Mortgaging a paid off house

[Ivo Archer]

Hey, looking for a gut check.
Getting ready to pull the trigger on a mortgage loan for our paid off house.
Loan is half the current market of the house.
Rate 5.125% with about $9K closing costs.

We bought the house for cash in 2018 as we were moving back from abroad and retiring so had no W2 income history and lenders were not amenable to lending to our situation.

After getting quotes on college loans at 11%, I decided to return to our bank and see if a mortgage loan was an option now.
DW and I are both under 59 and retired, but we have plenty in our After Tax portfolio to draw from.

Reasons for taking the loan:
Keeping our AGI low allows for cheaper healthcare in NY.
Defer capital gains taxes on withdrawals for DD college tuition payments.
Up our leverage from 0% and avoid withdrawals from investments. (hoping to earn more than the mortgage payments over time).

Concerns:
When/if we decide to relocate we'll have to cash out the loan and possibly pull from investments to purchase a new home.
Market downturn eliminating the justification of upping leverage.


Anyway, looking for feedback and opinions.

 

[SecondCor521]

Does the increase in leverage and associated risk sit well with both of you?

What is your asset allocation? What is the term of the loan? Fixed or variable rate?

What is your plan for the cash flow to make the mortgage payments?

If you're retired, why are you borrowing money for your DD's education? Can you and she really afford it? Where is the money coming from to pay back the college loans?

If I were in your shoes, I'd likely just sell from after tax and/or any college accounts to fund DD's college and my general life. That is actually what I did and it worked out well for my family. Doing so allowed me to keep my AGI low for ACA and do some Roth conversions each year.

 

[fosterscik]

I have a current 30 year mortgage (obtained in the very low Covid period) and won't pay it off before I die, but I keep a bond stash to cover the monthly expenses. I personally wouldn't remortgage unless I maintained a pool of investments which would guarantee I had a stock-market crash-proof pool of funds to cover those payments. That would be tough to do with the current safe investment return rates.

 

[RetireBy90]

Sounds to me you are thinking of 5% loan costing less than market returns. To me, doesn’t sound like a crazy bet. You know your finances and if you can pull enough to pay the loan.
Could be you may be able to deduct interest one day.
I’m 70 (almost) and lost interest in maxing returns to some degree but years ago I often did similar actions to give us flexibility.
I do t see any reason not to do it.

 

[Ivo Archer]

Does the increase in leverage and associated risk sit well with both of you?

Yes, we would have taken a mortgage back in 2018, but couldn't.

What is your asset allocation? What is the term of the loan? Fixed or variable rate?

80% Total Market Index
10% Bonds
10% Cash/Money Market

50% IRA
20% Roth
25% Taxable
5% Cash

Loan is 5 yr Arm @ 5.125% (by choice as we expect to either pay off then or not depending on rate change).

What is your plan for the cash flow to make the mortgage payments?

Take the lump sum mortgage and dump it into a money market. Then pay out college loan payments and mortgage loan payments from that. Also use this account to fine tune our AGI by offsetting taxable investments withdrawal for living expenses, if needed. The loan cash out will be used up in about three years.
After that the mortgage payments roll into our annual expenses that are covered now by taxable account withdrawals, but after age 59, they could come from IRA withdrawals.

If you're retired, why are you borrowing money for your DD's education? Can you and she really afford it? Where is the money coming from to pay back the college loans?

Yes we can definitely afford it.

If I were in your shoes, I'd likely just sell from after tax and/or any college accounts to fund DD's college and my general life. That is actually what I did and it worked out well for my family. Doing so allowed me to keep my AGI low for ACA and do some Roth conversions each year.

We never set up 529s or other education funds. We could sell from after tax, but that would trigger both capital gains taxes and increased healthcare costs for us in NYS, up to $20,000/year.

 

[Ivo Archer]

Sounds to me you are thinking of 5% loan costing less than market returns. To me, doesn’t sound like a crazy bet. You know your finances and if you can pull enough to pay the loan.

True.

Could be you may be able to deduct interest one day.

With SALT cap removed and high NYS property tax, this may help.

I’m 70 (almost) and lost interest in maxing returns to some degree but years ago I often did similar actions to give us flexibility.

I look forward to reaching that point, but I'm still crunching numbers 8 years after pulling the retirement trigger.

 

[old medic]

We have considered getting a HELOC on our paid off house. I think it gives a little more flexibility.

 

[pb4uski]

Hey, looking for a gut check.
Getting ready to pull the trigger on a mortgage loan for our paid off house.
Loan is half the current market of the house.
Rate 5.125% with about $9K closing costs.

We bought the house for cash in 2018 as we were moving back from abroad and retiring so had no W2 income history and lenders were not amenable to lending to our situation.

After getting quotes on college loans at 11%, I decided to return to our bank and see if a mortgage loan was an option now.
DW and I are both under 59 and retired, but we have plenty in our After Tax portfolio to draw from.

Reasons for taking the loan:
Keeping our AGI low allows for cheaper healthcare in NY.
Defer capital gains taxes on withdrawals for DD college tuition payments.
Up our leverage from 0% and avoid withdrawals from investments. (hoping to earn more than the mortgage payments over time).

Concerns:
When/if we decide to relocate we'll have to cash out the loan and possibly pull from investments to purchase a new home.
Market downturn eliminating the justification of upping leverage.


Anyway, looking for feedback and opinions.

One of my questions would be why only 50% and why not 80%? If 50% is good then wouldn't 80% be even better?

If you decide to relocate you wouldn't necessarily have to pay off the loan. You could sell and part of the sales proceeds would be used to pay off the mortgage loan and what you walk away with could be used as the down payment for the new place. Or you could buy a new place using some after tax funds for the down payment. Or you could do what we did when we moved in 2024... buy the new place for cash using a pledged asset loan secured by our taxable brokerage account then sell the old place and pay off the pledged asset loan.

 

[engineernerd]

Don't forget that your $9k closing costs mean you are really paying more than 5.125%. If you do end up refinancing after only 5 years, it could be a substantial increase in your actual financing cost. What would the interest rate be if you bought down the points? Can you finance the closing costs (roll them into the loan)?

 

[SecondCor521]

Yes, we would have taken a mortgage back in 2018, but couldn't.

That part's good.

80% Total Market Index
10% Bonds
10% Cash/Money Market

Over the long run I'd expect that to beat 5.125% on an after tax basis. (ETA: But not by much, especially if you're in a high tax bracket.)

However, you're talking about three years. That's less likely.

I personally would not take the bet when framed that way.

50% IRA
20% Roth
25% Taxable
5% Cash

Loan is 5 yr Arm @ 5.125% (by choice as we expect to either pay off then or not depending on rate change).

See the other poster's comment. That $9K in closing costs over three years means $3K per year. On a $100K loan, that's 3%, which means you're actually borrowing at 8.125%. On a $300K loan, that's 1%, which means you're actually borrowing at 6.125%.

I definitely wouldn't take the bet framed that way.

Take the lump sum mortgage and dump it into a money market. Then pay out college loan payments and mortgage loan payments from that. Also use this account to fine tune our AGI by offsetting taxable investments withdrawal for living expenses, if needed. The loan cash out will be used up in about three years.

Another thought - since you're using the loan proceeds to pay back the loan, you're really only getting use of the money for about half the time. Or half the money for all of the time, whichever way you want to think about it.

After that the mortgage payments roll into our annual expenses that are covered now by taxable account withdrawals, but after age 59, they could come from IRA withdrawals.

Yes we can definitely afford it.

Yay!!

We never set up 529s or other education funds. We could sell from after tax, but that would trigger both capital gains taxes and increased healthcare costs for us in NYS, up to $20,000/year.

So this is really the crux of the matter in my view. If you can get $20K per year subsidies by borrowing for three years, that's a $60K offset, which makes loan interest start to look really attractive.

I'm puzzled, though - what happens in three years when the loan proceeds are gone? Will you lose your NYS health care subsidies then? If so, why not, as pb4uski suggests, go for ~80% and a ~five year plan? How long are you facing this $20K healthcare subsidy thing?

Also, if you're going to pay it back in three years, I'd look for a 3 year ARM or 3 year balloon or something. You should be able to get a bit of a break on the rate.

I'd look at the rate vs. points situation. Paying that much in points probably doesn't make sense for a short term loan.

...

Another thing some people do is get healthcare subsidies every other year. Live of taxable in year N, sell enough in December of year N for year N+1, live off the proceeds in year N+1 and get the $20K subsidy. You can also do the same idea every three years. It sort of depends on your income and expense situation.

You're doing a similar idea, just using a loan.

...

Do you have any taxable with losses or small gains?

 

[imjustawarrior]

Let's call the tax adjusted 5.125% interest rate TA. Is there a risk free investment that returns TA? Probably not. You will have to assume more risk to get to a TA expected return. Since you are only talking a few years, that makes your proposal pretty risky.

The proper financial way to look at things are the after-tax after-cost risk adjusted returns.

 

[harley]

I personally would probably go for a HELOC, and only use it as needed. Probably a higher interest rate, but on a lower dollar amount, and you sound like you could pay it back fairly easily. I wouldn't bet that you could refinance in 5 years for a lower rate. You might, but equally likely you might not be able to. I agree with the comment above that with those closing costs you should actually consider the rate to be 8%.

 

[livingalmostlarge]

i agree the 80% and 7 year arm for flexibility?

 

[Ivo Archer]

I'm puzzled, though - what happens in three years when the loan proceeds are gone?
Will you lose your NYS health care subsidies then? If so, why not, as pb4uski suggests, go for ~80% and a ~five year plan? How long are you facing this $20K healthcare subsidy thing?

Back to dodging the AGI limit by using taxable withdrawals, by then the extra college payments will be done and we can meet the limit as we have for the past 3 years.
We have 6 to 7 years until we hit 65, so we may have to alternate years with IRA withdrawals paying healthcare, then no withdrawals with no cost healthcare.

Also, if you're going to pay it back in three years, I'd look for a 3 year ARM or 3 year balloon or something. You should be able to get a bit of a break on the rate.

Sorry, I never meant that we would only hold the loan for 3 years, just that we would probably use all the cash proceeds from the loan within 3 years (that would cover the college expenses). We expect to hold the loan at least 5, depending on if we relocate and whether the rates go down. If rates are comparable in 5 years we would keep the loan unless rates rise again (its a 5yr ARM).

I'd look at the rate vs. points situation. Paying that much in points probably doesn't make sense for a short term loan.

The points do seem a little high, I think the APR is just over 6%.

Making me wonder if we should trade less points for a higher rate...
Also thinking it may make sense to bump up the loan amount if we can keep the up front costs fixed.

 

[Stormy Kromer]

I suggest you look up a you tube video. I don't have the link. It is from the movie The Gambler. search John Goodman "when you get up 2.5 million"

Then decide if you want to own a house free and clear or not.

 

[SecondCor521]

Back to dodging the AGI limit by using taxable withdrawals, by then the extra college payments will be done and we can meet the limit as we have for the past 3 years.
We have 6 to 7 years until we hit 65, so we may have to alternate years with IRA withdrawals paying healthcare, then no withdrawals with no cost healthcare.

Ah, okay.

Sorry, I never meant that we would only hold the loan for 3 years, just that we would probably use all the cash proceeds from the loan within 3 years (that would cover the college expenses). We expect to hold the loan at least 5, depending on if we relocate and whether the rates go down. If rates are comparable in 5 years we would keep the loan unless rates rise again (its a 5yr ARM).

Ah, okay.

The points do seem a little high, I think the APR is just over 6%.

Making me wonder if we should trade less points for a higher rate...
Also thinking it may make sense to bump up the loan amount if we can keep the up front costs fixed.

Good luck.

Again, look at just the APY of 6%, I wouldn't do it. But if it meant saving $20K on health care premiums, I can see the appeal.

Are you sure the $20K is a real figure? Sounds plausible, but if it were me I would double check.