Q: My wife and I retired last year and we sold our San Diego home and moved to Tulare, CA. We are renting a duplex while we wait for completion of our new house.
We have no other income besides our federal government pensions but we have no major bills other than a new truck we bought. We don’t own stocks or bonds and have no other major assets besides two vehicles, one of which is paid for.
We believe we would like to pay cash for the house so as not to have a mortgage. We don’t believe we would realize all that much in tax benefits by financing the house and believe for us paying cash would be the most practical thing to do.
I’ll be 59 and the wife is 56. A mortgage seems like a great thing not to have. Can you offer some advice on whether that would be the thing to do, or direct us to some literature on the subject?
A: Only about two-thirds of homeowners take advantage of the mortgage interest deduction. That’s because with the rise in the standard deduction, the recent tax equalization for married couples, and super-low interest rates, fewer people qualify to itemize on their federal income tax return.
You’re smart to recognize that you have other priorities than getting the biggest mortgage you can afford. At the top of the list: Peace of mind.
By paying cash for your new home, you and your wife will have reduced monthly living expenses. Basically, you’ll have real estate taxes, utilities, maybe another car payment, some medical expenses and discretionary expenses, like travel and dining out.
I’m all for seniors reducing their daily living expenses. Just be aware that your new house may need repairs in 5 to 10 years, and will certainly need to be maintained along the way. Make sure you set aside enough cash in your monthly to meet those needs. Perhaps you’ll use the cash you get from social security, when that starts in a few years
Finally, when you buy the property, you may wish to open up a home equity line of credit for an amount you feel would be good for you. This amount can be as little as $30,000 or as high as half the value of the home. Other than a minimal yearly fee, you won’t pay anything unless you draw down on the line of credit.
But if you suddenly need access to a load of cash, it’ll be there for you.