- The Washington Times - Thursday, January 13, 2011

Q. I am a retired professor, and my wife will be retiring from a career in the government at the end of this year. Our pensions will be substantial, and we have about $500,000 in retirement accounts and another $400,000 in cash and marketable securities, so we are fortunate to be financially secure.

We own a home in Northern Virginia that has only about $50,000 in equity. Our plan is to sell the house and move into our mountain home in Lake Anna, Va., which we own free and clear.

Here’s our question: We are looking at buying a second home in a particular area in Florida. The house prices are depressed, so we think we can buy what we want for $150,000 to $200,000.

We can’t decide whether we should make an all-cash offer or make it contingent upon a mortgage. We don’t like the idea of carrying a mortgage in our retirement, although we understand the benefits of a mortgage, especially with the low rates available today. Liquidating some of our stocks and mutual funds might also carry a negative tax consequence.

I’m sure you would recommend that we take out a mortgage. Is there any real benefit to paying cash for the Florida property?

A. You and your wife are fortunate enough to have the resources and assets to obtain the best mortgage terms. I rarely recommend that folks purchase property with little or no down payment. The 100 percent loan that was widely available a few years ago is partially what got us in the economic mess we’re in today.

Having said that, I think I have a plan you’ll like. Instead of trying to decide whether to buy the Florida home with cash or a mortgage, I think you should refinance your Lake Anna property, obtain the desired amount of cash out, and make an all-cash offer when you find the right Florida property. There are several advantages to this arrangement.

First, an all-cash offer is highly desired by a seller, especially in today’s credit environment, when loans are harder to make. A buyer who’s prepared to pay all cash is in a good negotiating position and is likely to secure a lower purchase price.

Second, refinancing your Lake Anna home, whether it is considered a primary residence or an existing second home, is likely allow the most favorable mortgage terms as long as your loan-to-value remains less than 60 percent. Because you have no mortgage on this property, I’m assuming this is possible.

Third, closing on the refinance before making an offer enables you to be nimble during your house hunt. When you find the right house, you can strike immediately with an all-cash offer. With interest rates so low, the cost of holding the refinance proceeds in the bank is minimal.

Fourth, as you appropriately point out, liquidating your mutual funds to buy the house may result in a negative tax consequence.

Finally, it surely doesn’t hurt to lock in an interest rate now. While it’s certainly possible that mortgage rates will fall later this year, analysts are predicting otherwise.

It never hurts to have a financial plan completed and squared away before a contract is ratified.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.

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