Dear Rick:
I have a question that I hope you can help me with. I am in my early 60s and retired. My financial situation is very secure. I have no dependents and I am single. My pension more than covers all of my living expenses. At this point I have not touched my Social Security and don’t plan to until I’m 70. I have a nice size portfolio in the high six figures. About one-third of that money is in my IRA. Currently, I own a home that’s worth approximately $375,000. I own the home free and clear without a mortgage. My situation is, I would like to move. As opposed to a home, I would like to buy a condo. I have a good idea where I want to live and the condos in the complex I am looking at go for anywhere between $250,000 and $300,000. I have not had a mortgage for over a decade and I would like to pay cash for my new condo. I would like your opinion on that. My friends all say that I should get a mortgage. My second question is, I want to use the proceeds from the sale of my house to pay for my condo. I would prefer not to have to liquidate any of my investments. My question is do you have any ideas if I see a condo I like but have not sold my home?
Thank you.
Jeremy
Dear Jeremy:
I get this a lot that some people think that you should automatically get a mortgage for a home; I’m not one who believes that. Yes, in certain situations buying a home can have certain tax advantages; however, what people need to keep in mind is that even with the tax advantages there’s still a cost to obtaining a mortgage. For example, if you did get a mortgage, you could easily pay $8,000 a year in interest. If you were able to deduct your interest on your tax return it would save you approximately $2,000. However, what that means is that the mortgage, as opposed to costing you $8,000, is still costing you $6,000. Every year you have the mortgage there would be a significant economic cost no matter what the tax write-offs are. In addition, let’s not forget that mortgages are not free. There are substantial fees and costs that go with the mortgage that you would not have if you paid cash. Therefore, when people tell you should automatically get a mortgage, all they’re focusing on is the $2,000 of savings, not the $6,000 and all the fees and costs that that mortgage would cost you. Therefore, in your situation in being retired, I see no problem whatsoever paying cash for your condo; particularly, because you don’t want a mortgage.
I believe that when it comes to money too many people let the tax tail wag the dog. You should not make financial decisions based upon taxes and taxes alone. I have always said when you make decisions purely based upon taxes, you generally make the wrong decision. I think you need to look at the total financial picture and something probably even more important, particularly in the situation at hand, and that is comfort.
We should never forget that the purpose of money is to buy us comfort and security. Particularly, someone who is in as good of financial shape as Jeremy, comfort and security is the most important issue. Therefore, the fact that he doesn’t want a mortgage and he would feel more comfortable without one should be the prime concern, not taxes.
With regards to the timing issue of seeing a condo that you want before you sold your existing home, you have a couple different options. You can take a mortgage or a home equity loan on your current home for the price of the new condo and use that to pay cash for the new purchase. Then, when you sell your existing home you would use the proceeds to pay off the mortgage. In that way you would only have a mortgage for a relatively short period of time until your home sold. My view is that either the mortgage or a home equity loan would work for you. The key to me is what the cost is of the mortgage or the home equity loan. I would choose the one where you have the least out-of-pocket costs as possible. In some situations, with mortgages you can get a no-fee mortgage by paying a little higher in interest. As far as I’m concerned, since your mortgage would be outstanding only for a short period of time, paying a little extra interest would be preferable than paying the cost and fees up front. Another option would be to take out a mortgage on the new condo and then once your existing home sells, to use those proceeds to pay off the mortgage. The key is to get a mortgage that has the least possible out-of-pocket expenses. In addition, you can also go with an adjustable rate mortgage because more likely than not, before you have an adjustment you would sell your house thus, paying off the mortgage.
Mortgages are a great way to finance the purchase of a home; however, it’s not for everyone. Particularly, for someone who is retired and considering the new tax law, mortgages are not as beneficial as they used to be.
Good luck!
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.
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