Buying a house

accrawfordApril 30, 2004

I'm 60 years of age, recently retired and am thinking of taking a sizable portion of my retirement income and using it to pay cash for a house. After our present house sells, I would then take that money and invest it. Can you tell me the pros and cons of doing this?

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I assume that you are talking about using your retirement savings to pay for the house.

A few things I can think of:

1. Are the savings in a tax-deferred investment such as an IRA where you're going to have to pay taxes on the money to take it out? If so, is this a good time to pay all of those taxes? (In other words, could you pay less taxes in total by taking the money out more gradually, or waiting until your income is lower?)

2. How much retirement income are you going to lose by spending this chunk of money on a house? If the money is reasonably well invested at this point, taking $100,000 out, for instance, would cost you several thousand dollars per year in income. Could you rent a suitable house or apartment for a sum of money roughly equivalent to the lost income you're going to sustain from buying this house? If so, would you rather do that, and retain total flexibility over where you live, plus free yourself from the hassle and expense of taking care of a house? Be sure to look not just at the monthly payment on a house versus the rent on a house or apartment, but at the total cost of the two living options, such as potentially higher maintenance and utility costs if you buy rather than rent.

3. How easy would the house be to sell if you did not like it? In some areas, selling a house takes forever. Personally, if I were retired and therefore not tied to a job, I would want to have some freedom to move if I wished. If I bought a house, I'd want to know that in a few months, I could be out from under it and on my way somewhere else if I wanted.

4. Assuming you are sure that it's this house that you want, what is the compelling reason for using your savings to buy it rather than getting a mortgage? At today's mortgage rates, by the time you take into account your tax benefit from writing the interest off on your taxes, then compare that to what you'd lose by taking your money out of where it's now invested (taxes, lost income), it's possible that you'd have a net gain from getting a mortgage versus paying cash. This would be especially likely to be true if you get into an adjustable mortgage with very low upfront rates. Since you have the cash, it would seem to me that a low upfront rate adjustable mortgage holds almost no risk for you: If the rate goes up, write them a check and pay it off. Of course, run this by a mortgage lender to make sure the loan you get could be paid off in this way if so desired.

    Bookmark   May 2, 2004 at 12:04PM
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In addition to having your retirement income reduced for a period of time, you would be owning two houses, which means two sets of tax bills, utility bills, etc. OTOH, you would be able to move into the new one at your leisure without the problem of trying to time house selling and house buying so that everything works out.

A lot will depend on unpredictables. If the retirement money you're going to use is invested in equities, for example, the equity market may go up during the time between you taking the money out and you investing the proceeds from the sale of your house. You would have to buy back your equities at a higher price. OTOH, the market could go down, in which case you'd come out ahead. Historically, the market goes up more of the time than it goes down.

One thing you might consider doing as an alternative to disturbing your retirement investments would be to take out a HELOC on your house and buy the new house with the cash. This could work out very well if you presently have no mortgage on your existing house. You'd also have the benefit of fully deductable interest. With today's low interest rates, it's quite possible that the after-tax interest payments you would make on the HELOC would be less than the after-tax income from the retirement money if kept nvested.

You would need to work out the numbers and see what makes the best sense to you.

    Bookmark   May 4, 2004 at 3:13PM
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claireplymouth z6b coastal MA

Wow! Just found this thread while looking for information on a very similar situation. I hate to hijack your thread but maybe this is relevant.

I'm 62 and about to retire and I'm planning on building a new addition to a family house for me to live in (in-law apartment). I also have been considering the relative benefits/disadvantages of using retirement funds (mostly tax-deferred) versus a mortgage to pay for the construction.

The responses above re-state issues I've been agonizing over such as having to pay deferred taxes versus being able to deduct mortgage interest versus diminishing investment income. I will have a modest pension plus social security, but would like some additional income.

At this point I'm leaning toward the mortgage, while maybe re-allocating the retirement investments towards really safe funds.

I think I need to talk to a financial planner, and I'm looking around for one. I also need to talk to mortgage lenders to get an idea of available rates.


    Bookmark   May 9, 2004 at 10:31AM
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You said you were looking to build an addition to a family house for you to live in. That suggests that the house belongs to someone else, and you'd be paying for the addition. Are you sure you could take a tax deduction for an improvement on someone else's house? I'm definitely not a tax expert, but I don't know that you could do that.

Maybe a financial planner or mortgage banker would know a way you could set it up so that you could get the deduction.

    Bookmark   May 9, 2004 at 7:57PM
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claireplymouth z6b coastal MA

The family house and the property are jointly owned by my brother and me; he's living there now with his wife. The deed is in both our names (an inheritance).

I will be paying for the total cost of the addition (a long story I don't want to go into). The addition is legally an in-law apartment, which is limited to blood relatives.

I'm assuming that I could take a deduction for my construction/mortgage expenses, just as I take a deduction for my share of the real estate taxes. My brother would probably have to sign his agreement with a mortgage, but the expense would be mine.

I sure hope it works. This is a mind-boggling expense for me, but I love the property and really want to live there (it was our summer house when I was a kid).


    Bookmark   May 10, 2004 at 8:35PM
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Yes, if you're an owner of the house, there shouldn't be any problem. As an owner, you have the legal right to obtain a mortgage against it.

    Bookmark   May 10, 2004 at 10:45PM
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