Financing A Second Home

[AlaskaHunter]

Our Alaska home mortgage was paid off years ago.
Now that we are retired, we are looking at purchasing a winter home in the lower-48,
keeping our Alaska home for summers, renting the downstairs and staying upstairs for 3 months/year.

The "winter home" will be our primary home.
There are 2 options:
1) Pay cash from retirement funds
2) Traditional mortgage
With interest rates on traditional mortgage 3.5-4.5%,
leaving money in the retirement 401k to grow with an average return of 6-8%
it seems that the traditional mortgage is a better choice than cash.
The other advantages are low 12% income tax bracket and
saving >$25k per year in Obamacare-subsidized health insurance.

Thoughts?

 

[SwaggyD]

Our Alaska home mortgage was paid off years ago.
Now that we are retired, we are looking at purchasing a winter home in the lower-48,
keeping our Alaska home for summers, renting the downstairs and staying upstairs for 3 months/year.

The "winter home" will be our primary home.
There are 2 options:
1) Pay cash from retirement funds
2) Traditional mortgage
With interest rates on traditional mortgage 3.5-4.5%,
leaving money in the retirement 401k to grow with an average return of 6-8%
it seems that the traditional mortgage is a better choice than cash.
The other advantages are low 12% income tax bracket and
saving >$25k per year in Obamacare-subsidized health insurance.

Thoughts?

Do not know your willingness to take on a new payment now that you're retired, but could put a large percentage down and finance with a 15-year (take advantage while rates are down) that should have a relatively low payment (depending on purchase price of the new home).

 

[Tiredofthebickering]

Our Alaska home mortgage was paid off years ago.
Now that we are retired, we are looking at purchasing a winter home in the lower-48,
keeping our Alaska home for summers, renting the downstairs and staying upstairs for 3 months/year.

The "winter home" will be our primary home.
There are 2 options:
1) Pay cash from retirement funds
2) Traditional mortgage
With interest rates on traditional mortgage 3.5-4.5%,
leaving money in the retirement 401k to grow with an average return of 6-8%
it seems that the traditional mortgage is a better choice than cash.
The other advantages are low 12% income tax bracket and
saving >$25k per year in Obamacare-subsidized health insurance.

Thoughts?

If the mortgage rate is lower than the investment return rate, then mortgage.

 

[brymoore]

Mortgage. Don’t give up potential investment gains when you can borrow money cheap.

My percentage gain last year was stupid high.

 

[BigHornRam]

Our Alaska home mortgage was paid off years ago.
Now that we are retired, we are looking at purchasing a winter home in the lower-48,
keeping our Alaska home for summers, renting the downstairs and staying upstairs for 3 months/year.

The "winter home" will be our primary home.
There are 2 options:
1) Pay cash from retirement funds
2) Traditional mortgage
With interest rates on traditional mortgage 3.5-4.5%,
leaving money in the retirement 401k to grow with an average return of 6-8%
it seems that the traditional mortgage is a better choice than cash.
The other advantages are low 12% income tax bracket and
saving >$25k per year in Obamacare-subsidized health insurance.

Thoughts?

Not sure where you intend to buy, but IMO the home prices in most markets are way overpriced and a big correction is coming. Soon.

 

[Irrelevant]

Not sure where you intend to buy, but IMO the home prices in most markets are way overpriced and a big correction is coming. Soon.

I said that 5 years ago ( you probably did too), I still believe it, but I no longer attempt to qualify "soon"

 

[AlaskaHunter]

I said that 5 years ago ( you probably did too), I still believe it, but I no longer attempt to qualify "soon"

I expect the 2022-23 prices to not rise at the crazy 2020-21 rate they have,
but they are unlikely to go down due to high demand/low supply.

 

[BigHornRam]

I expect the 2022-23 prices to not rise at the crazy 2020-21 rate they have,
but they are unlikely to go down due to high demand/low supply.

I heard this song in 2007.

 

[BigHornRam]

Deja Vu all over again?

"Oil prices fell from a high of $133.88 in June 2008 to a low of $39.09 in February 2009. 1 Over the same time period, natural gas prices fell from $12.69 to $4.52. 2 The lower price for oil and gas due to the financial crisis was the major impact on the sector."

 

[Tiredofthebickering]

I heard this song in 2007.

And people have been singing the "another big crash is coming!" song for about 5-10 years now...

And the "the economy will take years to recover from Covid!" song...

If you're always projecting doom and gloom eventually you'll be right. That doesn't mean there are no opportunities in the meantime.

If the people who bought my Florida house right before the crash in 2008 would have held on instead of it going to short sale (where I got it ), they'd be sitting on over $120K in equity right now. And that assumes they never paid down their mortgage on the ensuing 15 years, so likely much more.

Don't buy more than you can afford, just keep making your payments, and you'll likely be fine.

 

[SAJ-99]

I heard this song in 2007.

There have been two nationwide declines in housing prices over the last 150 years - the Great Depression (1930's) and the Great financial crisis (2008ish). Those two situations had very different drivers, so comparing either to today is pointless. On one hand, another decline so soon after the last one wouldn't surprise me. As a group, investors seem to make the same mistakes over and over. On the other hand, the current situation doesn't look anything like the previous too. Buyers are not over extended, inventory is low while demand is high, etc. The very post shows part of the problem. They are buying a SECOND HOME!!!. That is a very common situation and simply adding to the problem. More buyers in a low-inventory environment prices out first-time homeowners. But I'm not sure it portends a correction.

 

[SwaggyD]

There have been two nationwide declines in housing prices over the last 150 years - the Great Depression (1930's) and the Great financial crisis (2008ish). Those two situations had very different drivers, so comparing either to today is pointless. On one hand, another decline so soon after the last one wouldn't surprise me. As a group, investors seem to make the same mistakes over and over. On the other hand, the current situation doesn't look anything like the previous too. Buyers are not over extended, inventory is low while demand is high, etc. The very post shows part of the problem. They are buying a SECOND HOME!!!. That is a very common situation and simply adding to the problem. More buyers in a low-inventory environment prices out first-time homeowners. But I'm not sure it portends a correction.

Right, very good analysis imo. And they’re calling it a second home which they will live in for 9/12 months. It’s a primary residence as far as financing goes.

 

[SAJ-99]

Right, very good analysis imo. And they’re calling it a second home which they will live in for 9/12 months. It’s a primary residence as far as financing goes.

Yes. Insurance company won't like they are gone 3 months, so premiums will be higher. But it will get classified as a primary residence so if they itemize they can deduct the interest cost. It doesn't change the situation where a lot of our housing problems are compounded by this very condition. Older people with "wealth" are allowed to take advantage of their situation, which adds to a structural housing crisis for younger people without a strong balance sheet.

 

[BigHornRam]

Had a feeling the second home for a boomer aspect of this thread was going to ruffle some feathers here.

 

[RobG]

If it were me I wouldn't compare the interest rate to your expected return of your entire 401(k). Instead, I would compare it to just the bond portion of it. Holding bonds earning 1-2% and getting a mortgage that costs 3.5-4.5% is a probably a money losing idea.

 

[npaden]

I think it sounds like you have it pretty well figured out. Drawing a big chunk out of your 401k and having to pay at a much higher tax rate that year is the big deciding factor IMO.

 

[SAJ-99]

Had a feeling the second home for a boomer aspect of this thread was going to ruffle some feathers here.

It doesn't ruffle my feathers. I don't fault any individual for doing what they want. I have known a LOT of people that have done it, including family members. But I don't like setting tax policy that allows them to benefit from doing it (not the case here with the OP) when everyone is screaming about a housing problem. Just like I don't like policy that incentivizes people to have more kids, especially when they are already on the public dole. It certainly doesn't solve the problem, but it is the equivalent of putting the shovel down when you find yourself in a hole.

 

[Maverick1]

Had a feeling the second home for a boomer aspect of this thread was going to ruffle some feathers here.

That's alright.

 

[belshawelk]

Mortgage all day long.You can always pay off if needed but you cant put money back into retirement account.

 

[belshawelk]

Yes. Insurance company won't like they are gone 3 months, so premiums will be higher. But it will get classified as a primary residence so if they itemize they can deduct the interest cost. It doesn't change the situation where a lot of our housing problems are compounded by this very condition. Older people with "wealth" are allowed to take advantage of their situation, which adds to a structural housing crisis for younger people without a strong balance sheet.

Huh?

Not sure I understand. It was rough when bought my first house 30 years ago. I worked and worked and worked and saved, saved saved. I do not feel guilty having 3 homes and several pieces of property. I am not wealthy, I was smart with my money investing not going to bars and wasting it. I lived frugal by choice many years to get to where I am now.

My insurance company doesn't care if I am ever in any of my homes. My cabin is expensive because its in a high fire level not because I do or don't live there.

Go get our second home without thought of what other people think.