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Old 05-16-2019, 04:00 PM
 
Location: Hampstead NC
5,578 posts, read 5,093,804 times
Reputation: 14060

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Or something in between?

I'm selling a house. Lets say it sells for the asking price of $365000. The payoff on the mortgage is $130000.

That leaves me with $235,000.

I am buying a home for $165,000. If I pay cash for the house, I will still have $70,000 that I can put in my retirement fund. Plus I'll avoid loan origination fees/expenses, etc. I live pretty well on what I make so I could put the house payment into my retirement each month.

OR, I can put down at least 20% down and end up with a house payment of $700 and end up paying a ton of interest BUT put $200000 into my retirement fund.

I'm 51 years old. Given my age, I suspect that the mortgage + large upfront contribution to retirement is the smarter option.

But I don't know how to calculate this. I make decent money from my Fidelity accounts, but I have no idea how to translate that into a rate of return to compare with the 4.25 interest on the loan.

I tried the retirement freedom calculator which said I am $200000 short for my retirement (what a coincidence!). It also says 8% return. Is that some sort of average? Are those reasonable figures to work with?
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Old 05-16-2019, 04:10 PM
 
71,511 posts, read 71,674,131 times
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Use firecalc ,,,that freedom calculator is useless ....don’t forget to change your portfolio allocation in the tabs at the top ..if you dont it assumes 75% equities
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Old 05-16-2019, 04:31 PM
 
4,431 posts, read 2,608,360 times
Reputation: 10299
Quote:
Originally Posted by Stagemomma View Post
Or something in between?

I'm selling a house. Lets say it sells for the asking price of $365000. The payoff on the mortgage is $130000.

That leaves me with $235,000.

I am buying a home for $165,000. If I pay cash for the house, I will still have $70,000 that I can put in my retirement fund. Plus I'll avoid loan origination fees/expenses, etc. I live pretty well on what I make so I could put the house payment into my retirement each month.

OR, I can put down at least 20% down and end up with a house payment of $700 and end up paying a ton of interest BUT put $200000 into my retirement fund.

I'm 51 years old. Given my age, I suspect that the mortgage + large upfront contribution to retirement is the smarter option.

But I don't know how to calculate this. I make decent money from my Fidelity accounts, but I have no idea how to translate that into a rate of return to compare with the 4.25 interest on the loan.

I tried the retirement freedom calculator which said I am $200000 short for my retirement (what a coincidence!). It also says 8% return. Is that some sort of average? Are those reasonable figures to work with?
I have more questions:


Are you already retired?
If not, how much longer do you expect to work? 11,years to age 62? That would allow for a 15 yr mortgage to be mostly paid for.

Can you put the 20% down and finace on a fixed 15 year mortgage? While still working can you pay it off early? That would save "a ton of interest " you'd be paying. Is tge $700 for a 30 yr fixed or 15 yr fixed? If 15 year fixed do you think you can firk over, say, $1k/ m to pay it off early?

The 8% is ONE average. 6% is reasonable also.10 -12% is possible, but be conservative go with the 6-8%. Averages are just averages, and not areflection of what may really happen, but I'm sure you knew that.

What is your level of comfort ? Would you be happier with a paid for house, or more in retirement?

Do you think you can make your plan work? ( the mortgage and upfront contributions)

Can your retirement income support the mortgage payment if you finance it and dont pay off while finishing working? $700 doesnt sound like a lot, but if your total retirement income is only $2k a month thats almost half your retirement income.

Is this your final house? Or will you be moving to somewhere else for final retirement?

Questions questions...

Best to you in deciding....

( btw im going to be 56, [my OH is now 60, works] and while disabled i work part time. We bought a house in 2015, we put 10% down, but rapidly paid it down...we now own 1/2 the house. Weve slowed down on that but will have it paid off like a 15 yr, and plan to retire in 10 years. Wed rather add more to retirement savings now. We are late to the party for retirement due to life crap happening, so catch up is essential)

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Old 05-16-2019, 04:32 PM
 
Location: Florida
4,359 posts, read 3,694,371 times
Reputation: 4085
Assume the mortgage interest rate would be under 5% and the minimum return you would earn on your equity investments is 6% (8 or more is possible but I do not think we will be repeating the historical returns). This would say the mortgage route is better by 1%. Add to this inflation would make your mortgage payment a little cheaper. Thus assuming no adverse sequence risk (down market and you sell) and good investments the mortgage would be the way to go to maximize dollars in your pocket.


But if you are conservate I would pay cash for the new home and invest the monthly mortgage payment. You will probably make a dollar or two less but I would tend to take this route.
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Old 05-16-2019, 05:15 PM
 
2,086 posts, read 706,293 times
Reputation: 5337
This is a very individual decision and people don't always make the decisions implied by a dry calculation. I like the idea of a 15-year mortgage if you can handle the payment. That's what I did when I bought a house at 50. I could have paid cash but chose the mortgage because I was making more on my investments than the mortgage interest rate.

Also- if you choose to pay cash, make sure you'd have enough discipline to invest the money you'd have made in mortgage payments rather than just increasing your spending.
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Old 05-16-2019, 06:36 PM
 
Location: Hampstead NC
5,578 posts, read 5,093,804 times
Reputation: 14060
Quote:
Originally Posted by athena53 View Post
This is a very individual decision and people don't always make the decisions implied by a dry calculation. I like the idea of a 15-year mortgage if you can handle the payment. That's what I did when I bought a house at 50. I could have paid cash but chose the mortgage because I was making more on my investments than the mortgage interest rate.

Also- if you choose to pay cash, make sure you'd have enough discipline to invest the money you'd have made in mortgage payments rather than just increasing your spending.
15 year mortgage payment is a little higher than I'd like relative to my monthly income (I'm a teacher) but 20 years looks doable. I think I will put the bulk of my equity into retirement right away, and with the money I save each month from payments lower than what I am paying now, I can fully fund my Roth each year and still have some leftover for a vacation once in a while.

As for discipline...8 years ago I sold a house and bought a house and kept a small chunk of the equity to plump up my retirement. I bought an annuity which has DOUBLED in value since then. That is all the reminder I need.

Thank you! I feel a lot more comfortable playing with these figures now.
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Old 05-16-2019, 06:46 PM
 
Location: Eastern Washington
14,227 posts, read 44,887,015 times
Reputation: 12798
Quote:
Originally Posted by Stagemomma View Post
Or something in between?

I'm selling a house. Lets say it sells for the asking price of $365000. The payoff on the mortgage is $130000.

That leaves me with $235,000.

I am buying a home for $165,000. If I pay cash for the house, I will still have $70,000 that I can put in my retirement fund. Plus I'll avoid loan origination fees/expenses, etc. I live pretty well on what I make so I could put the house payment into my retirement each month.

OR, I can put down at least 20% down and end up with a house payment of $700 and end up paying a ton of interest BUT put $200000 into my retirement fund.

I'm 51 years old. Given my age, I suspect that the mortgage + large upfront contribution to retirement is the smarter option.

But I don't know how to calculate this. I make decent money from my Fidelity accounts, but I have no idea how to translate that into a rate of return to compare with the 4.25 interest on the loan.

I tried the retirement freedom calculator which said I am $200000 short for my retirement (what a coincidence!). It also says 8% return. Is that some sort of average? Are those reasonable figures to work with?

As Mathjak has explained, there are only statistical answers to this question, if you consider investing the balance of the money. The tax advantages of the mortgage are reasonably certain at least in the short term, but tax laws can and do change.



The only real downside of investing most of the money and having a mortgage is if you have a "Financial Armageddon" type of event that involves stock prices going down sharply and you losing your job, or your ability to work, at the same time. You would insure against this by paying cash or nearly so.


It also does not have to be an A versus B choice. You could put 50% down on the house, put the rest in retirement funds. You could put 90% down. Not sure what the sense of 90% down would be, but, it's an option. Since the gains on a house are not taxable, maybe what you want to do is put them into a Roth? One of you financial gurus please chime in here, about how to handle the money since it's from the sale of a house.


I think an 8% return is on the high side for the kinds of investments most people use in retirement accounts.
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Old 05-16-2019, 06:53 PM
 
2,033 posts, read 859,539 times
Reputation: 5027
Live mortgage free. You can't safely earn as much with the money as you will pay in interest on your mortgage. If you are earning 6 to 8% and the market crashes when you retire, or if you lose your job before you plan to retire, what then? Maybe you can't afford to live in that house anymore.

I'm selling a house. Lets say it sells for the asking price of $365000. The payoff on the mortgage is $130000.

That leaves me with $235,000.

I am buying a home for $165,000. If I pay cash for the house, I will still have $70,000 that I can put in my retirement fund. Plus I'll avoid loan origination fees/expenses, etc. I live pretty well on what I make so I could put the house payment into my retirement each month.

OR, I can put down at least 20% down and end up with a house payment of $700 and end up paying a ton of interest BUT put $200000 into my retirement fund.

I'm 51 years old. Given my age, I suspect that the mortgage + large upfront contribution to retirement is the smarter option.

But I don't know how to calculate this. I make decent money from my Fidelity accounts, but I have no idea how to translate that into a rate of return to compare with the 4.25 interest on the loan.

I tried the retirement freedom calculator which said I am $200000 short for my retirement (what a coincidence!). It also says 8% return. Is that some sort of average? Are those reasonable figures to work with?[/quote]

Last edited by bobspez; 05-16-2019 at 07:07 PM..
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Old 05-17-2019, 02:32 AM
 
71,511 posts, read 71,674,131 times
Reputation: 49088
there is a lot to figuring out the equation .....

the mortgage at 4.25% is on a declining balance over time , the investing is compounding on an increasing balance for one thing ...

the tax aspect of the mortgage may not help if you can't clear the standard deduction .


running the numbers with a mortgage and without a mortgage in firecalc shows the smallest balance pretty consistently is potentially using your own money to pay cash .

many times people have it backwards ... in that hypothetical Armageddon scenario having that liquid investments in your accounts and available can trump having all that equity tied up in a house when you lose your job .
you need to meet the same criteria to get a heloc as a mortgage today . but 2008 saw helocs closed as money ran out for lending.

you can always pay bills from investments and a diversified portfolio will not be selling stocks in a bad down turn ..

so it really is a mental preferance rather than a financial one ..financially using others money is always best .. but there is an emperors new clothes mentality people have in having the money tied up in the property that just feels better to them .
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Old 05-17-2019, 04:42 AM
Status: "Excited to move to Vegas!" (set 27 days ago)
 
Location: Beaverton, OR
5,538 posts, read 5,904,077 times
Reputation: 6341
Yeah, true to the above. I’m not saying it makes full logical sense but I like the idea of a free and clear house and I’ve seen the worst effects of that decision and yet still in the future, I’ll do it again only it’ll make more sense next time. The last time I did that, I ran low on money for a bit and it was all tied up in investments (none liquid) and my house, despite my low monthly bills. My new mortgage is 2.95%, 10 year ARM, so I wanted the lowest payments possible with the intention of paying off the small mortgage in a few years. If I was in a different boat though I wouldn’t do that, rates are so good, you’re better investing! It’s just for me my asset allocation means the house is such a small portion of the total I find it better diversified to own it outright soon-ish.
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