Financing A Second Home

[SAJ-99]

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.

Second and vacation homes have higher insurance costs. why, because if stuff goes wrong in a house, they want someone there to notice so a small problem doesn’t become a big problem. If they never asked the question, I suggest reading the policy fine print. They may not have said it when they sold the policy, but when you have a claim they will tell you.

Again, don’t fault anyone for doing it. If that is where you choose to invest discretionary income fine. Great job. Congrats. Just don’t like tax policy to encourage it in any way.

 

[belshawelk]

Second and vacation homes have higher insurance costs. why, because if stuff goes wrong in a house, they want someone there to notice so a small problem doesn’t become a big problem. If they never asked the question, I suggest reading the policy fine print. They may not have said it when they sold the policy, but when you have a claim they will tell you.

Again, don’t fault anyone for doing it. If that is where you choose to invest discretionary income fine. Great job. Congrats. Just don’t like tax policy to encourage it in any

There are ways around the insurance as a “second home”. Taxes are a little different story but still ways to make some deductions.
I don’t make the rules. I just how how to use them to the fullest to get back what the government takes from every year to give to others.
No worries and I am not trying to argue. Many different thoughts on these discussions. Much smarter people out there than me.

 

[SwaggyD]

There are ways around the insurance as a “second home”. Taxes are a little different story but still ways to make some deductions.
I don’t make the rules. I just how how to use them to the fullest to get back what the government takes from every year to give to others.
No worries and I am not trying to argue. Many different thoughts on these discussions. Much smarter people out there than me.

It’s NOT a second home.
The OP said he’s gonna live upstairs For 3 months in AK house. That means 9 months in the new home. He’s buying a new primary residence. He’s not buying a second home for financing or insurance.

 

[AlaskaHunter]

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.

It’s NOT a second home.
The OP said he’s gonna live upstairs For 3 months in AK house. That means 9 months in the new home. He’s buying a new primary residence. He’s not buying a second home for financing or insurance.

Yes our thought is a gradual move, summering in Alaska for about 5 years, getting it ready to sell and finally selling our AK home,
but we are in no rush and if we have buyers remorse about living in the lower-48, we could decide to stay in AK.

 

[AlaskaHunter]

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.

When I contacted my insurance agent to inform him we would be gone for 6 months this past winter and to suspend my pickup insurance (I left my pickup in Alaska) he asked nothing about our AK home (our daughter is staying there) and said nothing about raising the home insurance.

 

[WesternRookie]

What state are you looking at?

FYI, Florida has the Homestead Law, which protects your primary residence from any judgements against you.

Florida Homestead Law & Homestead Exemption - Oppenheim Law

Florida Homestead Law If you are considering moving to Florida, or you are new to Florida, you will hear about something that you are likely unfamiliar with: Florida Homestead. The Florida Homestead law makes purchasing a primary residence exceptionally attractive as it protects a Florida...

www.oppenheimlaw.com

Also, the Homestead Property Tax Exemption will help greatly with your tax bill.

https://floridarevenue.com/property/Documents/pt113.pdf

 

[Steiny]

Retired guy here that has a couple homes. I'd figure out a way to pay cash for it, or wouldn't have two homes.
The last thing you need in retirement is more debt.

 

[AlaskaHunter]

Retired guy here that has a couple homes. I'd figure out a way to pay cash for it, or wouldn't have two homes.
The last thing you need in retirement is more debt.

Why?
By limiting our income we save over $25k per year in health insurance plus a low 12% tax income bracket.
There is always the option of prepaying principal in the future like I did with my first home mortgage...
a 30 year mortgage I paid off in 10 years. Plus if we decide to sell our Alaska home in the future,
would would pay off the mortgage on this winter home.

 

[BigHornRam]

Looks like inflation is going to run wild while mortgage rates are going to remain low. Borrow even more and buy 2 houses!

Russia-Ukraine puts 10% U.S. CPI on radar as BlackRock repeats central banks may have to live with inflation

The threat of a full-scale Russian invasion of Ukraine is raising the risks of an energy shock, which some say could send annual U.S. inflation up to 10%.

www.marketwatch.com

 

[Nick87]

Looks like inflation is going to run wild while mortgage rates are going to remain low. Borrow even more and buy 2 houses!

Russia-Ukraine puts 10% U.S. CPI on radar as BlackRock repeats central banks may have to live with inflation

The threat of a full-scale Russian invasion of Ukraine is raising the risks of an energy shock, which some say could send annual U.S. inflation up to 10%.

www.marketwatch.com

How convenient

 

[Steiny]

Why?
By limiting our income we save over $25k per year in health insurance plus a low 12% tax income bracket.
There is always the option of prepaying principal in the future like I did with my first home mortgage...
a 30 year mortgage I paid off in 10 years. Plus if we decide to sell our Alaska home in the future,
would would pay off the mortgage on this winter home.

Borrow -vs- pay cash for a home gets kicked around quite a bit with the relatively low interest rate environment. If you really truly believe that your money in the market is assured a return considerably higher than what a mortgage loan will cost you, then why haven't we all been borrowing money on a HELOC all along, investing it in the market and making a bunch of money? Simple answer ... that would be a silly risk. There is a whole lot of security and peace of mind knowing things are paid for and you don't have any payments to make. I'm sure you are aware of that already having a paid off home.

Don't know your personal situation, but it would be wise to talk to a CPA regarding the tax implications. If you pull it out or your IRA or 401k to buy a home it would be a one time hit and may not be as bad as you fear. Regarding ACA insurance, they raised the allowable income thresholds a bunch this year so check that out before you assume something. It varies by state, but ours (myself & spouse 62 & 59, IN) went down from $1500/mo to $1000/mo based on $150k max annual income.

Once I got to the point we could do so, I've just always leaned towards paying cash for things and not carrying debt. Makes for a lot less things to worry about.
Good luck whatever route you go and enjoy your retirement.

 

[AlaskaHunter]

Say we used $300k from a 401-k and need 75k for living expenses. We would loose our subsidized health insurance so add another $25k income needed. So that is $400k, with a standardized deduction of $25,100, that would be a taxable income of $375k so taxes would be 24% instead of 12%.
24% of 375k would be 90k, compared to 75k - 25k, 12% of 50k taxable income
is 6k in taxes.

So 90k - 6k in additional taxes, + 25k in additional health insurance payments =
109 k that is not invested.

 

[npaden]

Some of that is just timing difference on when you pay the tax but quite a bit of that is just extra tax due to the higher tax bracket. You would have to go in and look at the breakdown of each tax bracket to calculate it out. You actually would end up in the 35% tax bracket if you took out the $300K to buy the house outright.

$375K of taxable income you would end up paying $105K in income taxes for an effective tax rate of 28%.

You actually need to keep your taxable income under $41,775 to stay in the 12% bracket but lets say with the $25K standard deduction you are able to slide in under that. You will have to bump up your draws from your 401k some to pay for the monthly payment so that might be tougher than you think. To be conservative lets say you have to go up to $100K of annual withdrawals from your 401k to cover the payments less the $25K standard deduction and you have $75K of taxable income. That's $12K of taxes and gets you to an effective tax rate of 16%.

Boil that all down and you are paying an extra 12% on the money you withdraw for the house. That's $35K of extra taxes. Throw in your $25K of subsidized health insurance and it costs you $60K extra to pay cash for the house instead of borrowing.

Then you can look at whether your investments are earning more or less than you would be paying in interest and that could even show more lost opportunity cost.

It really seems like a no brainer.

 

[SAJ-99]

Say we used $300k from a 401-k and need 75k for living expenses. We would loose our subsidized health insurance so add another $25k income needed. So that is $400k, with a standardized deduction of $25,100, that would be a taxable income of $375k so taxes would be 24% instead of 12%.
24% of 375k would be 90k, compared to 75k - 25k, 12% of 50k taxable income
is 6k in taxes.

So 90k - 6k in additional taxes, + 25k in additional health insurance payments =
109 k that is not invested.

Sounds like you need a spreadsheet, at least. Or an accountant. You could always “split the baby” draw the income you need to keep insurance premiums low and pay the house off over 5 yrs or something. I’m sure that sounds easier than it is. Good luck.

 

[AlaskaHunter]

Some of that is just timing difference on when you pay the tax but quite a bit of that is just extra tax due to the higher tax bracket. You would have to go in and look at the breakdown of each tax bracket to calculate it out. You actually would end up in the 35% tax bracket if you took out the $300K to buy the house outright.

$375K of taxable income you would end up paying $105K in income taxes for an effective tax rate of 28%.

You actually need to keep your taxable income under $41,775 to stay in the 12% bracket but lets say with the $25K standard deduction you are able to slide in under that. You will have to bump up your draws from your 401k some to pay for the monthly payment so that might be tougher than you think. To be conservative lets say you have to go up to $100K of annual withdrawals from your 401k to cover the payments less the $25K standard deduction and you have $75K of taxable income. That's $12K of taxes and gets you to an effective tax rate of 16%.

Boil that all down and you are paying an extra 12% on the money you withdraw for the house. That's $35K of extra taxes. Throw in your $25K of subsidized health insurance and it costs you $60K extra to pay cash for the house instead of borrowing.

Then you can look at whether your investments are earning more or less than you would be paying in interest and that could even show more lost opportunity cost.

It really seems like a no brainer.

Married, filing jointly $19,901 to $81,050 is 12% tax bracket.
Married, filing jointly $172,751 to $329,850 is 24% tax bracket.

 

[npaden]

I pulled the single bracket for those calculations. You do still end up in the 32% bracket for the last little bit if you pulled the extra $325K out for the house and the medical insurance premiums. The end result is essentially the same with quite a bit of additional income taxes paid in the year you drew out just due to the higher tax rate.

 

[Steiny]

I've never heard of health insurance in excess of $25k ?
Did I read that correctly?

 

[BigHornRam]

Why?
By limiting our income we save over $25k per year in health insurance plus a low 12% tax income bracket.
There is always the option of prepaying principal in the future like I did with my first home mortgage...
a 30 year mortgage I paid off in 10 years. Plus if we decide to sell our Alaska home in the future,
would would pay off the mortgage on this winter home.

Or you could sell the AK house now, and pay no taxes on that. Pay cash for new house, and rent a place for the couple months in the summer. That's what I would do.

Edit to add that I would not rent for the summer but would be mobile with a travel trailer so as to see more of what the great large state of Alaska has to offer. That's what I would do.

 

[ashersdad]

I've never heard of health insurance in excess of $25k ?
Did I read that correctly?

Yes, you did. That's the going rate in alot of places for a couple in their 60's.

 

[TOGIE]

i think my lesson from this thread is that unless money is no object i just always need to own one house. unless that second house generates some income i guess.