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You swapped two different types of risks, and I think one is inherently smaller than the other. I don’t understand why people think that having a mortgage is risky. In a vacuum, it has no risk. It is only risky, if you can’t make the payments, which will only happen after a significant deterioration of your financial situation. If that significant deterioration happens, what will matter most is access to liquidity and savings to cover your basic expenses. You chose to reduce your basic expenses and your trade off was massive reduction in liquidity, which is a significant increase in risk and could hamper your ability to cover basic expenses (albeit reduced).
In addition, you have now assumed all of the price fluctuation risk and you are no longer sharing that risk with the bank. i.e. if home values dropped by 50%, you could potentially get a new mortgage, buy the house across the street and stick it to the bank with the old house. Now you don’t have that option, you bear all the price risk.
That’s really all there is to it, regardless of how you “feel” about. This is not about feelings, it is a simple math/risk problem.
I have never understood the “put 20% down” mantra. If you look at private equity, which are some of the savviest buyers in finance, they try to put as little equity and as much debt as they possibly can. Why? Because that minimizes their risk and shifts it to others – the lenders. The safest way to the borrower is to take out the longest possible mortgage and put as little down as humanly possible. I put 20% down, because I wouldn’t get approved for my jumbo, but if I could have put 0% I would have!
I sleep like a rock when I see my liquid savings, not knowing that they are locked into a house that could get obliterated in a fire or whatever. I like knowing that if I lost my job, I can cover my living expenses for X months, before I have to drastically change things and not have to think about selling my house to cover car payments and food.
The only reason I am writing all of the above is because you want to have a good understanding of risk and I hope the above helps.
Anyway, as far as your plan, I agree that you should sell the old house first and move into the other. You can then take all of that equity down and use it as a 50% down payment. You can also negotiate with the buyer where you pay them rent for 3 months or so until you find a new house, so you wouldn’t have to move more than once.
As others have said your gains will be exempt, but if you want to have zero concern about that, rolling it into a new property will cover all your bases.
Re: selling stocks, I personally subscribe to the view of not getting too cute. If you are not too worried about opportunity costs (which you don’t appear to be), I would start selling some over the year when market is strong. Maybe, in 20k-30k increments. If the stock market moves up 10% from where you sold, you will be down 2-3k, which in the long run is not going to make or break your financial situation. Then you can sell another batch of $20-30k at the higher prices.
Good luck
Thanks for the reply.
with regards to the above....yes, that's shifting the risk, but it comes at a price.....more interest paid to the lender. it's a balancing act the way i look at it.
With regards to the rent as you look....excellent idea. hadn't even thought of that. my worry was selling the house and then rushing to find another house, and finally 'settling' for something less than 'perfect'. whereas if we bought first, we'd know we've found the 'perfect' place, and wouldn't agonize over leaving our current house cause we'd be excited about the 'perfect' house we just bought. that said, again, i like your idea.
You are absolutely right and that's an excellent point. i will pause and think about this; although i have thought about it some in the past. I went to a 9 out of 10 school in the same district we're trying to go to now. Yet i only applied to one in state school (definitely not IVY league or ranked very high) and went there for both BS and Masters; I'm now not super wealthy but happy and content with where i am. so i 100% concur with your suggestion that there are other perhaps more important factors than the school itself...
I really like our current area as it's very close to everything.....the new location, although close to Washington DC, isn't close to a lot of the other stores we like; it also has its own traffic/conjestion problems, especially during the christmas season. anyway, i will do a bit more research on the schools....perhaps there's a better school district nearer.....our 650k home would probably be worth about 1M-1.1M in the new city we're considering....so staying closer to where we are would mean being able to buy more....
Thanks for the food for thought!
You might want to read up on Mr. Money Mustache's post on Ivy Leauge Preschool Syndrome:
Because i prefer a debt free life. May cost me a few bucks in the long run but it's a decision based on my risk tolerance and where my comfort level lies.
If you sell that many stocks at once the tax hit will be high. Perhaps just pile up some cash out of your income and sell only a portion of the stocks for your down payment.
Selling the stock over two years will help with taxes so your are correct to look at that.
The question is will the stocks be higher (enough to pay the tax) in the future than when you sell them in year one? Your guess.
Take a look at the various type of orders for selling stocks. Since you have time you probably want to place an order higher than the current market or an order that sells the stock when it falls say 5%. Of course you are hopping it goes up more than 5% before it sells.
If you sell that many stocks at once the tax hit will be high. Perhaps just pile up some cash out of your income and sell only a portion of the stocks for your down payment.
I mean how do you know that the tax bill will be high? Won't i just pay about 15% on the gains only? (Assuming ive held for 1+ year) how can you make that statement without knowing how much of that investment is profits? Hehe wink wink
Location: Formerly Pleasanton Ca, now in Marietta Ga
10,351 posts, read 8,572,211 times
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Quote:
Originally Posted by jrkliny
This is a very poor plan for a number of reasons.
First your guess on high and low home prices is likely to be wrong. Prices fluctuate for a wide variety of reasons including mortgage rates and the performance of the economy. Now there are also income tax deductions to consider especially for a high cost house where the deduction is now limited.
Second, you are planning on buying a new house while continuing to own the previous house. To do this you plan to sell stocks...another bad idea. You will incur cap gain taxes. You will need to pay costs for two house, one of which sits empty. The costs are likely to be much higher than what you hope to gain by buying high and selling low. In fact I doubt you have seriously researched this. You think the low time is in December. I found out that here in NY that is peak selling time. Of course, that is only a very general trend that cannot be counted on to effect prices and the time on market.
You got a realtor's license in order to save on the commissions for buying and selling, but it seems that you know nothing about real estate. I guess you realize that it is very typical for 2 realtors to be involved in each transaction and at best you can save only half of the realtor fees. You also know that realtor fees are only a part of the transaction costs. There are lots of other potential costs for loans, inspections, State and local fees, moving costs, etc. Have you also bought a truck so you can do your own moving?
I suggest you go back to the drawing board and re-examine this plan. Discuss it with your financial advisors, tax consultant and even practicing realtors.
I mean how do you know that the tax bill will be high?
They were giving you the benefit of doubt that you have been a savvy investor
and are sitting on a lot of unrealized Cap gains.
If that isn't the case then sure sell out for cash and don't sweat the CG taxes.
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