If you need less than $125k for the downpayment, I recommend you convert your mutual fund shares to their ETF counterparts tax-free:
Can I convert conventional Vanguard mutual fund shares to Vanguard
Shareholders of Vanguard stock index funds that offer Vanguard ETFs
may convert their conventional shares to Vanguard ETFs of the same
fund. This conversion is generally tax-free, although some brokerage
firms may be unable to convert fractional shares, which could result
in a modest taxable gain. (Four of our bond ETFs—Total Bond Market,
Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—do not
allow the conversion of bond index fund shares to bond ETF shares of
the same fund; the other eight Vanguard bond ETFs allow conversions.)
There is no fee for Vanguard Brokerage clients to convert conventional
shares to Vanguard ETFs of the same fund. Other brokerage providers
may charge a fee for this service. For more information, contact your
brokerage firm, or call 866-499-8473.
Once you convert from conventional shares to Vanguard ETFs, you cannot
convert back to conventional shares. Also, conventional shares held
through a 401(k) account cannot be converted to Vanguard ETFs.
Withdraw the money you need as a margin loan, buy the house, get a second mortgage of $125k, take the proceeds from the second mortgage and pay back the margin loan.
Even if you have short term credit funds, it'd still be wiser to lever up the house completely as long as you're not overpaying or in a bubble area, considering your ample personal investments and the combined rate of return of the house and the funds exceeding the mortgage interest rate. Also, mortgage interest is tax deductible while margin interest isn't, pushing the net return even higher.
Generally, I recommend this figure to you because the biggest S&P collapse since the recession took off about 50% from the top. If you borrow $125k on margin, and the total value of the funds drop 50%, you shouldn't suffer margin calls.
I assumed that you were more or less invested in the S&P on average (as most modern "asset allocations" basically recommend a back-door S&P as a mix of credit assets, managed futures, and small caps average the S&P).
Yes, you will have two loans that you're paying interest on.
You've traded having less invested in securities & a capital gains tax bill for more liabilities, interest payments, interest deductions, more invested in securities, a higher combined rate of return.
If you have $500k set aside in securities and want $500k in real estate, this is more than safe for you as you will most likely have a combined rate of return of ~5% on $500k with interest on $500k at ~3.5%. If you're in small cap value, you'll probably be grossing ~15% on $500k.
You definitely need to secure your labor income with supplementary insurance. Start a new question if you need a model for that.
Secure real estate with securities
A local bank would be more likely to do this than a major one, but if you secure the house with the investment account with special provisions like giving them copies of your monthly statements, etc, you might even get a lower rate on your mortgage considering how over-secured the loan would be.
You might even be able to wrap it up without a down payment in one loan if it's still legal. Mortgage regulations have changed a lot since the housing crash.