Best way for me to finance a second home

[JP.mpls]

I'm considering the purchase of a second home. I would appreciate advice on the best way for me to approach financing that purchase.


I would like to just pay cash, but I can't, because most of my money is in tax deferred accounts.



I understand that I would be financially better to just rent someplace in the area I'm looking at, but I'm in a "Blow that dough" frame of mind right now, which is definitely out of my comfort zone, but I don't care.


My situation:
- Zero debt.

- Paid off home valued at $350K to $380K.
- LBYM life style.

- Two paid off vehicles. A newer car, and an old truck.
- I'm looking at places that cost $300K to $400K. I really like a place I found for $460K, but so far I'm too cheap to go for it.

- All but $150K if my money is in a tax deferred IRA roll over account.

- If I withdrew $500K from my IRA account to pay for this home, I believe I could still live comfortably on a 4-5% withdrawal rate and my SS. This is what makes me think I can afford to do this.



What I'm considering doing:
- Fairly large ($100k) down payment to keep the loan as small as possible.

- Withdraw more money from my IRA each year, pay down the loan faster, but pay more taxes.

Note: I'm currently withdrawing money up to the 22% tax bracket, so I'm paying 12% fed tax rate. My withdrawals are about 50K/year. I could start withdrawing up to the top of the 22% tax bracket, about 100K/year, and pay down the loan faster. Is this crazy talk? I would be paying 22% tax rate instead of 12% tax rate on about 50K a year. So $5K more a year in taxes, minus some deductions for paying mortgage interest.

- So I could pay $50k extra per year against what I owe. The loan could be paid off in 5-6 years.



- The only alternative I see is to pay the place off slowly, and just deal with paying the interest, and owing a bunch of money. Not my style, but possibly not a bad move.



- I've also considered just going the RV route for now, or buying a much less expensive place that needs to be restored.



- I could also downsize my existing residence to help pay for the second place, but I would like to keep that as a back up plan if I'm over spending, or I decide to live in the second place full time.


Any positive or negative feedback on these thoughts would be appreciated. If you have a better approach, I'm very interested.



Thanks, JP

 

[Bamaman]

You didn't say what kind of house the second home is. Lake house? Mountain house? Beach House? Do you plan on spending much time there?

If I was going to step out and mortgage a second home while in retirement, I would want the property to be purchased at an advantageous (low) price vs. what it's worth. And it would be preferable if the house is located where homes sell easily--and fast.

We inherited a lake house and had a nice suburban home 5 miles out of town. My wife came up on a steal on a very large foreclosed house in great neighborhood--which we bought. It took me 10 months to recondition and sell our main residence to the 3rd person that looked at it for list price. We stepped out and walked that tightrope, but it really paid off in equity.

 

[JP.mpls]

Bamaman,
I'm looking at a home with a pool within walking distance to the beach and local downtown in Florida. The prices are high in this area.



I do believe it is a desirable enough area, that I could sell if I wanted out.

Possibly at a loss if the market is depressed.



This is on the golf side of Florida. If I'm willing to look further away from the ocean and town (out to the suburbs), the prices seem to be much more reasonable, the homes are newer, and there are many more homes for sale. I could see having trouble selling one of those homes in the future, mostly because of the supply and demand. There are so many to choose from.



JP

 

[Scrapr]

Be aware that resort type area (in general) will take a bigger hit on prices & stay down longer than "regular" working communities. In the Great Recession our 2nd home area pulled exactly 6 building permits one year in a town of >50k at the time. Prior years were approx 800 permits/year. So in a serious downturn you may not be able to get out at any price. There were 6-10 suicides by developers who got in too deep. Very sad.

It sounds like you have a handle on things. We just did a 15 year mortgage with about 35% down. Personally i would not take the tax hit on early withdrawal of IRA money. Can you cash flow the mortgage out of your earnings?

 

[W2R]

I understand that I would be financially better to just rent someplace in the area I'm looking at, [...] but I don't care.

Well OK then. Your mind is made up. You have decided to not only buy a second house just months before your retirement date, but also to take on a huge mortgage in order to do it. You don't care what is financially better. Good luck on that and I hope sequence of returns risk does not create problems for you as well.

Your approach to personal finance is so different from mine! Because of that I have nothing further to say.

 

[Senator]

Why not buy it and use it as a vacation rental?

You can use it for 14 days, or 10% of the time rented without penalty. If you use it for more, you cannot deduct a loss.

If you do maintenance on it, those days are not counted as part of the 14. Your mileage, hotels and meals are deductible while you are there doing maintenance at least 4 hours a day. Any improvements to it, including dishes, towels, coffee, soap, X-box, PS4, etc. are deductible. All utilities and insurance is deductible.

After 2+ years, you can make it a personal residence.

 

[JP.mpls]

Well OK then. Your mind is made up. You have decided to not only buy a second house just months before your retirement date, but also to take on a huge mortgage in order to do it. You don't care what is financially better. Good luck on that and I hope sequence of returns risk does not create problems for you as well.

Your approach to personal finance is so different from mine! Because of that I have nothing further to say.

W2R,
Thanks for the reply, and I value your opinions. Your comments are very logical, and I agree that my plans are not in my best financial interest.



Where you are wrong, is that I suspect my approach to personal finance is very similar to yours, but my life circumstances are very different.



I'm attempting to do something that I would like to do, but that doesn't mean that I'm comfortable doing it. Lets just say that it is a Carpe Diem type of effort, and if you knew me better, you might just be encouraging me to go for it.


Take care, JP

 

[JP.mpls]

Senator,
My desire would be to stay in Florida for >6 months, and return to MN (like you) for the remainder of the year.
I would encourage family and friends to visit me while I'm down there, and even use the place when I'm not there.

I would probably sell my MN home if I really enjoy it down there, and the finances become tight. I own a seasonal cabin in northern MN, so I could sell my home in the city.

I think if I purchase a nice enough place in a desirable area, it will always be in demand, and I won't be throwing away all of the money involved.


Not too interested in operating a rental. Should have purchased down there 20 years ago, and had the rental pay for itself.


Thanks for your comments. JP

 

[JP.mpls]

Scrapr,
I could probably pay for half of a 15 year mortgage payment without going into the higher tax bracket.
That may be the answer. Moderation. Maybe only pay higher taxes on 15K instead of 50K each year, and plan on a 15 year mortgage.

If I purchased something in the $250K range, I could more aggressively pay the whole thing off.

Sorry for the rambling, and thanks for your thoughts.

JP

 

[qt333]

It wasn’t easy to find a bank willing to use assets to qualify for a mortgage after retiring- that was 2014 though so perhaps it’s easier now.

 

[RunningBum]

Are you going to be in the 22% bracket when you hit MRD age? If so, I don't think I see an issue with withdrawing in that bracket now.

If not, I wouldn't do it. Yes, you're paying interest, but it's offset by the fact that you're keeping that money invested. Interest rates are good right now too. Paying an additional 10% in taxes, that money is gone, not offset by anything.

 

[Senator]

Senator,
My desire would be to stay in Florida for >6 months, and return to MN (like you) for the remainder of the year. I would encourage family and friends to visit me while I'm down there, and even use the place when I'm not there.

I would probably sell my MN home if I really enjoy it down there, and the finances become tight. I own a seasonal cabin in northern MN, so I could sell my home in the city.

I think if I purchase a nice enough place in a desirable area, it will always be in demand, and I won't be throwing away all of the money involved.

Not too interested in operating a rental. Should have purchased down there 20 years ago, and had the rental pay for itself.

Thanks for your comments. JP

My Vacation rental in Kissimmee is 100% hands off. I use Evolve for the marketing, and they have a PM on the ground to coordinate the cleaning and any fixes. Since I want a tax deductible trip, and hate to spend money, I go down a few times a year to do any maintenance that is needed and a cleaning.


My other place is about 100-miles north. There are plenty of places near Ocala that are cheap. My place was only $50K. 3BR, 2BA built in 2007 on 1-acre of land, in the middle of the Florida jungle. I can count on one hand the number of cars that drive by each day. And Amazon still delivers in 2-days.

20 years from now, people will be saying they should have purchased now...

 

[pb4uski]

Are you going to be in the 22% bracket when you hit MRD age? If so, I don't think I see an issue with withdrawing in that bracket now. ...

+1 If not, then I would do a 30 year and make the payment from withdrawals

 

[pjigar]

I think if I purchase a nice enough place in a desirable area, it will always be in demand, and I won't be throwing away all of the money involved.

I have seen this hold not true in Florida during last downturn. Our friend's house (brand new modern home near beach) lost more than half of its value and no one was buying even at that price. House prices can and do go down.

 

[mrWinter]

If you are definitely going to buy the home, and can afford to do so, I might vote to put 20% down and mortgage the rest, paying no extra down. This is the same old keep the mortgage in retirement vs pay it down discussion. Pros for financing as much as possible for as long as possible:

• Interest rates are insanely low right now (and we expect the fed to drop a bit more tomorrow right?) You can get a 3% loan. Do you think the market won't do better than that on average over the next 30 years?
• You won't be taking extra distributions from your account to pay the mortgage down earlier, at that higher tax bracket rate. Free 5k a year by your math if I recall correctly.
• The government subsidizes home loans, if I remember correctly 100k of the second/vacation home, so that 3% rate is effectively even lower.

None of this is supposed to be an argument for buying or financing more than you can afford of course, just how long you should take to pay it off.

 

[joeea]

I'm considering the purchase of a second home. I would appreciate advice on the best way for me to approach financing that purchase.


- The only alternative I see is to pay the place off slowly, and just deal with paying the interest, and owing a bunch of money. Not my style, but possibly not a bad move.

Just get a 30-year mortgage with 20% down.

But first, figure out what it is you really want, and where you want it. Right now it seems like you are tossing a large number of ideas (buy, rent, RV) around in your head. Rent in the area you desire first, unless you know the area very well.

 

[njhowie]

On the one hand, I agree completely with W2R. On the other hand, you have not provided a complete set of information regarding your situation.

If you have $1 million in tax deferred savings that's one thing. If you have $10 million that's something else and would affect my view.

 

[Mdlerth]

First things first

It wasn’t easy to find a bank willing to use assets to qualify for a mortgage after retiring- that was 2014 though so perhaps it’s easier now.

I've heard and read this often enough, and it sounds like a more immediate obstacle than what the optimum repayment schedule should be. First determine if OP can even obtain a mortgage without active W2 income. If not, then the answer is clear: tap the IRA for the full amount, pay cash and take the tax hit.

If it's of any help, I'll volunteer that DW and I bought our retirement house while still employed so mortgage approval was easy. The bank only cared about our earnings, not our retirement accounts.

But we don't intend to own two houses indefinitely. Once we clock out for good we will sell the old house to pay off the new mortgage. We were reluctant to carry debt into retirement; I guess that makes our thinking very similar to the banks'.

 

[sheehs1]

Just a couple of additional quick thoughts.

1) If you purchased, where does that put you with the $10,000 cap on property taxes that was in the new tax law? Would you remain below that or go over it possibly loosing some of the deduction?

2) You could consider an equity line against your first house. Typically it's 80% of the value. 80% of $350,00 is $280,000. You can find Equity Lines with zero closing costs and the bank pays for the appraisal on your house, etc. There are all sorts of caveats out there for Equity Lines, Prime + or - for the rate. But you would have to gage that rate against the current 15 or 30 year mortgage. My daughter and son-in-law just last week qualified for a 3.5% rate on a 30 year.

Also, check the new tax code for interest deductions on a HELOC against primary house.
I am only suggesting you look into this as you might not have to use your $150,000 or take larger deductions from your IRA's that may bump up your tax bracket.
Only you can decide how quickly you can pay off a HELOC (Equity Line). If you intend to pay if off rather quickly, an Equity Line with no closing costs or any costs...may be the way to go. i.e., why pay the closing costs of a mortgage?

I bought a second home but paid cash.

 

[JP.mpls]

It wasn’t easy to find a bank willing to use assets to qualify for a mortgage after retiring- that was 2014 though so perhaps it’s easier now.

QT333,
Thanks for the comment.

This is another concern. I've set up monthly withdrawals from my IRA, and along with my SS income and decent down payment, hopefully this won't be an issue. I should get prequalified for a loan. A good next step.


My home is paid off. Maybe they would finance using that property as collateral.



JP

 

[JP.mpls]

MrWinter,
Thanks for your comments/thoughts.

All of your recommendations seem very logical. Even if I'm planning to behave irrationally by purchasing a second place, I like the idea of doing it in a logical manner. (Too many years in an engineering environment. )
JP

 

[JP.mpls]

Just get a 30-year mortgage with 20% down.

But first, figure out what it is you really want, and where you want it. Right now it seems like you are tossing a large number of ideas (buy, rent, RV) around in your head. Rent in the area you desire first, unless you know the area very well.

Joeea,
Thanks for the comments.



The LBYM me wants to drive down there, and live out of my tent.

Living in a rental, RV or purchasing a fixer upper in a less desirable area are just incremental improvements to that lifestyle.


Ideally it would be a home I really like, and want to live in, possibly even year round. It would also be a place that family and friends would want to visit. (The good stuff.) Everyone likes that, and that is why it costs a lot of money.


Take care, JP

 

[qt333]

QT333,
Thanks for the comment.

This is another concern. I've set up monthly withdrawals from my IRA, and along with my SS income and decent down payment, hopefully this won't be an issue. I should get prequalified for a loan. A good next step.


My home is paid off. Maybe they would finance using that property as collateral.



JP

I was forced to refi due to condo conversion, my loan balance was less than 20% of appraised value and it was my principal residence. I was 3 years into retirement, a small pension but not yet collecting ss. Could have paid it off using after tax assets but preferred to keep mortgage for diversification and tax purposes. Eventually Merrill Lynch/BofA were able to qualify me - wasn’t a simple process. In 2016 I bought a second home, didn’t even try to finance, paid cash.