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Old 11-25-2009, 06:44 PM   #21
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Originally Posted by Katsmeow View Post
Zathras -- We would have to pay insurance and property taxes whether there is a mortgage or not. The taxes and insurance aren't going vary based upon whether we have a mortgage or not.
The only reason I mention this is that many people think that they will not have any of the payments once the mortgage is paid off.
But if they have an escrow that pays the insurance and property taxes, this will not be the case.
No offense intended if you were well aware of this, or if there is no escrow and you always paid those out of pocket.

For the most flexibility, you may want to see if you can get a home equity line of credit rather than a mortgage. This way you don't have to liquidate a large part of your portfolio, yet can pay off the debt as quickly or slowly (within reason).
I would not recommend this for everyone, it really depends on how quickly you could pay off the debt if you wanted to. All sorts of factors need to be considered (pay of part of the house, and home equity for the rest, etc). But purely on looking for the most flexible option, that is about as flexible as you can get.
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Old 11-25-2009, 07:22 PM   #22
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A mortgage for home purchase might be better than a later home equity loan. You can deduct purchase interest for a mortgage up to $1M, but once that is paid off you can only deduct for interest amounts for up to $100k in principle. You might be able to deduct additional interest if you use the loan to invest. I'm not sure how the reverse mortgage would be treated. Depending on your borrowed amounts, taxes may limit you a bit.

I don't mind refinancing once in a while to lower my rate and maintain most of the original home purchase loan balance. I'm keeping my mortage because I think I can invest the balance and make more than the borrowing costs. However, that's also a higher risk strategy given the chance of market losses and getting stuck with a large debt. Having no debt is safer and more conservative, but also doesn't have the upside of investment gains.
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Old 11-25-2009, 07:29 PM   #23
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On the other hand, I think about which decision is more reversible. If couple A becomes uncomfortable with the mortgage they can take money out of retirement funds and pay the mortgage.
I would personally be uncomfortable with this approach - the time when I would most likely want to get rid of the mortgage on emotional grounds would be when the markets have given my retirement portfolio a beating (like last year) - the very worst time to be taking money out of a portfolio.

The more I think about it, the more inclined I would be to go with option B. If I wanted to speculate, I would wait until the markets had taken a beating and then borrow whatever I was comfortable with to invest in equities then. In effect, I would time the markets.
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Old 11-25-2009, 07:30 PM   #24
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Originally Posted by Katsmeow View Post
I didn't see one either but always wonder if I've missed something so like to get other perspectives. In actuality, what I am seriously thinking about doing is taking the mortgage initially. We would probably buy the house in a year when we have significant earned income and are in the 33% tax bracket. If we took the money out to pay cash for the house the taxes would be significant. I might be inclined to retire, take out "extra" money over a few years to pay off the house and so that it is taxed at a lower rate. But, still not sure.
I agree that if the source of funds to purchase the house outright is a 401k or IRA, thus resulting in taxes on the full amount at your marginal rate, I'd probably mortgage and, depending how things go, pre-pay over the next several years based on tax efficiency. My previous comments were made not considering taxes.
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Old 11-25-2009, 08:16 PM   #25
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Getting a mortgage with the idea of taking out "extra" money over a few years to pay it off gives you a lot of flexibility. Owning a home outright provides a very secure feeling, and it's amazing how little one needs to spend when there's no mortgage.
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Old 11-25-2009, 09:01 PM   #26
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One should run TurboTax to see how much taxes these situations will require. Although mortgage interest is deductible, it is "below-the-line". One would have to cash-flow enough extra money for the payment which in turn would require AGI to be higher. If AGI is higher, then SS benefits will be taxed more.

This is a high income couple, so perhaps the SS benefits are going to be highly taxed anyways. Nevertheless, there may be a big difference in income taxes owed in the 2 situations. It can be complicated, so I would run some scenarios with TurboTax.

For example, suppose one wanted to convert 401(k) money to Roth. If most of one's income was from SS and LTCG, then maybe this could be done at a low tax rate. So instead of paying to the mortgage, you are converting to Roth IRA for the future.
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