Pay cash for condominium?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
jefmafnl
Posts: 473
Joined: Sun Mar 25, 2007 7:11 am

Pay cash for condominium?

Post by jefmafnl »

I recently retired; my wife retired earlier. We are planning to move from Europe, where we have lived for 26 years, to Akron, Ohio within the next 6 months, buying a condominium there.

The market there is very tight, so one must be pre-approved for a mortgage, and it’s not easy to get approved for a mortgage when coming from Europe.

Down payment would come from savings and savings bonds. We are considering using some of our retirement savings (in the US), from ordinary taxable accounts (so that we would pay tax only on the capital gains), and perhaps from Roth IRA’s, but not from Traditional IRA’s, to pay all “cash” for the condominium, rather than having a mortgage.

I have run the numbers, and, with a 15-year fixed rate mortgage on $200K, even at today’s low rates, the reduction in what we could take out each year from our retirement account (by paying cash rather than taking out a mortgage) is so much less than the mortgage payment (if we took out a mortgage) that we would have to live more than 9 additional years (beyond the 15 years) in order to come out behind, which in our case (ages 66 / 72, not great health) is extremely unlikely.

What would you see as the pros and cons of paying cash?

Thanks!

J
User avatar
grabiner
Advisory Board
Posts: 27691
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Pay cash for condominium?

Post by grabiner »

If you sell bonds from the IRA, you lose the low-risk return on those bonds. But if you use those bonds to avoid taking out a mortgage, you gain the risk-free return of the mortgage rate. Therefore, even if you could qualify for the mortgage, you might be better off selling bonds to pay cash for the condo.

If you do this, you aren't giving up the value of tax-deferred growth, since you would have to withdraw from your IRA anyway to make the mortgage payments.
]
Wiki David Grabiner
sandan
Posts: 46
Joined: Wed Apr 03, 2013 12:48 pm

Re: Pay cash for condominium?

Post by sandan »

I think there are a lot of cost savings.
1)As grabiner mentioned, gain on the spread between the interest rates.
2)No mortgage fees. (Maybe 1 or 2k in cost savings??)
3)Lower long-term income tax due to assets being in property instead of interest earning bonds.
4)The transaction and negotiation is likely to be much smoother. I've made two cash offers, and the prices were good. I think the agents work much harder to close the deal in such a circumstance.
Topic Author
jefmafnl
Posts: 473
Joined: Sun Mar 25, 2007 7:11 am

Re: Pay cash for condominium?

Post by jefmafnl »

Thanks.

But selling only bonds would give us an asset allocation in our "retirement accounts" that is much heavier in equities than what we have now.
Shouldn't we sell both stocks and bonds so as to keep our current allocation?

J
User avatar
grabiner
Advisory Board
Posts: 27691
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Pay cash for condominium?

Post by grabiner »

jefmafnl wrote: Wed Sep 16, 2020 10:16 am Thanks.

But selling only bonds would give us an asset allocation in our "retirement accounts" that is much heavier in equities than what we have now.
Shouldn't we sell both stocks and bonds so as to keep our current allocation?
You may choose to do this; if so, you are making a fair trade-off between risk and return.

Selling only bonds makes a simpler comparison, because you have the same amount of stock-market risk whether you have both bonds and a mortgage or neither. While you have a larger percentage of your portfolio in stock if you sell only bonds to avoid taking out the mortgage, you have the same dollar amount in stock.

Another way to look at this is to view a mortgage as a negative bond. A bond is an obligation to pay you money on certain future dates, while a mortgage is an obligation for you to pay money on certain future dates. If you are owed the same amount that you owe, this is equivalent to owing and being owed nothing.
Wiki David Grabiner
Post Reply