Good problem - home buying w/ cash

[zaffo oxnard]

My mom is 71 and just sold her house of 30 years for $650,000. No other debt. Buying a condo for $550,000 & wonder if she should 1) pay cash or 2) take out a mortgage?



She has about $100,000 in IRAs and HH bonds that need to be liquidated that she would pay 20% tax on if she does not have some sort of deduction. I'm thinking that she needs a no point no fee 5 year ARM that will throw 100% interest for 5 years. I can then liquidate the deferred asets (bonds and IRAs) and convert to cash, then pay off the mortgage in a few years, unless the returns in the stock market really go up. She can get a loan at 7% and get at least that in market returns with whatever does not get put down.



What am I missing? Why don't people take out a mortgage when they have all the tax deferred income to realize? Isn't it better to pay 7% on the mortgage rather than 20% to the IRS?



Shr has to close on the house anyway, so paying for escrow isn't an issue.

Thanks,

T

 

[matt thalken]

mortgages are not considered bad debt like say a cc, especially if the property is a good investment. I'd look at getting a fixed rate mortgage, a decent down payment, and investing the rest of the cash diversely.

 

[Thomas Rogers]

Talk to a tax person. I suspect she has been in her old home for some time, but there may be a significant tax burden to any equity on the home that she doesn't roll into the condo purchase; but then again, maybe not.



If there isn't, then I would consider paying only enough for the condo as needed...at least the 20% percent so as not to have to pay PMI, then put the rest into some *SAFE* investment plan that will with as much certainty as possible beat her fixed mortgage rate (probably around 6.x%, I would guess). As you consider the tax deduction of the mortgage interest and the interest income, it's better to carry the balance and invest than have 0 balance on the condo.



Lastly, consider getting a 15 year mortgage and some type of mortgage insurance that will pay the mortgage in full in case of your mom's death (a death rider???), or an amount of term insurance that will cover the mortgage balance. Either way, such insurance will be expensive for her age. It's not required, but if she can swing it then it makes the condo more of an inheritance item in case of her death instead of something that has to be sold to get out from under.



TJR

 

[Nelson Atwell]

If I were that age, I wouldn't buy a condo. Too many neighbors, and with 1/2 Million Dollars I could travel and see a good portion of the World. If I was going to live in an Apartment/Condo I would rent and keep that money liquid for medical bills, travel and gift a lot of it to my children and charities. Annuities may also be an option. Like others have said she needs to talk to a trusted investment advisor.

 

[zaffo oxnard]

As far as rolling equity - you don't have to do that anymore. IRS lets you keep the gain. (up to $250k single / $500k married)



This condo is in a "weekend at the beach" type place for Los Angeles types with only 20% full time occupants. I can see it getting a bit noisy on summer weekends, but for the most part I think it will be a mourge (nasty of me). She wants her own place and I wanted something that I didn't have to fix or maintain all the time (such as was happening with old house.) Actually rents here are $2000 a month, so her rent and house PMT are the same. She was able to take her $700/year property tax bill with her. Anyone else is paying $6,000 to $12,000 a year in prop. tax in the same building.



She is lucky. There is plenty of $$ for cruises with her sister, trips, etc..

Retired federal employees have great benifits the likes of which I'll never see.

tony

 

[Nelson Atwell]

Retired federal employees have great benefits the likes of which I'll never see.

I know what you mean. Military have it good, but civil service have it even better.

 

[kil roy]

I agree with TJR and if invested properly the balance should make enough

interest to cover at least half her monthly mortgage payment

 

[POJ Irving]

Hi Tony,



I am not a tax accountant but an accountant, what TJR says makes sense. Since I don't know how much research you did before taking the steps that you are taking, such as buying a condo for such a high price vs renting (considering the age of your mother, with great health and luck could go on to live another 10-30 years) Even if you were to rent consider the payment vs Mortgage payment and other costs.

Yes, a tax accountant may agree with some of your argument regarding the tax benefits, however you should look at making the money earn her enough interest / income on investments that can benefit her now while she still retain a large chunk of her principal. (I am considering age). Remember if you are looking at high returns you have to look at high interest rates and high interest rates leads to high risks.

It may be too late now, but go see a trusted tax accountant / investment advisor,weigh the options, don't just take their advise because trusted as they are they may want to get some of your money. In the end make the decision you think is best for her (your mother) and not the rest of the family. I have been there but I can not advise you base on my decision.



PJ.

 

[Dale Carlson]

I agree with TJR and PJ for the most part, Tony, but you didn't mention your mom's income. I think you'd have to take her total financial picture into account, not just the tax part of it.