quickly. If another 2008 housing meltdown were to occur, ARMs forcing people out of their homes might be a key suspect.

That seems logical, but lenders don't follow mustachian logic. The cheapest mortgage rates are the ones tied to acquisition. As to rates going up, that's the reason to look for a 5 or 7 year lock. I'm not a tax expert, but another possible snag is that even if you own your house outright, a loan on the house you live in is still considered a re-fi, which might have less favorable tax implications.

Fun fact: In the Oughties, I had a 5 year ARM and refinanced it to a fixed rate at about 4.5 years. If I had left it alone, my rate would have bottomed out at around 2%, because it was tied to a stable index that went low and stayed there for years.

[Daisy]

Look into an investment line of credit on your stock market assets. It works like a HELOC, but your collateral is the brokerage account. You can buy your house for cash and not have to sell your stocks. My line of credit is based on the prime rate, which currently is higher, so I am hoping the Fed stops raising rates.

Your house closing will be a lot easier if you pay cash.

You can always get a mortgage later.

[TomTX]

20% down, and if you're concerned about the rate - at $400k/yr you can pay it off pretty darn fast anyway. Unless you're buying WAY too much house.

[Much Fishing to Do]

There's some sub-5% 10 year fixed mortgages out there that may be perfect for your high income situation. Thats barely more than I'm making in my MM now.

I used an investment line of credit for my business someone mentioned below when I'd need to make large contractor payments prior to the funds coming in and not wanting to sell investments, which was great for the very short periods of time I needed the funds but with rates up may be pretty expensive for your purposes.

[use2betrix]

Also worth considering that VTSAX is currently down 15% from its peak last year. If it was back at its peak, I’d give that a bit more thought as well.

I’m basically in an identical situation. My wife and I have spent the last dozen years living all over the country and living. I just got my first permanent job and we’d consider buying a home if it weren’t for the rates. Property taxes are also very high here so it makes more sense to rent. Similarly, we could also sell about 40% of our liquid net worth (in taxable vtsax) and pay cash for a house.

We also keep about $180k in cash (currently in a 3.5% savings acct) for either a down payment and because I really value my large FU stache.

[wageslave23]

So how much of a gain would you have selling vtsax? And what are the estimated taxes?  I saw $30k taxes mentioned but that seems high.

I recommend 15 yr mortgage as well. Should be around 6%.

[jnw]

Could you handle the following scenario if you sold a bunch of VTSAX stock now and bought a home with it? :

1) stock market increases by 20%
2) home values drop by 30%

Home prices have skyrocketed the past couple years and interest rates have doubled.. how is the current pricing sustainable? It makes no sense to me.  But that's just me.

What seems to be a better investment now? Buying VTSAX when it's down in price, or a 30% overvalued home.

[FIPurpose]

Could you handle the following scenario if you sold a bunch of VTSAX stock now and bought a home with it? :

1) stock market increases by 20%
2) home values drop by 30%

Home prices have skyrocketed the past couple years and interest rates have doubled.. how is the current pricing sustainable? It makes no sense to me.  But that's just me.

What seems to be a better investment now? Buying VTSAX when it's down in price, or a 30% overvalued home.

Depends on where OP lives. If they are west coast, the price drop may have already settled.

I think we're going to end up looking more like Canadian real estate. Large inflated value that stays consistently high.

I don't think we'll see continued price increases, but I think these house prices will be more or less flat for the next 5 years.

[ChpBstrd]

Could you handle the following scenario if you sold a bunch of VTSAX stock now and bought a home with it? :

1) stock market increases by 20%
2) home values drop by 30%

Home prices have skyrocketed the past couple years and interest rates have doubled.. how is the current pricing sustainable? It makes no sense to me.  But that's just me.

What seems to be a better investment now? Buying VTSAX when it's down in price, or a 30% overvalued home.

Could both #1 and #2 happen simultaneously? E.g. if house values dropped 30%, then...

-the people buying with ARMs right now would be unable to refinance, and many would default because that's a better deal than being so far underwater (5% down payments/equity is common these days).
-there would be fears about credit default swaps imploding financial institutions like in 2008, or a bank collateral crisis like we've seen recently.
-banks would cut back on their lending in anticipation of a wave of foreclosures, affecting the broader economy.
-money would move out of the overpriced stock market into all-cash deals for real estate, depressing stock prices.

VTSAX is only "down in price" to January 2021 levels and at a PE of 21.03 the S&P500 is 31% above the mean historical valuation.

My suggestion is that the scenario described above seems unrealistic, and both stocks and housing remain historically over-valued.