paying for 2nd home

[upstater]

We are purchasing 2nd home that we will close on in Jan 2022. This Florida home will be principal residence for 6-7 months a year with existing New York home becoming secondary residence for about 5 months per year. Thinking about various ways to finance the purchase and would welcome any input.

Details:
Purchase price $860k less 20% down payment in cash that has left a balance of $688k

We are both retired, I am 66 and DW is 67. Kids very well off on their own.

Income:
Pension partial cola 63k per year
DW SS 23K per year
I plan on taking SS at 70 with an estimate of 43K per year

Assets (retired 6 years and have not touched any assets):
Taxable savings (mutual funds/Stock) $255K
Roths $940K - (about half of this is past 5 year rule for conversions)
Tax deferred $2.1 million

current principal residence $350k no mortgage
2 unit rental $230K no mortgage. Currently rehabbing 1 unit. We plan on selling this within 2 years.

 

[Ready]

Welcome! Are you looking for advice on whether to pay cash or take out a mortgage? Those are the only two ways I’m aware of to pay for a home, unless I’m missing something. Sometimes a mortgage can be tricky if you are both retired but as long as you have your pension and SS income you may be fine.

 

[upstater]

Thank you Ready. Yes, wondering if we should pay cash which would require some drawdown of retirement assets or get biggest mortgage we qualify for and pay it off over 3 to 6 years with drawdown from tax deferred and sale of rental property.

 

[Ready]

I would not want to take that much out of tax deferred accounts all at once because of the capital gains taxes it would trigger. So if you can get a mortgage and pay it down until you sell the rental property that would be the simplest way to go.

You don’t say what your expenses are. Does your current income cover your current expenses?

 

[Sunset]

I'd want to secure a mortgage as rates are historically low, going for a 30 yr mortgage.
Perhaps split it into 2 pieces, so you could use the sale of the rental unit to pay off the 2nd mortgage.
Example a $488K mortgage and a $200K mortgage (the rental will have taxes, deduction recapture, sale expenses, so won't really clear $200K).

 

[WhenIsItTime]

I would not want to take that much out of tax deferred accounts all at once because of the capital gains taxes it would trigger. So if you can get a mortgage and pay it down until you sell the rental property that would be the simplest way to go.

You don’t say what your expenses are. Does your current income cover your current expenses?

Do you need to furnish new house? And what will 2nd home add to expenses (travel, utilities, HOA, taxes) vs pension/SS income?

With the limited context, I think I’d be looking to mortgage big portion to have time to decide and provide cash flow flexibility.

 

[levindb]

We did something very similar one year ago...recommend the following:

1. Find a lender who will give you a mortgage (use realtor or mortgage broker)
2. Mortgage new property for 30 years...interest rates are too low to pass up
3. Sell the rental units when you are ready...depreciation recapture may be painful and may impact your Medicare payments. May want to sell them in 2 different calendar years to spread out the income taxes and IRMMA...do the arithmetic to calculate what works best for you.

Later, you can decide if it makes sense to pay down/off the mortgage based on your comfort level with the debt and no rental income

 

[pjigar]

Thank you Ready. Yes, wondering if we should pay cash which would require some drawdown of retirement assets or get biggest mortgage we qualify for and pay it off over 3 to 6 years with drawdown from tax deferred and sale of rental property.

In situation like yours, it is all about managing the tax bill! What is your current tax slab? And one after your SS starts? How your SS is going to be taxed?

I would not pay cash since I don't like withdrawing from Roth AND I don't like to pay huge tax. I would use up all after-tax money (minus emergency fund) for down payment. Depending on the tax on your SS benefits, you can pay mortgage in one of two ways:
1. If tax on SS benefit is going to substantial after 70 then I would plan to pay off mortgage using tax-deferred money in equal parts over next 3-4 year window. The idea is to spread tax bill thinner on withdrawals.
2. Otherwise spread mortgage payments over more years to lower the tax on withdrawals + SS combined.

I know it is wishy washy advise but without knowing your tax rates (now and in future), this is the best I can think of.

 

[ivinsfan]

Well what was your original plan fo pay for this house. And are you second guessing your payoff plan you made

 

[Exchme]

You obviously need a mortgage as you don't lack for assets or future income, but you do lack liquidity. The easiest thing would be if a you can get a mortgage, then you can go on as before and pay it off when you cash available (or keep it, whatever works best). I agree with other posters that your other options are far less attractive.