- The Washington Times - Thursday, July 1, 2004

Q:My husband and I are recently retired and living on a small pension. We don’t have a lot

of savings, but we don’t spend a lot either.

Our biggest asset is our town house in Washington. We have a $120,000 mortgage balance, and our real estate agent says that we should be able to sell it for about $350,000. She says that after paying off the mortgage and paying the sales costs, we should net about $210,000.

We plan on moving to the panhandle of Florida because the weather is warm and home prices are cheap: $200,000 will buy a very nice house there.

Here’s our quandary. I want to take the equity from the sale of our Washington home and buy a house in Florida for cash. My husband thinks that we should take out a mortgage and keep some money in the bank. We would like your opinion.

A: I’m not one of the so-called financial gurus who encourage everyone to obtain the largest mortgage possible. In fact, there are lots of situations where a having a mortgage is not a good idea.

Let’s take a look at some of the issues that need to be considered before you and your husband make this decision.

First, you should consider affordability. Create a realistic monthly budget. Based on your current income and living expenses, how much money would you be able to put toward a mortgage payment? Be sure to include things such as real estate taxes, hazard insurance and home maintenance costs in your budget.

Second, you should consider liquidity.

You say you don’t have a big savings account. Consider the drawbacks of having a very limited liquid savings account. Every household should have some cash in the bank for a rainy day.

What would happen, for example, if you had a death or illness in the family and you had to fly across the country and stay in a hotel for week? Putting those kinds of expenses on a credit card can lead to higher monthly obligations and higher consumer debt.

Third, you should consider the tax issues. Undoubtedly, any mortgage interest you pay can be deducted on your income-tax return. In essence, a tax-deductible mortgage means the actual cost to borrow is less than your interest rate.

For example, a 6 percent rate on a 30-year mortgage might equate to only 5 percent when you take into consideration the tax savings.

Having said that, I think the last, and one of the most important, things to do is compare the mortgage’s cost to borrow with the advantages of keeping your money and using it.

For example, taking out a $100,000 mortgage will enable you to keep $100,000 of your equity from the Washington home. You might want to keep $10,000 in a liquid savings account. You might want to take the remaining $90,000 and invest it in a successful mutual fund.

What kind of return can you make by investing in mutual funds? Who knows? It depends on your type of investment and market movements. But remember that a tax-deductible mortgage of 6 percent equates to an actual cost to borrow of perhaps 5 percent. This means that if you are able to invest your money and earn more than 5 percent over time, a mortgage makes plenty of sense.

My advice is to first ascertain the amount of mortgage you can afford. Once you have taken out the mortgage, stash away a bit of cash for emergencies and invest the rest.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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