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Two Loans or One?
Old 10-18-2009, 07:10 AM   #1
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Two Loans or One?

We're going to start building our retirement home in the next month or so, log house on 28 acres in WV. We had originally planned to wait another year or so before starting but builders seem motivated to get jobs now and if there is a full recovery, we think building supply prices will rise (some evidence they are already doing this according to several builder friends we've talked with).

We've already decided we won't have a mortgage on the new house. We have a combination of funds that become available to us over the next 18 months and some current cash on hand (outside what we've always considered as our retirement fund) that will cover about 50% of the new construction.

We have a line of credit available from our brokerage firm that can cover the rest of the costs but the thought of paying out more interest over this time period until we can sell our current house bothers me. Once the house we're in today is sold, we're reasonably confident that we'll have almost all that is needed to pay off the line of credit but will use some of our retirement savings to make up the difference if needed.

I guess this puts us in the "pay off the loan because we'll feel better" side of that debate, lol.

Having decided that we're willing to use reitirement savings to ensure we won't have a morgage, I'm now debating whether to just finance the delta on the construction of the new house as we go along from our retirement savings rather than using the line of credit. The retirement funds would be replaced as the payments we have coming in arrive and when we sell our current house. We'll miss any big recovery for the money we've taken from our investments. Being conservative, our asset allocation for equities is only 40% so we've limited our upside as much as the downside already so might not be limiting ourselves that much? We won't have to pay interest along the way (at about 5.5% today). This interest wouldn't be deductible as I understand it so no tax benefit from keeping the loan?

Thoughts on strategy or is this really just the same debate, stated differently? For those of you that feel like it's better to stay in the market and have a mortgage, what type of return do you think you need to get to make that strategy successful?
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