mortgage for old folks?

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Topic Author
Poodlefan
Posts: 22
Joined: Tue Mar 15, 2016 3:49 pm

mortgage for old folks?

Post by Poodlefan »

I suspect that this will give pause to many; it does to me. My husband and I spent 710000 for a nice house in a nice community in very pricey Seattle. This in the middle of a crazy market. We have made and lost money on houses. We couldn't stand rentals anymore and family reasons keep us here. In addition, we are elderly, and it will suit us as we age and help us remain independent. We are 72 and 81, fairly good health. We have 50K a year in pension type things pre-tax, we work a little for another 50K. We have 2,100,000 in DFA funds which are diversified and conservative. We are considering taking out a 30 year mortgage at 3.5 percent.
We don't really plan to spend it on anything; we just think we would have some liquid cushion for a new roof, or a car if needed, and money seems cheap now. I keep expecting inflation to hit, but I've been wrong with many predictions. We feel like we decimated our investment portfolio when we bought the house. and hate to have to liquidate in a pinch. We don't have to do it at all; we could do a different amount, term, etc. I would love to hear your responses to this, although I am cringing a bit. Thanks, Poodlefan
joebh
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Re: mortgage for old folks?

Post by joebh »

Poodlefan wrote:We feel like we decimated our investment portfolio when we bought the house
Decimated, yet you have 2.1M left and at least $100k in annual income? It's hard to believe you couldn't comfortably pay for a roof or car with that.

Have you considered a HELOC instead, to have on standby should a real need arise?

I agree that it would indeed be cheap money. But money you don't actually need isn't ever quite that cheap.
delamer
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Re: mortgage for old folks?

Post by delamer »

None of your $2.1 million is in tax-deferred that requires RMD, I assume?

If you no longer had the $50K in earned income, would you need to withdraw money from your investments? Could you carry the mortgage if you lost the $50K in earned income? What happens to the pension income when one of you dies?

You need to figure out your worst case scenario. It is a bad idea to take out a mortgage and then end up having to withdraw from your investments to pay that mortgage
Jack FFR1846
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Location: 26 miles, 385 yards west of Copley Square

Re: mortgage for old folks?

Post by Jack FFR1846 »

Either taking a mortgage or not taking it is absolutely fine. I would lose zero sleep with either decision.
Bogle: Smart Beta is stupid
Gill
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Location: Florida

Re: mortgage for old folks?

Post by Gill »

I agree with the home equity line of credit. It usually costs little or nothing but is available immediately. My situation is similar to yours and I've had one ever since they became common in the 1980's. In recent years I've rarely used it but it's good to know you can write a check at any time up to the limit.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
staythecourse
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Re: mortgage for old folks?

Post by staythecourse »

Not to be crasse but at your ages by bigger worry would be enjoying myself as much as possible before one or both of you two pass away. Money is not an issue for you with your life expectancies. Time is the bigger issue.

Spending time thinking about mortgage or no mortgage is a waste of precious time.

Good luck.

p.s. With 100k of income each year why even worry about a damaged roof or the unanticipated expense?
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
randomguy
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Joined: Wed Sep 17, 2014 9:00 am

Re: mortgage for old folks?

Post by randomguy »

Gill wrote:I agree with the home equity line of credit. It usually costs little or nothing but is available immediately. My situation is similar to yours and I've had one ever since they became common in the 1980's. In recent years I've rarely used it but it's good to know you can write a check at any time up to the limit.
Gill
There is some risk that the HELOC will be revoked right when you need it.

I am probably one of the biggest fans of not paying off your mortgage on this board but taking out a mortgage to invest in cash seems crazy to me. But we also don't have a complete view of your situation (what are expenses like, do you really expect 50k of working income for much longer, ....) but it really sounds like taking risks don't need do. It sounds like you might be happier with say 50k sitting in some CDs/Cash.
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Watty
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Re: mortgage for old folks?

Post by Watty »

Poodlefan wrote:We have 2,100,000 in DFA funds which are diversified and conservative. We are considering taking out a 30 year mortgage at 3.5 percent.
If you have a financial advisor that that is being paid something like a 1% AUM fee each year for the assets under management and they recommended that you take out a mortgage then you need to understand that they have a conflict if interest.

The problem is that if you take an extra $600K out of the account to pay cash for the house then that will reduce the assets under management and they will be paid $6,000 less in fees each year.
Poodlefan wrote: and money seems cheap now.
It could vary a lot but your asset allocation might be something like 70% bonds at your age.

That would mean that you have something like $1.4 million in bonds right now.

The Vanguard Total Bond Index fund has a yield of 1.74%

https://personal.vanguard.com/us/funds/ ... IntExt=INT

You would be borrowing money at 3.5% but lending money out by buying bonds at 1.74%

You are borrowing money at twice the rate that you are lending money at. That is very expensive money even with any tax advantages.
Poodlefan wrote: we just think we would have some liquid cushion for a new roof, or a car if needed,


Not that you would need it but you can get new car loans at 1.49% which is a lot lower than a 3.5% mortgage.

https://www.penfed.org/Auto-Loans-Overview/#tabs-2
Poodlefan wrote:I would love to hear your responses to this, although I am cringing a bit.
.

You are asking the right questions which is great.

From what you have said there really isn't any good reason to get a mortgage.
VaR
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Re: mortgage for old folks?

Post by VaR »

1. What is your current cash cushion for unexpected expenses? I think the question you are really asking is, "How much should my cash cushion be and how should I structure it"?
2. I would not create leverage in your portfolio by getting a mortgage at this point.
3. Getting a HELOC with the right bank is a good idea. I have one myself with a small local bank that doesn't care that I've had it for 15 years now without accessing it.

It seems to me like you're feeling a bit uncomfortable with your current asset allocation or cash cushion compared to before you bought the house. Could you give us any insight into the difference between your cash situation then and your cash situation now?
Topic Author
Poodlefan
Posts: 22
Joined: Tue Mar 15, 2016 3:49 pm

Re: mortgage for old folks?

Post by Poodlefan »

First, thanks to all of you for considering my question. We really appreciated your consideration and sensitivity. I think you are right that I am worried about our cash cushion. This is amusing since our bonds seem to be mainly short term investments. We have about 30 K in checking (darned if I can find a CD that makes much difference) and about 70000 in cash in the post-tax investment portfolio. I think this is too much cash but our adviser was waiting to see what happened with our purchase. We will probably return some for investing. It is interesting how much psychology plays into this I come from Italian and Scotch Irish people who would keep all their money buried in the backyard.My husband is one generation American from well off peasantry in Ireland. He doesn't seem to take any of this very seriously, although he earned much of it. I had originally considered a Heloc and still will, I don't even know what we might need the money for except the roof etc. which we can manage. I think I may be reacting to liquidating all that money. I posted our portfolio a few months ago and the responsders were very comfortable with it. It is reduced by a third but still diversified with DFA. I must say our investment adviser gets a set rate every year; doesn't matter what he does with it. He is a good guy. I am spreading my anxiety about money, a good Italian peasant trait, among you all. It is very reassuring to realize I am not too far off in left field. Thanks, I think maybe the Heloc, and it isn't even necessary. I also think the advice to enjoy our life is good advice. Thanks so much. Poodle fan
Topic Author
Poodlefan
Posts: 22
Joined: Tue Mar 15, 2016 3:49 pm

Re: mortgage for old folks?

Post by Poodlefan »

I realize I didn't respond to the allocation we have. We have one and a half million in tax deferred accounts and about 650000 in an investment account. There is about 30000 in savings for that cushion during the settling in period. We could probably not live on our pension and would use our RMD if we stopped working. I was recently taken aback to learn that we are statistically likely to live into our nineties. However, we are fairly flexible and would sell this place and move to a cheaper locale than the Seattle area if it makes sense in a few years, i.e. when the grandkids are spread out on their own.

Thanks for the info about car loans; it has been a long time since I had one. If they are cheaper than mortgages, that's what we will do if we have to.

Our DFA advisers are only 2000 a year and our strong on diversification as well as conservative with old folks' money.
Still I do consider Vanguard's Wellesley fund or one of their others. I find the advisers have been a good buffer against our occasional impulsive responses to market turmoil However, we could probably manage that; one does learn some things with age.Thanks again. It was very helpful to have "new eyes" look at our plans. All responses considered and appreciated. Poodle fan
CWhea1775
Posts: 50
Joined: Thu Jan 28, 2016 3:45 pm

Re: mortgage for old folks?

Post by CWhea1775 »

We just made a similar decision and ended up getting a 30 year mortgage at 3.65% for about half the value of a $650k house. We are younger than you (both 62), but our thought process was:
Mortgage rates are at historic lows
With pension and SS we can easily afford a mortgage payment forever - we calculated our annual post-retirement budget and the mortgage fit in just fine (we aren't retired yet, but soon)
Taking money out of tax deferred accounts to pay cash would generate a huge tax bill (this was the big one)
Lost opportunity value of investments if used to pay for house

We did use a 60 day "rollover" of an IRA to pay the 50% down payment while we sold our home - that has been a bit stressful
c1over8
Posts: 272
Joined: Fri Apr 01, 2016 10:15 am

Re: mortgage for old folks?

Post by c1over8 »

If you are counting on being able to deduct the mortgage interest on your taxes, make sure your read up on mortgage interest deductibility before you take out the mortgage. If it is not home acquisition indebtedness (and it sounds like it won't be), you would only be able to deduct interest on $100,000 of the mortgage if you file married filing joint ($50,000 if filing separate).

IRS Pub 936 states:

Fully deductible interest. In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.

If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category.) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct.
The three categories are as follows.
1. Mortgages you took out on or before October 13, 1987 (called grandfathered debt).

2. Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2015 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).

3. Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2015 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

https://www.irs.gov/publications/p936/ar02.html
delamer
Posts: 10588
Joined: Tue Feb 08, 2011 6:13 pm

Re: mortgage for old folks?

Post by delamer »

Poodlefan wrote:I realize I didn't respond to the allocation we have. We have one and a half million in tax deferred accounts and about 650000 in an investment account. There is about 30000 in savings for that cushion during the settling in period. We could probably not live on our pension and would use our RMD if we stopped working. I was recently taken aback to learn that we are statistically likely to live into our nineties. However, we are fairly flexible and would sell this place and move to a cheaper locale than the Seattle area if it makes sense in a few years, i.e. when the grandkids are spread out on their own.

Thanks for the info about car loans; it has been a long time since I had one. If they are cheaper than mortgages, that's what we will do if we have to.

Our DFA advisers are only 2000 a year and our strong on diversification as well as conservative with old folks' money.
Still I do consider Vanguard's Wellesley fund or one of their others. I find the advisers have been a good buffer against our occasional impulsive responses to market turmoil However, we could probably manage that; one does learn some things with age.Thanks again. It was very helpful to have "new eyes" look at our plans. All responses considered and appreciated. Poodle fan
I am curious as to what you are doing with your RMD's now. Are you putting them into your investment account, and so not spending them?
Topic Author
Poodlefan
Posts: 22
Joined: Tue Mar 15, 2016 3:49 pm

Re: mortgage for old folks?

Post by Poodlefan »

We have been reinvesting them in our joint account. I think that will stop at some point, clearly. Although two of our dear friends kept working until 90, albeit not full time! We enjoy our work, mental health types; flatter ourselves that we are better with age; and find it is good for us. So we have tried not to use the RMD; in fact, at times we make more than 50K before taxes. I always assume the worst. Poodle fan
furnace
Posts: 336
Joined: Tue Oct 20, 2015 3:38 pm

Re: mortgage for old folks?

Post by furnace »

Poodlefan wrote:we work a little for another 50K.
You got the attention of a lot of elderly people -- earn 50k by working a little :mrgreen: If you want to elaborate, I think they would appreciate it. If it's something proprietary or fragile, please don't share.
Topic Author
Poodlefan
Posts: 22
Joined: Tue Mar 15, 2016 3:49 pm

Re: mortgage for old folks?

Post by Poodlefan »

My husband is a psychiatrist, would be lost without his work. I am a psychologist and have been consulting for disability work. It is satisfying work, gets us nice interaction (usually) with other people, and I think we are often helpful. The money is nice on a part-time basis, very nice really. We both work about 10 hours a week, and it is good work. Unfortunately, no good ideas for stating businesses, etc. We were never good at that, but we do interesting work and get paid well for it. We hope to continue it for a long time. God will decide. Poodle fan
Mike83
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Joined: Tue Apr 01, 2014 1:37 pm

Re: mortgage for old folks?

Post by Mike83 »

Something to consider would be Washington's Homestead Law protections that you may lose if you hoard cash by getting a mortgage. In Florida, if you 'cash-out' your house, the money is exposed to creditors (think big medical bills; plus you would still owe the mortgage company). If Floridians leave the 'cash' in the house, it is not accessible to creditors.

You need to look up specifics for your state.
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