Ah, the "tax reasons" are this: you must pay interest in order to take the deduction on your taxes. However, you end up paying more money in interest than you get back. It could only help you if you are very near the bottom of your tax bracket and you need the interest deduction to put you in the lower bracket. However, the deduction could also trigger the AMT! So, save your money (what would be paid in interest and to a tax preporation person) and buy the house with cash.

Babyv7....nice to see you here. I saw your post on the other forum.

Try looking at this link. If you have enough money for any emaergencies after paying for the home, then I would most definitely. If this will tie up all your money, I wouldn't. As the link says, you are only getting about $.30 per dollar on your interest.

Here is a link that might be useful: Buying a home with cash

you need a financial advisor.

I believe the main question becomes whether an outside investment with your cash can earn more than you'd save based on using that cash to offset the princiapl on the mortgage. The earnings have to be higher than the tax leveraged interest rate on your mortgage.

We recieved similar advice selling/buying this summer when we hada lot of equity on the sale. We felt more comfortable rolling over the equity into house #2, than using that cash for an investment.

Make sure you use an independant financial advisor and not one employed by an investment house.

What an expert can't tell you is how much persoanl satisfaction and piece of mind having a paid-for house would bring to you versus how much you might gain financially by taking out a mortgage and investing the rest of your money elsewhwere. That's really what it comes down to and only you can answer that. But at least an expert can tell you what you are likely to gain or lose finacially if you follow one path or the other.

Thanks so much for your feedback. As with anyone, my situation is somewhat unique, in that I'm making a life change. I currently have a great job in the Northeast, but would like to move closer to family in the south. In addition to the equity I've built up in my little home, I also have some stock options that I'd have to sell when I leave the company. I'd like to be able to change careers which means my income would probably be about 1/3 of what it is now. After purchasing a home with cash (I've already got my eye on one), I estimate I'd have about $20k left in savings. But, I'd have no mortgage. I'd get a job, but possibly a teaching job, but I'm not expecting to earn a whole lot which is actually ok with me. My concern is when tax time comes, I'd have to pay quite a lot on the stock options I sell, but then I expect to be in a pretty low tax bracket at that point. To be honest, I'm concerned about going to a financial advisor because they may advise me to take out a small mortgage & invest the rest using them as an advisor so they can get their commission/fee, but how would I know unless I ask, right? I totally understand what you're saying, though, about weighing the interest earned on an investment vs. saving money by foregoing the paying of interest on a home loan. I've got a lot to think about. Thanks again for the input.

Nowadays $20K isn't much money! A new roof would cost me close to that. It cost me $10K to have the house painted last fall. A septic failure would probably cost me over $40K. Granted, I'm in MA and have a largish house, but you need to consider all the unexpected things that happen in homes and your life.

What will your real estate taxes be? What about other expenses such as insurance, health insurance, utilities,etc. What if you don't find a job right away? Maybe you can put 50% down, have a small mortgage and more cash in the bank.

babyv7, you can do the analysis without a financial advisor. Its quite simple and does not require a real sophisticated analysis. You will need to know the average return you have had on your portfolio over the last two to three years and what you think it will be in the future. So long as the return is greater then the rate of interest on your mortgage it makes sense to have a mortgage. For instance if your mortgage is at 6% and your return on investments is 8% then you are making a 2% profit on every dollar you mortgage. I am ignoring taxes on the assumption that your interest is deductible and your investment earnings are taxable and thus its a wash. BTW, mortgage interest is deductible for AMT.

The things you cannot quantify are things like piece of mind and the satisfaction of not owing anybody for your house. It also depends on where you are in your life. As you move into retirement your investments will become more conservative and thus your earnings more consistent but generally lower.

The first consideration should be having cash in the bank. Having equity in a home is not the same as liquid investments. I would recommend that anyone before paying off a mortgage that you have at least a year's wages in savings. My wife had a client (she's realtor) that found this out the hard way. The client paid off her mortgage in 04 and then got sick in 05. When she tried to get a loan she was turned down because she had no income. The only people that would lend her money were predator lenders, which is where she turned (we are talking about interest at credit card rates, bad credit cards). She ended up having to sell the home to avoid foreclosure. Cash is king.

One last comment, what has always made realestate such a great investment was that the gain to invested capital was always very excellent. For instance if you had a property worth 100k and you owed 80k on it, your invested capital is 20k. If the property appreciates at 2% a year that's a 10% return (unrealized of course) on your invested capital (100k*2%)/20k.

Oh, one more thing, anyone that is providing you financial advise should not be the same person investing your assets. If that is the case, call them what they are, a broker. Consider talking with your CPA or getting an independent certified financial advisor that get's paid by the hour.

My friend just went through a divorce and with the money that she got, her and her new boyfriend were able to pay for their new home in cash.
She loves not having no mortgage payment and she only pays taxes on the house. She told me she didn't have no problem buying in cash.
I assume that she did have to pay something on her taxes...I am not to sure.
Now she works with boyfriend and they travel all the time. I guess if you have the money and the income to support yourself, than i guess it wouldn't be a problem.

$20k in the bank, when you don't have another job lined up, I think is insufficient. I'm also concerned about the stock options--I read a horror story in a magazine a couple years ago about a family who were losing their house because of taxes on stock options--whichh they hadn't even exercised! Don't know how that would be possible, but I'd certainly look into it before tying up all my cash in a house.

Also, if you find a fee-only financial advisor, you don't have to worry about conflicts of interest in advice--there's no commision, so no conflict.

I agree with housenewbie, 20k cash is too little for your situation. Personally I'm not fond of the idea of paying cash for someone who's still working. You really need your money to be working for you during your working years in order to save enough for retirement. A house is just part of a balanced portfolio. If you put 100% of your savings in your house, every single financial adviser in the world will tell you that you're pursuing a poor investment strategy.

I'd put at least enough so you can comfortably pay the mortgage on your expected new income, or 30% of your total cash, whichever is greater. Save 10% or 1 year's worth of expenses in a combination of cash and CD's (whichever is greater). Max out your IRA, and plan on contributing the maximum every year until you retire. For the remainder put 80% into a mixture of stocks (index funds or ETF's if you're an investing newbie), and 20% in bonds. When buying the stocks you may want to spread your purchases out over the year so you can average out the cost a bit. That's my free advice, and it's worth what you paid for it.

I wouldn't sink everything into the new house/new area. What if you hate the house/new area? What if you can't sell for what you paid for the house? If you only have X percent invested, you still have cash -- and an out.

I've read this advice over and over for people making a big change -- pulling up stakes and trying something new. Of course, you have to have enough income or interest on your portfolio to pay that mortgage!

Another possibility would be to rent for six months or a year and see if you really want to buy a house there -- or if you want to buy at all.

housenewbie is right - $20k isn't a lot of money. But, I thought at least until I get a job probably as a teacher which would provide me with the health insurance. I also just sat for my real estate license exam which I may do on the side. I'm definitely not looking forward to seeing how much I'm going to owe on taxes after exercising my options, but I've planned on taking 30% of the cash from the exercise & immediately putting it aside for when the tax man comes a-knockin'. I appreciate you all taking the time to reply with your thoughtful comments & advice. I'm still not sure which way to go, but you've given me some great food for thought.

You have received much good advice on this forum. However, I wonder about your plans to get a teaching job. Why do you think this will be possible? In my area, public schools are suffering from shrinking enrollment and laying off teachers. These are highly coveted jobs in rural and semi rural areas.

As for getting your real estate license and making money on the side, I can say flatly that you are being unrealistic. Real estate can be a lucrative career, but it takes years to ramp up to the point that you are breaking even. If you are moving to a new community you will not know the territory, and you will be surrounded by established realtors who do. The field is crowded and competitive.

Before you sink most of your assets into a new house, why not get the job first? Then you will have a solid basis on which to make investment decisions.

If you pay cash you have tied up a lot of money in an asset that may not appreciate as wel as others.
The tax break argument really makes no sense, but the 'investment' in a house with ZERO leverage can be risky.

Another thing to consider is that if you need cash fior something do you have an income that can support borrowing?

Banks love to loan money to folks with a lot of liquid assets. They are more reluctant to lend to someone who is cash poor but property rich.

I don't understand the liquidity objection to owning the house free and clear - can't he just get a home equity line of credit? He won't have to use it, but it will be there for emergencies...

The tax argument is for people who like to pay a dollar in order to save 25 cents. Yes, there are a great many people that dumb out there.

mfbenson-
You're only looking at part of the picture. I'll give you an example. I've got a fixed-rate mortgage at 5.5%; after I take the tax deduction, it effectively means that I'm paying about 4% interest. I also happen to have enough in investments that I could pay off my mortgage if I wanted to. However, my mutual funds last year gave me about a 20% return (17% after taxes). So here's the bottomline: I've got a sum of money that I'm paying 4% to borrow, and I'm making 17% on the money...which nets me 13%. Or, I can cash out the stocks, pay off the mortgage, and net 4%. That's why I haven't paid off my mortgage.

Now I'll admit that I may not do this well every year on my stocks, but it would take a number of bad years for me to get to the point where I'd say that I'd been better off to pay off the mortgage. In fact, on average -- counting in all the good years and bad -- stocks have historically returned about 10% annually over the last 50 years or so, so I would argue that if you invest in decent mutual funds you're going to be better off investing the money than paying off the mortgage.

I would recommend paying off the mortgage only for two reasons: 1) the unquantifiable security that owning your house free and clear provides (although you've still got those pesky property taxes to deal with), and/or 2) you're an incompetent investor or you're simply not comfortable investing.

As for getting your real estate license and making money on the side, I can say flatly that you are being unrealistic. Real estate can be a lucrative career, but it takes years to ramp up to the point that you are breaking even. If you are moving to a new community you will not know the territory, and you will be surrounded by established realtors who do. The field is crowded and competitive.

Truer words were never spoken. Plus there are lots of expenses involved in getting into real estate. It's also not really a job you can "do on the side", at least not if you want to do it well.

kudzu9

There is one additional reason for paying off your mortgage. If you enter retirement with a mortgage payment, then a large part of the income from your nest egg will have to be used to make the payments and you will have much less income to use for other purposes. Of course, you could save like made to increase the size of your nest egg accordingly, but you will need a whole lot of saved money devoted expressly to the purpose of making your mortgage payments.

It would make more sense for most people nearing retirement to to plan to have it paid off when they retire. That may mean that their nest egg will be somewhat smaller, but they will still have much more income that they can use to live on.

Example -- If a retiree's mortgage payment is $1500/month, that means 30K per year will be needed just for that purpose. Assuming a 6% reuturn on investments, that means that 500K of the retiree's nest egg will be needed to generate the cash to make the mortgage payments.

It would make more sense, would it not, to either pay the mortgage off by retirement time, or at least reduce it to the point where a lump-sum payoff from the nest egg is feasible?

feedingfrenzy-
You make an interesting point but I'm not sure I completely agree. Your math is a little off ($1500/month = $18K/year), but I understand what you're saying. I think the issue boils down to whether a person has saved adequately for retirement. Here's the simplest example:

You've got a $250K nest egg and a $250K mortgage. If you pay off the mortgage, you've got your house paid for, but you've lost the income from your assets. If you stay invested AND you're making at least as much on your $250K as the amount you're paying after taxes on your mortgage, then you'll be able to meet your mortgage payments with the income, and your nest egg may even grow if you're at all successful. It all boils down to what economists refer to as "a lost opportunity cost." If you pay off the mortgage, you're giving up on the opportunity to generate any more profits with the money.

I'll repeat that if someone is uncomfortable with the uncertainties of the investing world or doesn't think they can do ok with basic mutual fund investments, then they may want to pay off the mortgage for the security that gives. But, unless you have a really high fixed mortgage (which you should have refinanced to under 6% by now), you should be able to meet or beat that with investment income.

I think all this just says: save like crazy for your retirement so that you always have enough to meet your expenses and have a nest egg that's big enough to cover your mortgage whether you pay it off or not.

Sorry about the math blunder. The 30k would be true if you have a $2500/mo payment, not a $1500. In that case, you'd "only" need to devote 300K of your nest egg to your mortgage payment.

My point really bears only on people who are close to retirement and still have a mortgage, which is a lot of pre-retirees. We don't have much more time to invest and let our money grow. Instead, we're going to be starting to withdraw it.

The issue is whether it's better to pay off the blance when you retire or continue to make payments. The only scenario I would see where it would make sense to continue making mortgage payments would be if the payment was small relative to the amount of return your nest egg generates. That could happen if you've you put away a great deal of money (how lovely!) or if your mortgage payment is small. But if it's that small, then you very likely don't have all that much of a balance, either.

feedingfrenzy-
This is interesting, so please bear with me (I'm not trying to one-up you or fight). I still understand where you're coming from on a gut level, but I'd like you to give me an example with numbers that convinces me. If one could pay off a mortgage without it affecting your retirement income, that would be great. But that's not the reality.

I believe my argument makes sense in any case where you can generate more income from the nest egg than the mortgage costs...it doesn't matter what size the mortgage is. I understand that it is scarier psychologically to have a mortgage, but it isn't logical to pay it off if you have a net financial loss each year from doing so. (Now my argument also assumes a fixed rate mortgage...if you have an adjustable rate mortgage in retirement, you're asking for trouble.)

I should also have specificially commented on this part of kudzu9's post above:

"You've got a $250K nest egg and a $250K mortgage. If you pay off the mortgage, you've got your house paid for, but you've lost the income from your assets. If you stay invested AND you're making at least as much on your $250K as the amount you're paying after taxes on your mortgage, then you'll be able to meet your mortgage payments with the income, and your nest egg may even grow if you're at all successful."

That's true, but it ignores the point that devoting all of the investment income in your example to your mortgage payment means that none is left for any other purpose. Wouldn't you like to have some left over to spend on other things when you're retired? I certainly would.

You shouldn't ignore the fundamental fact that the financial equation changes as you approach retirement. Instead of focussing exclusively on accumulating wealth (which you should have been doing all along), you will need to consider the optimum strategies for living on it. That requires a different set of considerations.

Oh, I never said that paying off your mortgage wouldn't reduce your retirement income. Of course it will. But don't forget that you have to consider more than just income. Without a mortgage payment, your expenses will be much lower and you won't need as much income.

Let's say you retire at 66 with a 1M nestegg. You're going to withdraw from it at a rate of 6%/year, which should be less than it earns, if invested correctly. That gives you a $60k income from that source, and Social Security pays you 20K yearly. That's a nice income of 80K/year. Not bad, right?

But wait! You built your dream home when you were 51 with a 30 year 6.0% mortgage. Your monthly payment (principle plus interest) is $2000. Your mortgage balance is 150k. If you keep the mortgage, you'll have a fixed yearly expense of 24K, leaving you 56K to live on, and that will be true until the mortgage is paid off when you're 81.

If, instead, you decide to pay it off, you'll reduce your nest egg by maybe 190K (you'll need some extra for taxes), leaving you with 810K. That will generate a yearly income of $48,600. Adding that to the other $20K from SS makes $68,600 per year to live on, or $12,600 more than if you keep the mortgage, a significant improvement.

I would much rather have that extra income when I'm in my 60s and 70s rather than having to wait until my 80s, if I make it that far Most retirees spend a lot more in their earlier years of retiremnt than their later years.

For me, it is about peace of mind.

I am sorry, but my house isn't an investment like a stock. It is the place I live in. My shelter. My HOME.

Yes, it is possible to have a better financial picture when using your money to invest instead of paying your mortgage. But it is not guaranteed. And that is the crux for me personally.

I paid off my mortgage because it immediately gives me a guaranteed return of my investment of 6%. And it makes it impossible for a bank to foreclose on my HOME. So it is mine, nothing belongs to the bank. This is worth a lot to me.
What investment guarantees you a 6% return AND makes it impossible for a bank to foreclose on your home?

Yeah, a mutual fund or other investments often go up 20% a year. But not always. I have a 401k and know that this can also go down. Like massively in 2001.

So "babyv6" "only" will have 20k cash after buying the house. Why is this "little" money? Maybe for a lot of people here on ths, who usually are much, much better off than the average person (just look at some of the houses being built by members of ths). But there are hundreds of thousands of people who make less than 20k NET a year.
Also 20k in cash, if you have paid off your house, and you live modest, let's say you spend 1k/month for food, utilities, property taxes, insurance, car isn't that bad.

And if you get a job, it is a wonderful situation not having to pay a significant chunk of your income to the mortgage bank. I enjoy my excellent income a lot more now that most of it stays with me - and now, I can use that to invest without having to worry that I ever lose my home to a bank.

jrldh, what you are describing is the part of the equation that can't be quantified in dollars. From a pure dollar and cents analysis, you would be hard pressed to make a case that supports paying off a mortgage in today's market. However, what plays into the equation is risk aversion. The more risk adverse you want to be, usually the less money you make but the more constant your life. For many, that's pure heaven, so not owing a mortgage is worth the lost opportunity of possible increased wealth. There is nothing wrong with thinking and acting like that. But understand what the trade off is. If you are young, I think you are crazy to pay off a mortgage, but if you're 60 and heading into retirement, it may make sense for the peace of mind it gives you.

As for cash in the bank goes, one needs to balance liquid assets to non-liquid assets like a home. I know when I hit retirement, I want as much liquidity as I can have. Liquidity gives you the most options and provides you the most protection from lifeÂs little surprises.
.

I think we're in heated agreement! It all depends on both good financial planning and your risk tolerance.

feedingfrenzy-
Thanks. That's a good example...if you keep that mortgage. I will point out, however, that if your dream home has a $150K mortgage balance, you could easily refinance to another fixed, 30-year mortgage and your payments would drop to about $850 a month, or a little more than $10K per year. So you've still got your $80K income and you're getting about a $3K tax break, for a total of $83K. You've got a mortgage of $10K, which reduces your effective income to $73K, but this is more than the $68,600 in your example...and you haven't had to reduce your nest egg. But, you say, now I've got this horrible mortgage that will be around for another 30 years. Yes, but that's 30 years where you can hopefully make even more on the $190K you wanted to liquidate. And, in a worst case, if you don't outlive the mortgage, when you die, the balance on your mortgage will be a good deal less than the $190K you would have liquidated. I'm not saying my way is the right answer; I'm just saying that, if you've got the appetite for investing, you should be better off by keeping the mortgage.

I have no argument with those who want to own a home free and clear. In fact, I spent most of my working life with the goal of paying off my mortgage before I retired, and I succeeded. However, when I retired a couple of years later I ended up moving into a different house which was more expensive and resulted in me having a mortgage all over again! Was I crazy or irresponsible? No, I don't think so. It was the result of a careful calculation, and a decision to move into a home that I really like a lot better than my old one. My new mortgage is for only a small fraction of my home's value, and I have enough coming in from a pension and Social Security that I've never had to touch my investments. I could pay off my mortgage if I had to from my investments, but I like the fact that I can get a tax deduction and a better return on my money by keeping it invested, and I have an asset (the house) which has also increased in value faster than my investments. Please don't think I'm bragging; I've simply been fortunate and maybe lucky, and I am a very cautious investor, despite what it may sound like. My point in saying any of this is just to point out that there is no one right answer. What's important is for everyone considering the mortgage vs. no-mortgage decision to be in full posssession of the facts, to understand your own priorities, and to do a careful analysis that's specific to your situation.

I am in the same position as baby. We are just about ready to put our home on the market and will be moving out of state and have our retirement home built on property we already own. I am not old enough to retire and draw social security (feel like it though) and my husband took an early out at age 55 from the federal government and gets a decent retirement check. I plan to quit work and never work again. The cost of living where we are moving is considerably lower than here in the city. We will have free gas to heat our home, no water or sewer bills and will be able to live comfortably on my husband's retirement check if we don't have a mortgage. I have sizeable 401K money and consider that "emergency" money. We also receive royalties from gas wells on our property which will add to our retirement income. We plan on paying cash for our new home from the proceeds of the sale of our present home. We're paying cash ONLY for the peace of mind it brings to us (especially me). Each of us wants to know that if and when the other dies the survivor won't have to worry about how they are going to keep a roof over their head. Peace of mind is very important to both of us and that's the only reason we don't want a mortgage. We want to wake up to the sunset and say "Honey, we don't owe anyone a damn cent, what do you feel like doing today."

"there is no one right answer"

Exactly my point as well.

But I would like to point out that most retired people are less risk tolerant than they were when they were working and that's not surprising. What if we get another crash like 2001 and the value of the nest egg is reduced by 40 or 50%? That makes that mortgage payment look a lot bigger than it did before. Added to that is the reality that the retiree doesn't have the luxury of waiting out the market until it rebounds (which can take over a decade) and also can't, in most cases, easily find lucrative employment that would allow him/her to build the nest egg back up again. Then you have to consider the always increasing possibility that serious illness or death may greatly alter the financial picture.

I mention these factors only because most retirees want their financial situation to be as secure and predictable as possible. You have chosen to continue using the leverage power of a mortgage even though you're retired and that works for you. After all, you're lucky enough to have a pension, something that most future retirees will not enjoy so you 're in a better position to take some risk. Not having one does alter the equation.

Emotionally, I am totally in sympathy with the idea of buying a house outright. After consideration, though, I think there is much to be said for the views submitted by chiefneil, chisue, and others advocating caution and a conservative approach. Two of my friends have taken early retirement after careers (30 years each) with government agencies. Each of them moved to a small town in another state to be near family. Both were familiar with the respective locales. Sadly, both of them are unhappy with the house and/or the situation. A substantial difference exists between staying in a lively household with attentive family members versus living alone.

Both wish that they had rented for at least a year before buying to allow themselves time to grow familiar with the pattern of daily life in the area, e.g., traffic patterns, noise from schools and playing fields, shopping, churches, trends in property values, and so forth. Neither lady faces any financial hardship from their present situations, but neither situation can be amended at the present time without financial loss. Both wish they had approached their moves and real estate purchases more conservatively.

"I paid off my mortgage because it immediately gives me a guaranteed return of my investment of 6%. And it makes it impossible for a bank to foreclose on my HOME."

But if you have limited cash available for an emergency, where would you get cash when you need it in a hurry? Most people in that situation would turn to a HELOC, which would bring back the foreclosure risk you're trying to avoid.

"So "babyv6" "only" will have 20k cash after buying the house. Why is this "little" money?"

babyv6 will be unemployed while moving and looking for a job. One car accident and a trip to the hospital will wipe out that 20k. And with all the cash tied up in the house, he'd then have to try to get a HELOC. Which might be difficult with no income to show the lender, even with 100% equity in the home.

I'm not disagreeing with anything you're saying, just suggesting that there are pros and cons to every decision. There's no right or wrong, but it's better to make your choice with both eyes open.

A sklong as you can make more return on the investments (after taxes) than the mortgage rate (after taxes) it is NEVER better to pay off the mortgage.
As for making a platry 6%, look to better investments.
Way to many of the 'ivestment tools' assume you are going tio live forever and set the base amount of principal for investments based on ONLTY using the interest/dividends to love on.
While a really nice idea, using a reonable life expectancy based on your family history (and even ading some margin) greatly reduces the capital that must be invested.
The equivalent cash value needed to produce the SS stream should be included in the cash holdings for a portfolio. This can have a great effect on how the portfolio is balanced between stocks, bonds, and cash.
It is not very difficult to determine the cash value required to generate SS income at a completely safe rate of return. You have 'invested' this amount if you like it or not. Balance the remainder of the money you have based on this, and do not pretend you are going to live forever.

The retirement tools I've seen lately allow you to input life expentancy, as well as expected return on investments and expected inflation rate. While this makes them more flexible, it also means that, by fiddling with these inputs, you can come up with about any outcome you want.

It's in the interest of those who sell investment vehicles to make you think you need to pile up an awful lot of money for retirement. Their advice should always be taken with a huge dose of salt.

But it is an inescapable fact that retirees' portfolios need to be more conservative than younger folks, both because their time horizon is shorter and also because, as they grow older, it becomes increasingly harder to supplement with earned income shortfalls caused by down years in the markets.

The rate at which a retiree withdraws from the nest egg also needs to take inflation into account. Withdrawing at a more modest rate early on allows the nest egg to continue growing at a rate that is, hopefully, sufficient to keep up with inflation. A beginning withrawal rate of 6% is actually higher than most experts recommend.

I disagree that all of this is "not very difficult." There's just too much guesswork involved about what will happen in the future. Beacause that's unknowable, most people prefer to err on the side of caution rather than err the other way and be left short.

I can't follow at all what you're saying on the SS advice. Most retirement calculators allow you to enter the amount you expect or receive from SS which is easy to find out since the government sends us that info once a year.

Back in 1990 I had to make this same decision. I moved to a less expensive area, bought a less expensive(than I had had & than I could have) but good house in a solid neighborhood, & paid cash. I made this choice because I was a single parent with little to no family support and having housing security allowed me to take a job that allowed more flexibility to meet my parenting obligations ( but also created flexibility in my income). I did have money leftover to invest, which I did, and was lucky and frugal enough to continue to invest yearly. It has all turned out well for me; I may have ended up with more money if I had carried a mortgage after home loan interest rates fell, but in the end I do feel that this was the best global decision for me. Plus, I believe that my house appreciation has matched historic average stock mkt returns --which might not occur if I were buying now, tho, or if I hadn't committed to staying put in this house.

I have a question that relates to this topic, but it is the other side of the coin. Most people, when they retire, have to watch their money so that it lasts their lifetime. In that case, when one is retired, I would think that the best course of action would be to ensure the house is fully paid prior to retirement.

The other side is what if someone has too much money in retirement? Tough position to be in eh? What I mean by too much money is what if someone inherits alot of money, is at an age where they are required to pull out of their IRA's annually and they are buying their new retirement home?

I know someone in this position. Her husband died a couple years ago, she of course, inherited everything and now is in the position that she must manage her money in such a way to avoid as much taxation as possible.

She is selling the family home and will be buying a retirement condo. Her FP suggested she get a mortgage for the property to help with her tax issue, rather than paying cash outright for it.

I know that in the initial years of a mortgage, the interest deduction is helpful, but as the mortgage carries on over the years, that deduction becomes less valuable.

I see this route she plans to take as costing her a heckuvalot more money in the long run, especially in taxes and lost growth in her investments, because she will be pulling out of her IRA as required and paying the mortgage with after tax dollars. So, any tax savings she gets with the mortgage, I would see as being overridden by the tax she pays to pull out the money.

I see it as she will have to pull out more money, thus more taxation to cover the mortgage and her living expenses, when if she paid cash outright for the home, she would not have to withdraw as much from her retirement funds.

I suggested she look into a HE or HELOC to fund the new condo until she sells her family home. She will still get a tax break and won't have to pull out as much money to cover the expenses of having a mortgage.

Is my logic correct?

Rather than depend on advice from her FP, I think she should consult a tax attorney or CPA tax specialist. So much depends on the specifics of her situation, such as what sums of money are involved, her tax bracket, her age, etc. This is especially true if she's not paying the FP by the hour. FPs who earn their money through commissions on sales can't be expected to give neutral advice. Taking advantage of well-off widows has been going on for thousands of years.

I can see that using the money from the sale of the house probably wouldn't trigger any tax payments whereas a big IRA withdrawal would. But without knowing all the details, one can't say for sure. I'd certainly get a second opinion from an objective expert. Competant tax accountants and lawyers know a lot more about how to minimize taxes than do FPs, IMHO.

FF - thanks for that. I was thinking that there would be a bit of bias in terms of getting a mortgage since the FP recco'd her company's mortgage division.

If it makes any difference, she's 70.5 years, must start pulling out her IRA's and those of her deceased husband. She is in the highest tax bracket - I believe 38%.

She called me and told me the mortage rate she was quoted by the same place that has a good portion of her money. It was hiway robbery and she was given a much lower rate at USAA where she's dealt for years. When she called the FP company back, the guy said he would match anything. Here she has several million dollars with this co, and they're trying to give her a higher rate mortgage. Why didn't they offer her the best in the first place given how much she has with them?

I'm going to call her and suggest she consult a tax professional. I don't know if she has already done so, but I will make sure she knows that she needs to keep her FP somewhat at bay when it comes to the taxation advice. I know her FP is a female and specializes in elderly women/widows. Don't know if that makes a difference or not.

Thanks so much!

At that level of assets, she really needs to be careful whom she consults. She also needs full-service tax and estate planning from a really good professional, someone she meets with on a regular basis for periodic reviews. I'd suggest that she might want to do an inital consult with several and pick out the one she's most comfortable with.

Good luck with your efforts to intercede!

FF - I was brought in somewhat unwillingly as she called me seeking advice based on what her FP told her. She hasn't had a mortgage in years and wanted info on making her offer on the condo and then got into the spiel about her taxes.

First thing she said the condo was asking $420K and should she offer $380K? My first questions were had she seen the comps, how long on the market, etc., because she couldn't make an offer without knowing that. Ohhhh good point, she said. Duhh

However, it just didn't make sense to me when the FP advised to take a mortgage instead of taking an HE loan and then paying off after her house sells. Taking the mortgage would require her to pull more IRA's out and then have to do something with the money from the sale of her home. Sounds too complicated for something that could be more simple.

Trust me, I would much rather not be asked about this stuff as I just read these boards and try to learn. *sigh*

"I don't understand the liquidity objection to owning the house free and clear - can't he just get a home equity line of credit? He won't have to use it, but it will be there for emergencies..."

You cannot get a home equity line of credit without an income stream to pay it back.
Only reverse mortgages can typically be used with no income since they have no repayment until death/move out/sale occurs.

Being cash poor and house rich is what pushed the creation of the reverse mortgages in the first place.

FF - I talked to her last night and she said that her FP charges based on the amount of money she manages for her, not hourly or by commission, so she is confident that she's not ill advising for the FP's own gain. She also said that the FP said to consult a tax specialist, which made me breathe a sigh of relief.

She made an offer on the condo and sent me the comps to look at after the fact. I don't know what she was thinking because she lowballed her offer when the comps were alot higher.

She offered $380K on a $420K asking price, when the comps showed nothing went for less than $410K. I hope that the seller looks at it as a starting point for negotiations and doesn't flat out refuse.

Here's something weird. When she told her realtor she wanted to put in an offer, the realtor didn't hightail it to get the paperwork done. She spoke to the realtor on Thursday and the papers are being faxed to her today (Saturday). I thought that was kind of odd. I always thought realtors jumped lickety split to get the offer in so the buyer doesn't become remorseful.

Her realtor also didn't suggest an expiry time for the offer. I told her to call the realtor prior to the papers being faxed to put a time limit. The seller's realtor also said that another offer "may" be coming in, which I find strange since the condo has been on the market for over 4 months. We don't know if it's a bluff or they're holding out for the 2nd offer and that's why they delayed getting the contract to her. Her realtor and the seller's realtor are in the same office, which added to my suspicion.

I told her to make sure that she gets a copy of the response from the seller, even if they flat out refuse it so she knows the offer was actually presented.

"Her realtor also didn't suggest an expiry time for the offer."

Bad agent (from the buyers view).
Of course the agent is working for the seller absent any written agreement withthe buyer.

I would call the agent and withdraw the offer immediately.
You can always submit it again with a short fuse, like 24 or 48 hours.
The agent is not allowed to change the contract to place a time limit.
A time limit is like any other change to a written contract and needs to be initialed by the contract maker.

sparksals -- Don't be too happy that your friend's FP is paid a percentage of the portfolio. We decided to "try" a FP when we were selling off some of a portfolio to fund our new home. There were no fees for management or brokerage fees on the sales for one year. Fine. We saved money there. The following year, we continued with the FP until I realized that our portfolio is so conservative it doesn't NEED managing, certainly not at a 1% management fee! (CDs, bonds, mutual funds -- all very static. Back to a plain old investment firm, which handles the numbers and provides an annual summary for our accountant for a LOT less money.

I'd wonder if the reason the FP suggests a mortgage instead of paying cash is that then some money leaves the portfolio. (Not that I think it's a bad idea, but there is a conflict of interest.)

One other thing: Is this FP certified? Our FP was with Mesirow and had been recommended by a friend, but we found that he had not completed all the FP requirements for credentials -- was on track, but not yet there.

brickeye - the contract hadn't been written up yet. I spoke to her prior to her receiving it and told her to contact her agent to put a time limit on the offer. I haven't heard from her as to what happened with the contract when she received it. To add to the difficulty, she's buying this home long distance and has to do the documents via fax and being on the phone with the realtor explaining everything to her.

Her agent is not the seller's agent. I specifically asked her that, but she did say they were from the same broker office.

============

chisue - Hmmm I didn't think of the situation where if money leaves the portfolio, the FP loses money based on the lower percentage of funds to manage.

I will ask if this FP is certifed. I assumed she was.

BTW, the person who is asking for my help is my MIL. ugggh

sparksals -- Oh-oh. Well, at least she is *asking* you! Mine ignored pretty much any information DH and I gave her -- any information *anyone* gave her, actually!

You are being a good DIL.