I am 68 years old and I am retired. My current home is worth about $ 400,000 and is being paid for. I own a lot in Delaware and will be building a house that will cost about $ 450,000 to $ 500,000.
I don’t want to sell my current house until the new one is ready, so I need a building loan to finance the new house. At the same time, I have ample funds in my IRA. What is the best way to finance the new house? Should I use the money from the sale of my current home to repay the building loan or should I invest the money and pay a mortgage? I would be very grateful for any further suggestions on how to finance this project.
Dreams of Delaware
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I do not want to downplay how difficult it may be for you to make this decision, but I would first like to point out that you are in a rather enviable position at the moment. Many people have no choice but to rely on mortgage financing – especially when building a home, which can be a fairly costly endeavor. It’s nice that the proceeds from the sale of your current home will cover almost all of the anticipated costs of building your new home.
Because of this flexibility, this decision between repaying the loan after your home is sold or repaying the mortgage over time largely depends on your personal preferences. I’ve presented your scenario to a few financial advisors, both of whom emphasized that there are only a few potential pitfalls to be aware of. Otherwise, it depends on the approach you want to take with your finances and budget.
“When retirees are no longer used to paying a mortgage, they may not be used to budgeting that payment in their heads,” said Marco Rimassa, president and founder of Texas-based investment advisory firm CFE Financial. “Overall, both approaches could work, and a lot depends on the willingness to take risks and the willingness to adapt one way or another to the monthly budget requirements.”
To build on Rimasa’s Point you need to find out what your tolerance is when you have a large monthly payment on your back. And as I’m sure you know, don’t forget that the mortgage is not your only home-related expense. There are also taxes, utilities, and maintenance to consider.
Also, determine what the goal of investing the money and maintaining the mortgage will be. Do you have children who you would like to bequeath a great legacy to? Would you like to go on a big trip in a few years and want to earn interest on the money you earn from selling your home?
“If you don’t need the extra growth and don’t want to take the risk, your best bet is to pay off the mortgage and be done,” suggested Joshua Hargrove, financial advisor at Insight Wealth Partners, a consulting firm based in Plano, Texas. “Psychologically, it feels a lot better for most people than investing the money.”
A few things to keep in mind when determining your exact course of action. First of all, you should think twice before withdrawing money from your IRA during this process and instead rely on other savings that are available to you. Unless you have a Roth IRA, withdrawals are taxable. “That can be more expensive than the small interest they pay on the construction loan,” warned Hargrove.
““If you don’t need the extra growth and don’t want to take the risk, your best bet is to pay off the mortgage and go.”â
If you assume that you will only need the construction loan for a short time, you should consider an interest loan. With this type of loan, if you make monthly payments, you don’t pay back the principal. Instead, you only pay the interest portion of a monthly mortgage payment. As a result, the monthly payment is usually lower.
“A lot of home loans are structured this way,” said Hargrove. âWhen you’re done, refinance it with a regular loan. The property value serves as a down payment so little to no cash is required in the end. As soon as the old house is sold, use the proceeds to pay off the new mortgage. “
Remember, however, that only interest-bearing loans are usually floating rate and mortgage rates go up. Therefore, the price you pay at the beginning can increase over time.
If you are going to take the mortgage route and are investing the money you are making from selling your current home, consider a shorter term such as 15 years instead of a 30 year loan. The monthly payments would be higher, but you would be debt free faster. This can be useful later in retirement, especially if your health worsens and you need to free up your monthly budget for increased medical expenses.
Finally, you should consider the rising cost of home building in your decisions. Labor and building materials are scarce, making building new homes a lengthy and expensive process. I don’t want you to be surprised by higher costs along the way.
Whichever you choose, I hope you enjoy your new home and I wish you all the best.
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