Mortgage or not?

Question

I am 57, spouse 53. I lost my 30+ year business in 2009, declared personal bankruptcy and now have only $4K in retirement accounts. The positive news is that I am employed; my income is 110K, hers is about 6K. After my youngest is done with college in two years, we'll be able to start saving about 10K annually.

We own our home outright, a condo, market value is 150K. It's a little small for our needs. We owed 5K to the fed this year, as we have no home mortgage deduction.

The question: is it a good idea to sell the condo, use all of the proceeds to put down on a new 350K home, resulting an a 200K mortgage, and get an interest deduction?

Or, better to stay in a paid-for home and not assume new debt, and no tax benefit?

Thank very much in advance for the advice.

Answer 1

I often say "don't let the tax tail wag the investing dog." I need to change that phrase a bit to "don't let the tax tail wag the mortgage dog."

Getting a tax deduction on a 4% mortgage basically results (assuming you already itemize) in an effective 3% rate mortgage. The best way to avoid tax is save pretax in a 401(k), IRA, or both.

You are 57, and been through a tough time. You're helping your daughter through college, which is an expense, and admirable kindness to her. But all this means you won't start saving $10K/yr until age 59. The last thing I'd do is buy a bigger home and take on a mortgage. Unless you told me the house you want has an in-law apartment that will bring in a high rent, or can be used to rent rooms and be a money maker, I'd not do this.

No matter how small the mortgage, your property tax bill will go up, and there would be a mortgage to pay. Even a tiny mortgage payment, $400, is nearly half that $10K potential annual savings plan.

Your income is now excellent. Can your wife do anything to get hers to a higher level? In your situation, I'd save every cent I can.

Answer 2

Better in terms of what? less taxes paid? or more money to save for retirement? In terms of retirement, it would be better for you to keep the condo you currently have for at least two reasons:

You wouldn't incur the penalties and fees from buying and selling a home. Selling and buying a home comes with a multitude of fees and expenses that aren't included in your estimation.

You aren't saddled with a mortgage payment again. You aren't paying a mortgage payment right now. If you set aside the amount you would be paying towards that, it more than covers your taxes, with plenty left over to put towards retirement.

Answer 3

In addition to the other answers, I think you would also need to account for the increased utility and maintenance costs on the more expensive house. Typically it is recommended to budget 1% to 4% the cost of the home per year for routine maintenance. While it likely won't cost that much every year, you will have those expensive items come up (e.g. roof, HVAC) that come up periodically. The larger house will also cost more to heat/cool. Depending on where you live could also have increased property taxes.

Answer 4

Short answer: No.

Longer answer: The only reason to move would be to get out of the condo and into a SFR of equal cost because condos can be quite difficult to sell and you don't really want that potential burden later on. Moving is expensive though and you can't afford to spend more when you are already living on the financial edge.

Speaking of living on the edge, that's a recipe for disaster. I make, ratio-wise, a similar sort of income. Even accounting for the generous college tuition, you should be able to save at least $20K per year...at a bare minimum. And if you were careful, I figure you should be able to save $40K/year. You need to figure out where you are dumping all of your money and cut WAY back on spending and focus entirely on saving money.

1) Stop eating out. Make your own meals. I average about $2 per meal per person - no junk food. Eating out is 6 to 30 times as expensive as making meals at home. Do the math: $10 * 2 people * number of times you eat out per week * 52 ($1,040 per year for each time/week!) vs $2 * 2 people * 21 (3 meals per day) * 52 ($4,368 per year for both of you...maximum). Now I know some meals are more expensive to prepare, but the math is not unrealistic - I spend about $140 per month on groceries and make the bulk of my own food. Eating out is sticker shock for me. The food I prepare is nutritionally balanced and complete. Now I'm not a complete health-nut. I love the occasional deep-fried treat or hamburger, but those are "once every couple of months" sort of things, which makes them special.

2) Stop going to Starbucks or wherever you habitually go. It takes fuel to get there. It's also expensive when you get there. Bring your own drink if you are hanging out with friends.

3) Drop golf. Or whatever expensive sport you are sinking money into. Invest in some cheap running clothes and focus on cardio-based workouts. Heart health is more important than anything else. If you can't live without your sport, then find an alternate sport that is "equal"-ish in challenge but a ton cheaper to play. For example, if you like playing golf, play discgolf instead (most cities have courses) - there's no cost beyond a couple of discs and the challenge is still there.

4) Drop entertainment. Movies at the theater are expensive. Drop your cable subscription (you are getting financially raped for $1,500/year). Get a Netflix subscription and find shows via free online streaming services. Buy some dominoes, card games, and a couple of classic board games. Keep entertainment simple and cheap.

5) Drop your cell phone's data plan. Republic Wireless is the only decent cellular provider and even their $12/month plan is living a luxury lifestyle. If you spend more than $10/month/person for phone service, you are spending too much.

6) Stop driving everywhere. Gas is expensive. Cars are expensive. If you have more than two cars, sell the extras. If your car is worth more than $20,000, sell it and get something cheaper.

7) Stop drinking alcohol. Alcohol impairs mental functions, is addictive, smells terrible, and is ridiculously expensive. There's no actual need to consume it either.

By the way, don't go and make major financial changes without the wife's sign-off. Finances are the #1 reason for divorce. So get her "OK" on this stuff. Hopefully you already knew that. The above are just some common financial pitfalls where people sink thousands and thousand of dollars and gain nothing. You can still have a full and complete life with just a minimum of the above.

There is no excuse for living on the edge financially. Your story is one I'm going to share with those who give me the same excuse because they are "poor". You are "I want to punch you in the face" wealthy and you spend every last penny because you think that's how money works. You are wrong.

One final piece of advice: Find a financial adviser. It is clear to me that you've been managing money wrong your whole life. A financial adviser will look at your situation and help you far more than someone on the Internet ever can. If you attend a church, many churches have the excellent Crown Financial Ministries program available which teaches sound financial management principles. The education system doesn't show people how to manage money, but that's not an excuse either. Once you dig yourself out of the financial hole you've dug for yourself, you can pass the knowledge on how to correctly manage money onto other people.

Answer 5

Consider the next 30 years

Here is something that should help your decision:

Currently you are 57, suppose that means that you will still work for 10 years, and then be retired for another 20 before you sell the house.

Your retirement account is nearly flat, so you will have to support yourself with your own income.

If there are no surprises, you and your wife could expect to earn 1.16 million over the next 10 years.

There will be interest on your savings, but also inflation, so to simplify I will ignore both. That means you will have an average of 40k (gross?) per year available to live from during the next 30 years.

If you get a mortgage where you only pay nett 3% interest (no payback of the loan), that would cost you 6k per year on interest (based on 350k-150k), if you also want to pay back the 200k difference within 30 years, it would totally be close to 13k in annual interest+payback.

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Now consider whether you would rather live on 40k per year in your current place, or on a lower amount in a bigger place. Personally I would not choose to make a 200k investment at this point, perhaps after trying to live on a budget for a while. (This has the additional benefit that you can even build some cash reserve before buying anything.)

Answer 6

A primary residence can be an admirable investment/retirement vehicle for a number of reasons.

1. It is easy to leverage; since the bank is reasonably assured you will not walk away from the debt, they are willing to allow a 9x leverage in return for paltry interest.
2. Real estate is a famously stable investment. That reputation has been dented in the last few years, but sober investing can still be extremely safe.
3. The appreciation (capital gains) is tax-free.
4. Unlike almost any other investment, your personal diligence can pay off enormously. Well-considered remodeling and responsible maintenance turns into cash in your pocket when you sell.
5. Unlike any other investment, you get to live in it, and enjoy its use.

The tax savings on the mortgage are negligible compared to these. A $200,000 mortgage might result in a $2000 annual savings on your taxes -- but a $350,000 house might easily appreciate $20,000 (tax free!) in a good year.

Some reasons to not buy a larger house.

Getting into or out of a house is tremendously expensive and inconvenient. It can make some life-changes (including retirement) more difficult.

There is no way to "diversify" a primary residence. You have one investment and you are a hostage to its fortunes. The shopping center down the street goes defunct and its ruins becomes a magnet for criminals and derelicts? Your next-door neighbor is a lunatic or a pyromaniac? A big hurricane hits your county? Ha-ha, now you're screwed. As they say in the Army, BOHICA: bend over, here it comes again.

Even if nothing bad happens, you are paying to "enjoy" a bigger house whether you enjoy it or not. Eating spaghetti from paper plates, sitting on the floor of your enormous, empty dining room, may be romantic when you're 27. When you're 57, it may be considerably less fun.

Speaking for myself, both my salary and my investment income have varied wildly, and often discouragingly, over my life, but my habit of buying and renovating dilapidated homes in chic neighborhoods has brought me six figures a year, year after year after year.

tl;dr the mortgage-interest deduction is the smallest of many reasons to invest in residential real-estate, but there are good reasons not to.

Answer 7

If you do as you propose you are going to get burned. You need to sell, then start to rent. amongst other things.

Since 2008, the economy never "recovered," but was sort of stabilized temporarily like a fighter on the ropes. The economy is beginning to collapse again, and that collapse will accelerate around the Fall. The dollar too will also begin its delayed downward fall come Autumn.

Just one example of what I speak: https://research.stlouisfed.org/fred2/series/CIVPART

I would be happy to tell you more if you like, but I am already going to get pilloried for what I have already said. I do not sell anything, or push anything, but since you asked, and I follow this day in and day out, I thought that I would give you my very well informed answer. Take it for what it's worth.

So let me know if you want more.

Answer 8

Buy a rental property instead. You get tax benefits as well as passive income. And it pays for itself