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 401kAge - 40Family: 2 adults 2 kids < 5 yearsHome: 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 investMortgage 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!
In this area real estate is starting to recover. Zillow just marked up houses in my development by 10-15%. That means houses are still down abt 8% from the peak, but no mortgages under water anymore as most would have at least 8% down payments.You know real estate prospects in your area better than I do, but I would suggest funding retirement and investing in stocks in a cash account for now. Wait as long as you can to see how well real estate will recover in your market. You can always decide to pay off your mortgage later if you need to.Right now stocks seems to be doing quite well. Investors are optimistic. Its a good time to buy. The good times may not last forever, but for now it looks like some major worries are behind us.
My thought at the moment is to put the money in some fairly conservative fund and bide my time. Whilst I do believe that property prices are recovering, my house has risen around 100k in the last year or so I am less interested in trying to predict the housing market and more interested in seeing how best to take advantage of the historically low mortgage interest rates. Since 1971 interest rates have never been so low. If you can get a mortgage at these rates it seems like a good idea to try and take advantage of that. Economies go up and down, as do stocks and house prices. However the one variable that seems a little different at this time are interest rates. I have a mortgage in the UK at 0.9%! The crucial difference here though is that the mortgage rates are fixed for 30 years as opposed to the variable rate in the UK. Am I wrong to put so much emphasis on the interest rates? Of course they could go down further but they are lower than in the last 40 years or so which must be something of significance.
You can easily calculate how much you can save in interest costs vs returns on investing the funds. A speadsheet should easily give you return required to break even or the time required to breakeven with various numbers.
Could you sell your current house if you wanted to upgrade? By my math, you still have $90k in equity in the current home. That could be a key factor in your decision. Note that you don't have to take out the maximum mortgage you can afford. Set a maximum limit for the home, then look for homes 10% below that amount. Only then would you figure out how much you can put down and how much pay monthly. This way, you won't stretch yourself too thin. There are always moving and new home incidentals for which you want to save some cash.FuskieWho had more to say but then put his iPad down and lost his train of thought...
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