I need advice on how to stretch my money on my next house purchase. I just went under contract this week to sell my house and on my next house I’ll have enough money to put 20% and have about $70,000 left over. I have to draw on that $70,000 every month in order to afford my new house.

I will most likely need about $600/mnth from this $70,000 [which looks to be about a 10% return if I never touch the principal]. So what is the best thing to do w/ this money? Help me wrap me my head around this problem, BFI minds.

Thanks.

Seems like the problem is you're trying to live above your means.

if i went the conservative route and put everything down i will get on the sale of my home on my next house, my new payment (Principal, Interest, escrow) will be an estimated $300 more which isn't an issue for me. the range of the prices for houses im looking at actually starts at the sales price of my current home and goes up 10%.

the big descrepency youre noting is due to taxes. my house is currently county appraised way below the market value (about 60% of market). i currently live in an area that has seen ridiculous appreciation the last several years because of some developmental changes in the city. im estimating my next house to be county appraised at 95% of market value.

i just know it would be better to put down 20% at a 6% rate than 50% down (or whatever) at a 6% rate but am not smart enough to figure out what to do w/ that extra 30% to maximze its use.

Kinda depends on your utility curve and what its use is for. If you need it to pay off your house each month, it'd likely be better just putting it down as you're not going to see 10% returns with low enough swongs to make it happen.

If it isn't an issue and you're trying to maximize wealth, you'd just allocate it to whatever its best use would be (BR, IRA, whatever). Though there is some contention between Graham/Dodd in allocation and MPT, so you may want to make your own decisions on how to handle risk etc.

Your original post and the response is kinda confusing. So if my advice doesn't make any sense. Oops?

perhaps with everything over the 20% downpayment allocating it to different might be best. i could use an addiotional amount to have a comfortable mortgage every month, use an amount for IRA, an amount for stocks, etc. i was somewhat focused on finding one area to focus on to solve this problem. perphaps i need multiple solutions to solve this.


yeah, rereading it doesnt make a heck of a lot of sense. hope my follow up cleared it up.

I'm confused.

1) If you pay 20% down can you comfortably make the payments?
2) Do you have a fixed or variable income?


There's probably something better to do than paying down your mortgage.

1) if i only put down 20% i wouldnt be able to make payments on the types of houses im looking at for very long just on my income alone.

2) i have a fixed income


for hypothetical purposes suppose i have $250k cash and am looking at houses around $500k. i could put down anywhere between $100k to $250k.

A) if i put down $250k the mortgage payment will be comfortable by itself.
B) if i only put down $100k, i can invest the other $150k but will need to draw on those other sources to pay the mortgage.

Well you'll need to earn more than then effective interest rate to make the decision to invest the other money a good one. I disagree with your decision to overreach on housing, but that is for you to do. You can probably get a bond fund or something very simple to return more than what your mortgage would cost after taxes. It just depends on your level of risk. You might be able to be slightly better off just opening an ING acct and using that for the difference.

What are you keeping the $70K in capital for, other than as a vehicle to return you the $600/mo. supplementary income you require for your monthly mortgage payment?

What I'm getting at, is, if you don't require to hold that much cash in reserves, then consider just throwing another $35K or whatever towards the DP. Your return won't be $600/mo., but then again, because of your larger DP, you will now require less than the additional $600/mo. in order to meet your mortgage payment.

Decide how much reserve cash you need. $70K in reserves seems like a lot to me, but I don't know your whole situation.

Also, how much will your property taxes be? I looked at homes in Houston this spring, and found prop. taxes as high as 3.71% per year. On a $150K home, which is what I'm looking at, the taxes are $5-$6K per year!

I'm paying $10,000 a year to rent, with none of the hassles of owning. $6K in prop. taxes + whatever mortgage interest would be + all other home-ownership expenses + hassles of owning make me think that renting at $10K per year is better. I'm holding off on buying my first home until Summer of '09, but can certainly see why you may want to strike this summer. I thought I may strike this Summer as well, until I began doing homework.

This is what I understand: you want to buy a home that you can't afford. To make those payments you have a large cash reserve that you want to invest. The trick here is you need to beat the interest rate with a large margin so you can handle the swings. So I would suggest putting more down so you can actually pay the home. The remaining money you can take to try and beat the interest.

Another option would be buying a home you can actually afford. People living above their means is a big part of the financial problems we have now.

If you've got that much equity maybe you should just keep that property as a rental. Have you considered that option?

I don't think this is quite fair if I understand things correctly. The way I understand things if he puts his 70k down on the house he will be able to make the payments so he's not necessarily living above his means. He's just trying to decide if it would be more profitable to not put the 70k down and instead invest it. However, that would require him to draw some of the money out.

My advice would be to put the 70k down so you don't have to worry about making the monthly payments. Theoretically you could make more by putting your money to work for you, but I think the risk of ruin is to high.