Rules of thumb for saving to upgrade house?

[Rotish]

Have full equity in our starter home. The plan is to keep it until making partner (3-4 years from now).

Just thinking ahead, what is the best way to buy a new home while selling the house that a lot of your cash is tied into? I know selling then buying could work, but that would require extreme luck to land the perfect house to buy while a sale goes smoothly...unlikely.

Options seems to be:

1) home equity loan/bridge loan. This will probably have to play into the equation as we're in a pretty high cost of living area. But if the house doesn't sell fast it would be a very expensive option.

2) save up 20% for the down payment. What is the better option here? A high yield savings account or investing? I at first thought investing, but run the risk of losing a massive chunk when i would need it the most due to volatility.

Any advice?

[Peds]

well first, you can stay put and save a lot of money.

2nd, you could sell, rent, then buy once you are sure.

4 years out is kind of short to invest like you mention. so i would just cont to stockpile cash as well.

[jfoxcpacfp]

Rotish wrote:

Have full equity in our starter home. The plan is to keep it until making partner (3-4 years from now).

Just thinking ahead, what is the best way to buy a new home while selling the house that a lot of your cash is tied into? I know selling then buying could work, but that would require extreme luck to land the perfect house to buy while a sale goes smoothly…unlikely.

Options seems to be:

1) home equity loan/bridge loan. This will probably have to play into the equation as we’re in a pretty high cost of living area. But if the house doesn’t sell fast it would be a very expensive option.

2) save up 20% for the down payment. What is the better option here? A high yield savings account or investing? I at first thought investing, but run the risk of losing a massive chunk when i would need it the most due to volatility.

Any advice?

Click to expand...

NOOOOOOOOOOOOOOOOOOOO to investing any money you will need within the next 5 years. Your instincts are right on.

Here's an idea:

1. Mortgage your starter home for the downpayment.


2. Convert your starter home into rental property.


3. Sell rental property within 3 years to be able to exclude all gain (yes, you will recapture depreciation, which is only fair).


4. Deduct interest on rental property "above the line" rather than it being subject to itemized deduction (Pease) phaseouts.

Of course, you should still be saving for furniture and such. Even in a high-interest savings account, you'll probably not yield enough for an ottoman. The main issue is liquidity and safety, not how much interest you will receive.

Congratulations on having a mortgage-free house in a HCOL area. You're doing something right.

[janettebournes]

Rotish wrote:

Have full equity in our starter home. The plan is to keep it until making partner (3-4 years from now).

Just thinking ahead, what is the best way to buy a new home while selling the house that a lot of your cash is tied into? I know selling then buying could work, but that would require extreme luck to land the perfect house to buy while a sale goes smoothly…unlikely.

Options seems to be:

1) home equity loan/bridge loan. This will probably have to play into the equation as we’re in a pretty high cost of living area. But if the house doesn’t sell fast it would be a very expensive option.

2) save up 20% for the down payment. What is the better option here? A high yield savings account or investing? I at first thought investing, but run the risk of losing a massive chunk when i would need it the most due to volatility.

Any advice?

Click to expand...

I agree with peds

We are in our starter home with designs on upgrading to a larger home in 5-10 years. It turns out we actually love the size of our starter home (and even more, loving having a paid off home). We no longer plan on upgrading.

I like the idea of selling, renting, and then buying rather than taking a bridge loan.

I also like the idea of saving up 20% for the down payment of your new dream home. If you are planning on making this move in 3 - 4 years, I wouldn't invest it. I would put it in a high yield savings account or a CD of some sort. Afterwards, you can choose to rent your starter home or sell it and apply the sale toward your new mortgage.

[Hatton]

Easy unless you want to be a landlord sell house number 1 prior to buying number 2.  Sell, rent (or live with family if available), and buy with 20+% down.