What would you do? $600,000 in savings to buy home and... ???

[Lindley]

Hi everyone!

First, let me say:   I LOVE THE NEW FORUM!!  THANK YOU WCI!!

 

Background:

• 2 physician 4 person family grossing $740,000 per year (combination of W-2 and 1099 income via S corporation)


• 3 years out of residency


• $360,000 in student loans left, but all are consolidated and fall under public service loan forgiveness (PSLF) on an IBR plan with hospital paying $2,500 per month which more than covers the payment (6.5 yrs left).


• House:  we owe $135,000 on a $200,000 house @ 3.5% on a 15 year  (will be sold within the next 6 months and equity rolled into new mortgage below or ???)


• Retirement:  $50,000 in combo of Roth IRA, 457, and 401(a)


• Savings:  $600,000 in cash


• Savings rate:  currently accumulating ~$25,000 per month in cash after all expenses paid including the $12,500 towards retirement, all taxes, all insurances ($2,200/mnth), monthly living expenses, pvt. school for 2 kiddos, etc.  (Yes, we have been living like residents for 3 years.  No wait... more like peasants).

 

The Big Plan

Sooooo...

Now that we have done our "hard time" in solitary confinement in a small town making good money and living a simple (i.e. cheap) life while aggressively paying off debt and saving up a nest egg, it is time to make parole and move back to where we love to live the most and continue to raise our little family.  We are ready to be "settled" for good.

As of last Friday, we have all of our ducks in a row:

1. Kids enrolled in school (BTW, that was worse than applying & interviewing for medical school!!)


2. New jobs under contract


3. Dream home under contract  (closing April 14th or sooner)

 

3 major financial goals are:

1. Continue to save at least 20% of gross income for retirement (currently saving $150,000 per year)


2. Be debt free


3. Both of us retire (financially at least) in year 2030

 

House Details:

I'll start off by saying we were very patient and have been watching this particular real estate market very closely while we were both in medical school, residency, and even after we moved 25 miles north to a small town.  We know it intimately.  We saw the perfect opportunity and struck immediately.  We STOLE this house.  Friend-of-a-friend deal.  No agents.  New construction built by them in an historic area on a golf course / big park / zoo in the heart of city.  Total dream home in a triple wet dream location.  Sellers were in an unfortunate bind... job transfer out of state followed immediately by pregnancy with Mo-Mo twins (50% mortality??) and mom of two already has to go into hospital for several months of bedrest.  Sad for them, but in the process we got a great deal and they are getting the immediate $$$ they desperately need.  Win-win.

We are paying under $300/sq ft in a neighborhood that starts at $400/sq ft and tops out around $450.  Most won't believe this, but this zip code jumped 48% from 2014 to 2015.  So needless to say, we never thought we could ever afford to buy there and maintain our 3 financial goals above, but now here we are.  A true blessing for us.

 

Purchase price:  $980,000
QUESTION:

Now what the heck do we do?  (ha!)

We do private banking with Capital One.   We hate debt, so we are are looking at 15 year mortgages with plans to pay off in 10 years or less.

We have been approved and have been given the following options thus far:

1.   $580,000 loan (40% downpayment) @ 3.625% for 15 years.    No fees. (PMI. Jumbo loan fees, origination fees, etc).


2.   $580,000 loan (40% downpayment) @ 3.375% for 15 with buying 1 point


3. , 4., 5. ... ????

 

 

What would you do??

 

Thanks everyone in advance for your input.  This should be really interesting.

[jfoxcpacfp]

Congratulations on finding your dream home. I'm having a little trouble getting past your location description ops: but enjoyed your enthusiastic post.

You will come out ahead (a little) by buying 1 point. You also get to amortize the point over the term of the loan, with any remaining paid off in year 10, if you follow the plan. Bankrate has a nifty calculator that lets you run the whole scenario.

Looks to me as if your next goal should be catching up on retirement funding. I'm a little dismayed to see that you have so much in cash and so little in retirement funding but presume this is because you expected to put more into your downpayment. Even though your plan is ambitious, you should be able to retire in 15 years with a modest lifestyle. Just keep in mind that you'll be funding your own health insurance for many years until you qualify for Medicare and (presumably) putting kids through college at the same time. Don't know all ages, so this is a guess.

Strongly suggest financial planning - life sometimes gets in the way of goals and you need answers to all of the "what if's".

[Zaphod]

Your 600k is in cash, not a taxable account? How long has that gone on? You are in a very stable position income wise, so I'd try to maximize your retirement accounts.

Personally, and we're all different, I'd probably not put 40% down, that is basically all money risked on your part especially if the area is currently appreciating. I dont think the rate matters too much, its one of your only write offs, and after tax considerations its low either way.

[jfoxcpacfp]

Zaphod wrote:

Your 600k is in cash, not a taxable account? How long has that gone on? You are in a very stable position income wise, so I’d try to maximize your retirement accounts.

Click to expand...

I agree with their decision to save to a cash account because the money was for a short-term need (downpayment on an expensive home within the next 5 years). It would have been terribly risky to gamble with the stock market, easily demonstrated by the recent volatility and drops right at the time they will need the money. Given the facts, it appears they simply overestimated how much they would need for the downpayment and a great deal fell into their laps.

[childay]

Great job saving up that much 3 years after residency!  Maybe I should have gone for PSLF..

I would recommend trying to find a way to put more in retirement accounts if at all possible.  Not sure what your employment situation is.

I don't have much comment on the mortgage but 40% down does sound like a lot.  You could put a smaller amount down and open a taxable investment account with the remainder.  I know you want to be debt free though.

[jfoxcpacfp]

childay wrote:

I don’t have much comment on the mortgage but 40% down does sound like a lot.  You could put a smaller amount down and open a taxable investment account with the remainder.  I know you want to be debt free though.

Click to expand...

Assuming this is to meet Jumbo loan requirements, no?

[The White Coat Investor]

You need several plans:

A spending plan

A student loan plan

A plan to deal with your housing

An investing plan

etc.

I would start writing down these plans one by one and make sure they all mesh together. Certainly put at least 20% down on the house so you can get a conventional loan. You should be able to get a 15 year fixed in the lower 3s I would think, even jumbo.

Figure out your student loan plan. If the plan is to get PSLF, great. If the plan is to pay them off, then I'd probably throw the rest of the cash at them. Make sure you have an adequate emergency fund. Then start maxing out retirement accounts. If you have SE income, be sure to get an individual 401(k) in addition to one from your employer, backdoor Roths, maybe an HSA etc. You'll probably have some taxable retirement savings too.

13 years is a pretty ambitious retirement plan for someone with only $50K saved toward retirement (since the rest of that cash is pretty much just downpayment and loan payoff) but you've got a huge income, so it's still doable even with a million dollar house. But you'll have to maintain discipline to get there.

Paying for some hourly advice will probably be worth it to get a second set of eyes on your plans if you don't feel you can draw the up yourselves.

[jfoxcpacfp]

The White Coat Investor wrote:

Paying for some hourly advice will probably be worth it to get a second set of eyes on your plans if you don’t feel you can draw the up yourselves.

Click to expand...

If you want some help in getting started with the planning process itself, try reading The One Page Financial Plan by Carl Richards. Fast read, practical, and easy to implement.

[Zaphod]

jfoxcpacfp wrote:

The White Coat Investor wrote:

Paying for some hourly advice will probably be worth it to get a second set of eyes on your plans if you don’t feel you can draw the up yourselves.

Click to expand…

If you want some help in getting started with the planning process itself, try reading The One Page Financial Plan by Carl Richards. Fast read, practical, and easy to implement.

Click to expand...

Um, that is 223 pages more than advertised.  

[Jane]

Isn't the question simply which loan to choose? If you hold the loan for the 15-year term, you would be better off with the 3.375% at 1 point. The difference in those interest rates will save you a maximum of $1,450 ($580,000 times the 0.25%) in interest per year. Actually it is $1,426 in the first year assuming no extra payments and will decline every year since you will be paying down the balance. Your plan is to pay off the loan within 10 years or less. Which loan is better depends when you make those extra payments and how much faster you think you will pay off the loan. If you throw the same dollar amount at the loan every month ($3,300 extra each month), you would be indifferent between the 2 rates and would pay off the loan within 7 years and 4-5 months. If you think you will pay off the loan sooner than 7.5 years or if you think you will make some large one-time payments early on, personally I would go with the higher rate at 0 points.

[DoubleMDs]

You make 740K and only put 12,500 towards retirement? You're not even coming close to maxing out your potential tax sheltered accounts. I get saving up for a downpayment but that seems like a huge void to me. You could max out retirement accounts and still have a huge savings rate. "Retire Secure" is worth the read.

[asmallchild]

I'm pretty sure that's 12500/month for a total of 150k/year

[Lindley]

jfoxcpacfp wrote:

 

1)  You will come out ahead (a little) by buying 1 point. You also get to amortize the point over the term of the loan, with any remaining paid off in year 10, if you follow the plan. Bankrate has a nifty calculator that lets you run the whole scenario.

2) Looks to me as if your next goal should be catching up on retirement funding.

3) .... presume this is because you expected to put more into your downpayment.

4) ....Just keep in mind that you’ll be funding your own health insurance for many years until you qualify for Medicare

5) ... and (presumably) putting kids through college at the same time. Don’t know all ages, so this is a guess.

6)   Strongly suggest financial planning – life sometimes gets in the way of goals and you need answers to all of the “what if’s”.

Click to expand...

First off, THANK YOU everyone.  I am completely humbled by the information given and just how quickly it has come.  I am working nights this weeks, so things just slowed down enough for me to answer some of these questions and make clarifications.  I have been anxious to respond for hours, but now I just need to find an efficient and clear way to do so.   So I'll try this approach:

1) That's good news.  I used the same calculator(s) last night and came to the same conclusion.  The savings with buying 1.0 point and paying off in 10 years is almost negligible, but it is there nonetheless.  Plus who doesn't like the look of a lower interest rate.

2) You are correct on that one.   Our MINIMUM goal is to save and invest 20% of our gross income.   We need to get comfortable in our new skin after the move to determine how much extra we will be able to put towards our other financial goals.  For the last 12 to 24 months after ALL expenditures (recurring monthly expenses, insurances, taxes, student loans, 457 plan... so everything) was paid, we were able to put between $35,000 to $40,000 away in savings OR to reduce student loan debt.  More on that later.

3)  That is exactly right, we have been saving up a nest egg.  But we also paid off over $300,000 in debt, mainly in student loans, over the last 2 1/2 years in addition to saving the $600,000 in cash.  So that should relieve the sphincters for some of you asking why we didn't just blindly plunge into the market with our brand new shiny paychecks.  :P

4) Fortunately, my new employer will offer and HSA.  We are both healthy and so are our children, thanks be to God.  We are giving consideration to overfunding the HSA with the specific goal of paying for healthcare insurance & expenditures from ages ~53 to ~65.  Still a little murky on the details of this though.  Need to research it more.

5) We have two little angels:  Ages 2 yrs 9 mnth and 9 mnths - both beautiful girls!  We will save for their college expenses, but there is also a more likely alternative plan that will pay for it and not cost us directly.  [Going to keep those details private as it is a family matter.]  So that money will likely become their dowry, so to speak.

6) Totally agree.  We got some advice very early on by an advisor of a close family member.  Not to be disparaging, because I don't think this represents Edward Jones as a whole, but he gave us some very spooky advice.  Thanks to the good folks on WCI and the amazing blog posts, we wised up quick and retreated with caution.  He was trying to sell (yes, sell I think is the correct term) a LIRP policy to the tune of $75,000 each = $150,000 per year as the "Only retirement instrument you will ever need."   When he also discouraged me from investing in my hospital's 457 plan, backdoor IRAs, 401(a) plan, FSA, etc. I got really concerned and phoned a close friend and hunting buddy of mine out of state, who also happened to be an Edward Jones CFP.  He of course called bullshit on the guy and reaffirmed my sixth sense screaming, "RUN!!"    So I have been collecting names of advisors that I am going to sit down with and see how it goes.  I have three names so far and I am looking forward to hearing what they have to say.  I will admit though, we certainly have some apprehension at this point and it has been a real motivator to gain some at least basic knowledge on investing.  Again the WCI and the resources I have learned of from this site have been indispensable.

 

Okay... that about wraps up that response.  This is fun, but it's going to take a while I can already tell!

[Lindley]

Zaphod wrote:

1)  Your 600k is in cash, not a taxable account? How long has that gone on? You are in a very stable position income wise, so I’d try to maximize your retirement accounts.

2)  Personally, and we’re all different, I’d probably not put 40% down, that is basically all money risked on your part especially if the area is currently appreciating. I dont think the rate matters too much, its one of your only write offs, and after tax considerations its low either way.

Click to expand...

{Numbers correspond to your questions/comments above}

1)  It's just in a plain old savings account (Where does the FDIC stop coverage?)  Anyway, if you read above, it hasn't been in there that long.  We just finished residency in June 2013 and started aggressively paying off debt and saving at that time.

2) That really gets at the heart of the questions I am asking.  Are we putting too much down?  Not enough?  How should we shuffle things around?

With regards to the risk of putting money in the home due to appreciation, are you concerned that the market will pop and I will suddenly lose the equity I put into with the larger downpayment?  Sorry for my ignorance.  Just trying to understand.  Also, I attached a graph showing the 10 year average for this specific neighborhood (not city, not ZIP code, but actual neigborhood).  Pay special attention to 2008 - 2009... looks like a promising indicator to me.

Initially we were thinking something like this:

• $50,000 - Next estimated quarterly tax installment


• $100,000 - emergency reserve fund


• $450,000 - split up between a) down payment and/or  b) Vanguard SEP-IRA or Employer 401K plan

Again, we need some sage advice on the latter option.  Hence the purpose of my initial post.

 

(I can't believe I am airing all this out on the internet!  It just hit me as to how weird this is... We almost NEVER talk about the taboo topic of money with friends or colleagues, but here I am...)

 

 

[Lindley]

jfoxcpacfp wrote:

Zaphod wrote:

Your 600k is in cash, not a taxable account? How long has that gone on? You are in a very stable position income wise, so I’d try to maximize your retirement accounts. 

Click to expand…

I agree with their decision to save to a cash account because the money was for a short-term need (downpayment on an expensive home within the next 5 years). It would have been terribly risky to gamble with the stock market, easily demonstrated by the recent volatility and drops right at the time they will need the money. Given the facts, it appears they simply overestimated how much they would need for the downpayment and a great deal fell into their laps.

Click to expand...

Are you clairvoyant or something?   I could not have explained it more clearly myself.  Thank you!