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This may sound initially like a very foolish (in a bad way) kind of question but please bear with me.
Facts are:
Received 230k lump sum.
Retirement funding: close to nil - just starting my first 401k
Age - 40
Family: 2 adults 2 kids < 5 years
Home: purchased for 610k, now worth 470k. 380k left on the mortgage - 2 bedroom SFH in LA.
Savings: I have maybe $50k in rainy day money, after all bills from our relatively frugal lifestyle I have close to 0 to save or invest
Mortgage interest rates are at a record low: 3.75%

My initial instinct is/was to start and fully fund a 401k (vanguard), start some other kind of taxable account with another vanguard fund. Low fees nice and balanced which I know would be a foolish (in a good way) balanced sensible thing to do.

Question is though. I WILL need to move to a larger house if not right now but in the next few years as the kids grow up and will eventually need their own rooms etc. 1 bath and 4 people can get hairy at times even now.
I normally wouldn't consider this but given the record low mortgage rates I was thinking that really I should look at buying a larger house now. Taking advantage of such low interest rates perhaps I should try and take out the largest mortgage I can afford to pay off monthly (around 500k maybe) and put the lump sum down as a downpayment.
My current thought given how much money my current house has lost and the ease with which I could rent it out and easily cover the mortgage payments it to keep my current home and rent it out.

The main issue I see is that of course buying a new home to live in is not a retirement plan and is highly illiquid. Having said that perhaps it would be foolish not to use these low interest rates to really leverage my lump sum nicely.

I wish I was clever enough to create some nice spreadsheets to try and illustrate various scenarios to show how say 10-15 years down the line I could end up. ie. if I put my money into some low cost funds how could that potentially compare to putting my money in a house now.

Funding the 401k (non matching) may be a no brainer for tax reasons but I might be able to match that writing off the interest payments on my mortgage.

Any insights and help would be greatly appreciated.. and may help me sleep. I spent the night awake trying to figure it all out in my head!
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