House conundrum

[Katsmeow]

DH and I plan to retire in mid-2010. For both financial and non-financial reasons this is the best time to do it so don't want to defer. At time of retirement, DH will get a lump of about $1 million which will go into tax deferred account. We will have about $400k in 401(k) funds (assuming no huge drop in values in the next 6 months) and about $120k in taxable accounts. We are currently in the 33% tax bracket and will probably be so for 2010.

We have a house that we want to sell to downsize. The downsize home that we want to buy has to meet some specific requirements as we have pets such that we need unrestricted property. The point being that if we find something that meets the requirements it could be months or longer before something else turns up.

Our property market here (Texas) is a mild seller's market. Our current house sold quickly the last 2 times it was sold. However, it is a higher end (top 5% of prices) for the area and is a custom home on acreage so may sell quickly but might not. It would not be unusual for it to sell within 30 days, but on the other hand it has occasionally taken some houses over a year. House has guest house and pool which if someone sees it who wants those things then it is great but could be turnoff for other buyers.

Some of the options we have:

1. Wait to buy new house until sell current house. New house will likely cost around $250k. To buy it we would have to either get a mortgage during retirement or would have to pay cash. To pay cash we would have to take a large amount out of retirement accounts paying at a hefty tax rate if we sell this year which seems probable. To get a mortgage our only income during retirement is DH SS plus whatever we withdraw from his retirement accounts so not sure if we could even get a mortgage given the lack of regular income. Another disadvantage is that when we sell this house there could easily not be a suitable replacement house on the market for months so we might have to rent for awhile (difficult due to pets) and then move twice.

2. Buy new house now and get a mortgage for it while still working. We should be able to easily qualify for the mortgage even without selling our current house. Advantage of this is that we can pay for the new house over a period of a few years if we want minimizing the tax hit (or could choose to pay out over a longer period if we wanted to). Disadvantage is that we are paying for the new house while still owing this one. This is fine if we sell within a reasonable time, but problematic if it takes more than say 2 years to sell current house (extremely unlikely but anything is possible). Currently it looks like there is a house on market that might be suitable for us and would probably result in a mortgage of about $180k with but would need to have a room added on to the house (perfect location but just one room too small).

3. Defer selling current house for the next 4 years until our youngest child is out of high school. We could pay off the $110k 2nd lien on the house which is at a relatively high interest rate with the cash we have in our taxable accounts. We could right now (while we are still working) refinance the first since we bought the house 3 years ago when rates were higher. Doing this would cut our mortgage payment by about 40%.

Doing this would only make sense if we were going to stay in the house long enough to make it worthwhile to refinance and to take our money in taxable accounts and use it for this purpose. The hope being that in 4 years we could sell this house for enough to then almost pay for a new house which at that time we might be able to buy a smaller one that we would need now (currently would need a house for 4 people). Four years from now more likely to need one for 2 or 3.

However, the mortgage on this house even if cut 40% would still be more than the mortgage on a downsized house we would buy now. Also, our property taxes on this house are over $8k a year and would be about $3300 on a house in the price range we are looking for. Also, this house is huge (4400 square feet, plus guest house) so electric is high. And, it has a pool which requires maintenance.

Essentially, if we refinanced this house we would have $110k less cash (since would pay off second lien) but even after doing this it would cost about $22k more a year to pay the mortgage and live in this house that it would cost to pay the mortgage and live in a downsized house. This does not consider however the greater tax deductions of this house (currently we pay AMT).

And, of course refinancing doesn't make sense unless we know we will stay here long enough to pay for the refinancing. We would not want to refinance and then sell soon thereafter.

Given all the above we are inclined to try to buy the downsized house now before selling this one. I realize that this is not without risk but every one of our choices has risk particularly since it is so hard to find houses that meet our criteria. Waiting to buy until we sell this house is appealing but we don't like the idea of having to withdraw enough to pay cash for the downsized hosue and I am not confident we could get a mortgage then given our lack of regular income during retirement. And we don't like the idea of likely having to move twice if we do that since there is a good chance we would have to go to a rental (and then would have costs for that as well).

Any thoughts?

 

[W2R]

Any thoughts?

Only that I am so glad I am not dealing with as many issues as you are, in regards to this move! My sympathies and I hope someone else has good advice for you.

In my case I will be selling my home and moving to another state, probably in about a year (depending on how long it takes to sell). I have no mortgage or HELOC. I will probably sell my house and then rent for a few months up there while looking for my new home.

If I see one that I like between now and then, I might just buy it in cash even if my home down here hasn't sold yet. Luckily I won't be needing a mortgage to pull that off, but I will be trying hard to resist even so! But sometimes houses really "call" to me.

 

[Meadbh]

My situation has some elements in common with yours, except that (a) I don't have a mortgage on my current home; (b) I am buying my next home now; and (c) I am going to continue w*orking till I pay it off. I plan to rent it in the meantime. When I own it outright I plan to RE and sell my current home. The sale proceeds (not taxable) should fund approximately 4 years' RE expenses.

Personally, what you propose would be too much leverage heading into retirement for me. But YMMV.

 

[Katsmeow]

There are financial and non-financial reasons not to defer the retirement. We have run the scenarios through Firecalc and are still at 100% even if we don't sell our current house before retiring. Of course, we can spend less if we sell this existing house quickly.

For the long term our goal is to not own our current house and to have less expensive to maintain house that is much smaller that we will either owe no debt on or if we do have a mortgage it is because we choose to do that knowing we could pay it off any time.

How to get to best get to that is the question. We could pay cash for the downsized house even now, but the money taken out of the retirement accounts would be taxed at the 33% tax bracket which doesn't seem like a good idea. This is the reason we are considering a mortgage for that house. If we had the cash in non-retirement accounts we wouldn't consider the mortgage at all. Ideally I think we would plan to pay for the house within 5 years even if we did get a mortgage spreading out the income taken from retirement accounts over that period so that it is taxed at a lower rate.

Of course it would all be easier if we didn't have a mortgage on our current house, but, we do. So, I have to figure out the best choice out of the options that I actually have.

 

[jimnjana]

what about paying off mortgage on current house and downsizing later. You could then either sell current house first or take mortgage on down size house and pay it off when the current house sells.

 

[RunningBum]

Could you rent one of the houses until you sell the current one? Sounds like the smaller one would be easier to rent. Not really an ideal situation since the renter probably wants a lease and when you sell the current one you'll probably want to move within 60 days or less, but maybe you could find a month-to-month renter.

 

[Katsmeow]

Jimnjana -- It would cost over $500k to pay off current mortgage and we would have to draw $400k out of retirement accounts to do it and would throw into 35% tax bracket so can't think that is a good idea.

RunningBum - To get a mortgage at a good rate on the new house we would have to be intending to occupy it as our primary residence. Renting it out would make it where we couldn't get a mortgage except as an investor which would be much more expensive.

 

[jimnjana]

Jimnjana -- It would cost over $500k to pay off current mortgage and we would have to draw $400k out of retirement accounts to do it and would throw into 35% tax bracket so can't think that is a good idea.

In that case I would opt to sell current house first. We have been in the situation of having a house on the market when buying a house in our new location and would not recommend that for anyone. Worst case you end up having to rent while looking for next home because your current home sells so fast... not a bad position to be in.

 

[SecondCor521]

Two comments:

1. I would take what I see as a more conservative approach and sell the larger home first, rent, then buy the smaller home. The thought of renters or paying two mortgages would give me the heebie-jeebies. Moving twice and renting for a while until the right smaller property comes up are small prices to pay IMHO. The pets can always be boarded somewhere; maybe even at your current property after you sell to the new owners. If you can't pay cash for the smaller home or get a suitable mortgage on it given your retirement plans, then I would rethink the retirement plans instead of the house downsizing plans.

2. I would wonder about that kid still left at home. Would s/he be able to continue in the same school system and keep his/her friends if you moved? If not, I'd seriously consider just bucking up and staying in the large home, regardless of what that meant to my FIRE plans.

In other words, I would prioritize things in the following manner:

1. Kid
2. House downsizing
3. Retirement

It sounds to me like your conundrum is caused by a lack of prioritization -- i.e., you want it all and you subconsciously realize you're not guaranteed to have it all. Prioritize the above three things (maybe in a different order -- it's your life) and then the decisions will be easier for you.

My 2 cents.

2Cor521

 

[Katsmeow]

My younger daughter is starting high school next fall and will be changing schools at that time and most of the people in high school will be new to her. She does not mind moving to a different school district. She would prefer to move before starting high school rather than moving during high school.

I don't think we have lack of priotization, it is a question of deciding how to best meet our goals.

There are certain financial advantages to DH retiring this year that cause it to have a better financial outcome even if we have not sold the house.

Speaking strictly for myself my personal risk averseness would have us go ahead and retire even though this house is not sold (I've run those numbers and are comfortable with this). But I would wait to buy until the house is sold. There is some chance this could occur before my daughter starts high school in the fall. And there is a chance we could then find our permanent house and move into it by the fall. I think that chance is unlikely.

If we don't know where our permanent house would be then there is a good chance that wherever we would rent would be in a different school than where we end up buying. So my daughter could end up moving to a different high school after starting high school which she really does not want to do.

The only way to avoid that is to not sell this house for 4 years. That is an option, although it costs us roughly $80k more over the 4 years to do that than it would cost us if we could downsize now.

The best option is that this house sells relatively soon and we are in the downsized house by next fall and our daughter is able to go to the same high school for the entire 4 years. The average days on market for houses in our area would say that this is highly likely to happen. However there is always some risk.

 

[Moemg]

The one thing that was not very clear is after you sell your present house will you be able to pay cash for the downsized house ?

 

[molly]

Our current house has no mortgage and we also intend to relocate in a year or so - depending on how long it takes us to sell our house. We could buy another house prior to selling this house, but that would go outside our comfort zone. This is a crazy time in the housing market and I would rather sell first and then rent for a few months while making the transition.

I realize that your daughter's school is a factor in all of this. However, you could rent for a short time in the appropriate area so that she could go to the school that you all have in mind. A few months of inconvenience is not "HUGE" in the scheme of things.

Remember, in a few years she will be off to college and then you have a whole other set of expenses. Why not just "keep it simple".? This could be a good life learning experience for your daughter also. Neither a rental/vacant situation on a large house is a good thing. I would procede conservatively.

Good luck

 

[clifp]

Wow lots of moving parts.

It sounds like you have between now and say Aug to sell the old house and buy a new one, in order to avoid having the kid change High Schools which seems quite doable.

I see no reason not to go ahead and get pre-qualified for a mortgage for the smaller home while you are still working. I would think that you could buy the new house while working with mortgage if you aren't able to sell the old house in time.

Other than simply not wanting to work, (can't blame your DH) it seems like the situation that has the most flexibility is when you retire. As long as it is done sometime in 2010 it sounds like he should keep working until you have sold the old house.

Obviously the situation you should avoid is owning two houses with no job....

 

[Moemg]

In this market there is no way I would buy a house until my present house sold . I would target the area I was looking for and really investigate it so the minute I sold my house I could go forward on buying another house . I have seen too many people get stuck with two mortgages and have to return to work. I just reread your original post " Am I missing Something " and I'd have to say yes . You are missing a tried plan . Most of us that have retired lived on our retirement budgets for several years before making the plunge so we knew it would work . You are diving off the high wire without a net . You are going from spending freely to much more limited budget plus you are assuming things about a house you do not even own yet which would be okay if your retirement was not partially based on these assumptions . I hope you are right but it is taking a big chance .

 

[Katsmeow]

In this market there is no way I would buy a house until my present house sold

This much depends on the market in involved. I live in what is considered a mild seller's market. This market never had the huge run up in prices of bubble areas and so never had a huge downturn either. Most houses here are selling fairly quickly.
We plan to put this house on the market probably in March. There is an excellent chance it sells by the end of the summer, but there is a chance it takes longer.

The one thing that was not very clear is after you sell your present house will you be able to pay cash for the downsized house ?

We could pay cash and would prefer to do so but we would have to take most of the money to do so out of retirement funds and would have to pay taxes on it in the 33% tax bracket. That is the reason for considering getting a mortgage now to buy the house so that we could for the house later from a lower tax bracket (for example, we could pay it off over 5 years taking out 1/5 of the needed money in each year so that it was spread out to lower taxes).

However, you could rent for a short time in the appropriate area so that she could go to the school that you all have in mind. A few months of inconvenience is not "HUGE" in the scheme of things.

The problem is that there is no way to know what the appropriate area is. There are at least 20 different school districts around here and we could find the perfect house in any one of them. If we decided to rent in a particular school district and only look for houses in that district our requirements for unrestricted land and other things that we want are specific enough that it could be years before a house came on the market that met the requirements. I've been following the market for the last 5 years and am very familiar with it. For example in the school district we live in now there are zero houses for sale now that are within the price range we want and meet our requirements. In the next school district over there are two that would be acceptable. There are no rentals that would meet our requirements. One reason we are seriously considering the buy now scenario is because there is something there now that would work for us.

I should probably add that DH is less risk averse than I am. The way he sees it is that this buying one house while still owning the other only becomes problematical (poses a risk to our retirement) if we are unable to sell this house for more than 2 years. He thinks that is extremely unlikely given our housing market. If it did happen then he or more likely I could go do some contract work. It is likely that I could do so at that time and could cover any needed shortfall. He would rather be prepared to possibly do that rather than most likely needlessly deferring retirement or needlessly having to pay cash for our downsize house having to take a huge tax hit to do so. If we borrowed now for the downsize house our mortgage payment would only be about $1000 a month for that house and he feels that risk is worth taking rather than the risk of having to pay cash later for the house in one year resulting in high taxes.

 

[tryan]

No way I would carry 2 mortgages on 2 primary residences. And no way I would want to rely on getting approved for a 250k mortgage with SS income. Sooo this one seems like a no brainer. Put the McMansion on the market proto and make an offer on the new place contingent on the sale of the McMansion ... all while you're still working.

 

[Katsmeow]

DH and I each have reasons for why we want to retire according to a specific timetable. I don't want to derail this by getting into those reasons. I plan to retire around about April. DH will retire probably in June.

Given that, what I am really trying to decide on is which of 3 solutions, given the following information. In looking at these solutions, FIRECALC puts us at being able to take out enough money to carry mortgages on 2 houses for 3 years without us having to reduce our later spending below our desired level (that desired level is not our minimum required level -- our minimum level is well below the desired level). This is why we would be willing to retire with the mortgage. It is vanishingly unlikely that we couldn't sell this house within 3 years.

Given that we plan to retire whether this house has sold or not, I am really trying to decide between 2 choices:

1. Buy downsized house now. We would put down 20% and would have a mortgage payment of between $870 and $1050 a month (depending on what house costs -- the actual house we are seriously considering would have the lower mortgage payment). We would therefore be paying 2 mortgages (current house and the new house) until current house is sold. The numbers say that this is not problematical so long as current house sells within 3 years.

2. Sell this house, buy downsized house then. Perhaps we could get a mortgage, but for planning I assume we could not. Therefore, we pay cash for downsized house. Assume that we need to get $160,000 from our retirement accounts to pay for the house (some part would come from our non-retirement accoutns). For 2010 this money would have to be taken out at the 33% tax bracket. So to get $160,000 out we would need to withdraw $240,000 with $80,000 going to taxes.

The fundamental question is whether it is better to have 2 mortgages now (with the new one being between $870 and $1050 a month) or whether it is better to not have 2 mortgages and to then withdraw $240,000 to buy a house after this one sells ($80,000 going to taxes).

If this house doesn't sell this year, and sold next year and we withdraw cash to buy a house the tax bracket would be lower with some at 25% and some at 28%. But, still a hefty amount would have to be withdrawn to cover the taxes.

If we take the mortgage now instead then we could pay off the new house over a period of years minimizing the tax hit.

Actually, there is one other possible option.

3. Payoff the $115k second lien on the current house (we could use the money in our taxable accounts to do this). Keep house for 4 years and then sell it. At that point we get back the $115k and something above that if the house has appreciated somewhat in value. We then buy a new house for cash perhaps having to draw out roughly $100k from our retirement accounts (with probably 28% going to tases). However, according to Firecalc this option permanently reduces our safe spending level by $5000 a year. That is why that option is not terribly attractive to me.

 

[Martha]

Why not just put your house on the market right now and see what happens?

 

[Katsmeow]

Why not just put your house on the market right now and see what happens?

We are going to do so but we need to do some work to get it ready to sell. We will list in February or March depending on how fast we can get it on the market. I think it is highly likely to sell before the end of the year. However, that it is based upon properly preparing it for sale.

However, if we are going to get a mortgage on a replacement house while still working we effectively would need to apply to do that by, say, early February since we need my income to qualify for a mortgage.

So we won't have the results of listing this house when we apply for a mortgage (all of this presupposes we find a suitable downsize house within the next 30 days. We have a possibility of one now. But if that one doesn't work out it is possible we won't find one in the time window we have and so taking a mortgage now would be moot.

 

[bubba]

In this market there is no way I would buy a house until my present house sold . I would target the area I was looking for and really investigate it so the minute I sold my house I could go forward on buying another house . I have seen too many people get stuck with two mortgages and have to return to work. I just reread your original post " Am I missing Something " and I'd have to say yes . You are missing a tried plan . Most of us that have retired lived on our retirement budgets for several years before making the plunge so we knew it would work . You are diving off the high wire without a net . You are going from spending freely to much more limited budget plus you are assuming things about a house you do not even own yet which would be okay if your retirement was not partially based on these assumptions . I hope you are right but it is taking a big chance .

Moemg summed up my feelings. You're guessing what the new home will cost and how the expenses will run. I've done that myself more than once, and somehow I always guess too low. List the house now and see what happens. If you get a buyer, vacate quickly and rent in your current neighborhood until school is out, or buy in the new neighborhood and drive the child back and forth to school until the end of the semester. But keep this in mind. Several years ago, we experienced a drop in income and even though we knew it was coming and thought we had planned for it, it took a good year to adjust and we overspent our budget every month during that year. Finally, we realized that the drop in income was easily dealt with on paper but IRL, different story. You need a trial run on the retirement budget before pulling the plug.

 

[Katsmeow]

Most of us that have retired lived on our retirement budgets for several years before making the plunge so we knew it would work . You are diving off the high wire without a net.

I guess I don't agree. If you have the type of expenses where you can live on a retirement budget without being retired then that is clearly optimal. We didn't have that situation.

Our retirement budget is different from the budget we had for the past few years because in the past we had certain expenses, including some expensive child related expenses, that we no longer have. I also know we have certain work related expenses that we would not have if we retired so it is reasonable to make a budget based upon those expenses not being there.


If I had married younger and had children at a younger age I could wait to retire until all children were out of the house and out of college. And, then we could live several years as empty nesters in our retirement home and then retire. However, DH will be 71 when our youngest child is scheduled to graduate college (at best). To then live several years with child related expenses entirely gone would mean DH was in his mid-70s before retiring. That just doesn't work for us.

You're guessing what the new home will cost and how the expenses will run.

Not really. I have 2 houses I am looking at right now and know exactly what they are listed for. I am positive we can buy a house in the price range of those houses. There is no guessing involved. We would not buy a new home that was not within the amount we have budgeted for that.

I also have looked up the taxes on those houses and know what those are.

These houses are on well and septic so the only utilities are electricity which I know those rates. There is some estimation on the amount of the monthly electric bill but I have been very generous on that. We currently have well and septic so I am very familiar with those expenses and have accounted for them in the budget. My maintenance/repair budget is based upon the maintenance/repair budget for our current house even though this house is twice the size of what we plan to downsize to.

You need a trial run on the retirement budget before pulling the plug.

I guess the difficulty with that it is hard to have the retirement budget without actually being retired since parts of it vary with being retired.

If what you are saying is that we should sell this house, buy new house, live in it for years and then retire -- well, that just isn't want we want to do.

Here is how I see it. We have a retirement budget that has a lot of discretionary spending in it. If non-discretionary spending is more than we think it will be (for example, I estimate electricity at $300 a month in the future house. Let's assume I'm wrong and it is $400 a month), then we would have to cut some of the discretionary spending. I am fully prepared to do that.

The bottom line is that if we need to modify our budget after retiring we wll. FIRECALC gives 100% based on very generous spending that well exceeds what I think our actual spending will be. Our actual spending could be considerably greater than what I have budgeted and we would still be at 100%. I did FIRECALC with higher spending numbers for the first few years after retirement (due to the house and to the kids) but then reduced to $80,000 for the remainder. That is still at 100%. But our projected budgeted expenditures are well below that number. If it turns out the projection is wrong then we are still OK if we don't go over $80,000 a year once our daughter graduates high school. We will stay within that $80,000 a year and will adjust the lifestyle however we need to adjust it to stay within that budget.

 

[Meadbh]

If what you are saying is that we should sell this house, buy new house, live in it for years and then retire -- well, that just isn't want we want to do.

Go ahead then, do what you want to do!

 

[Katsmeow]

Go ahead then, do what you want to do!

Well, we are but we haven't decided what we want to do on one point which is the reason for this post.

From a tax standpoint it costs us roughly $25,000 in extra taxes to buy a house and pay cash for it as opposed to now taking a mortgage to buy a house and then paying it off over 5 years.

The part we are trying to decide on is whether to take the mortgage and save that $25,000 which means buying a house now while still employed or whether to wait to sell this house and then buy a house recognizing that if we can't get a mortgage then we pay the extra $25,000 in taxes.

We will end up doing what we want when we make that decision but we aren't sure now which one we want to do. If this house sells very quickly then the first of those options makes more sense. If this house sells more slowly then the second makes more sense even if costs $25,000 more in taxes.

House sales in this area for houses similar to ours seem to have a bimodal distribution. Some sell very quickly in under 3 months (which argues in favor of buying new house now and taking a mortgage). Others take over a year (which argues in favor of not buying and just taking the $25,000 hit on taxes).

Unfortunately I have not found a common factor in those that sell quickly versus those that do not (leaving out houses that are obviously under or over priced). That makes it difficult to decide what we want to do.

I want to know exactly how long it will take to sell this house and then the decision would be easy, but that is something I can't know so that makes it more difficult.

 

[W2R]

House sales in this area for houses similar to ours seem to have a bimodal distribution. Some sell very quickly in under 3 months (which argues in favor of buying new house now and taking a mortgage). Others take over a year (which argues in favor of not buying and just taking the $25,000 hit on taxes).

Unfortunately I have not found a common factor in those that sell quickly versus those that do not (leaving out houses that are obviously under or over priced). That makes it difficult to decide what we want to do.

I want to know exactly how long it will take to sell this house and then the decision would be easy

Wouldn't that be nice? It would sure make our inter-state move to Missouri a lot easier if Frank and I knew that too, given that we have to sell not one, but two houses and then try to buy two houses up there that are very close to one another and yet meet our many other criteria. Knowing when our houses down here would sell (or even knowing in what order they would sell) would make our move a breeze!

What we need is a housing fortune teller with an impeccable track record.

 

[Meadbh]

No, what we need is decision making under uncertainty, which is now a science in itself:
file:///C:/Documents%20and%20Settings/Catherine/Local%20Settings/Temporary%20Internet%20Files/Content.IE5/C4O2134J/Oreskes.Milan%5B1%5D.ppt#256,1,Decision-making under uncertainty: Is there any other kind?