Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

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Homeby5
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Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

My wife and I are retired. Well...I am retired and my wife works part time as travelling nurse. Maybe 10 weeks a year. We have a home that is paid off worth about $1.6mil in Florida Keys but make very little income (less than $70k). We have about $500k in IRA's that we use if we need to pull out money but we hardly ever touch it because we also have little debt and live within our means.
OK...we are thinking about buying a second home under $400k somewhere and spending summers in second home. We are thinking about taking out a reverse mortgage to pay for second home. Is that smart or would it be better to fund the second home with a HELOC, regular mortgage or draining our IRA's and then living off of reverse mortgage if needed?
Anyway...ideas
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retired@50
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by retired@50 »

This sounds like a recipe to have too much in real estate ($2 million) and not enough ($100k) in assets that are easily liquidated.

The typical knock on reverse mortgages is that they tend to have high fees/costs so I'd be careful.

More details here: https://www.investopedia.com/biggest-mi ... es-5225608

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Carl53
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Carl53 »

We purchased a second home with a HELOC on our first home. Our intent was use those funds for the purchase and other funds to upgrade and add on to the new home. About the time we were ready to move into the second home (roughly 12 months into the HELOC) we sold the first and paid off the HELOC, thus avoiding needing to dip into retirement funds.

In your case, you only mention $70k in income. If your wife's income is half of that you will be dipping into the retirement funds when she retires. I would be concerned about your overhead (property taxes, utilities, insurance) on nearly $2 million in properties eating up your retirement funds. Additionally with a second home there would be substantial other initial expenditures (furnishings at a minimum). I'd suggest that you might consider downsizing to your second home and using the some of the left over funds to come back to the Keys to visit.
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

Thanks. My wife only brings in about a third of our $70k income now. But I get your concern. One thing I didn't mention is my home in Key Largo also has a nice rental attached. We rent it now for about $30k a year. If we do decide to get a second home and become snowbirds, we could always rent the main house out for about $60k a year and keep the smaller rental when we come back. This way, we shouldn't have to dip into our IRA's too much.

Anyway...my main question is what is the best way to buy my second home given my situation? Is a HELOC more advantages than a Reverse Mortgage?
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Third Son
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Third Son »

I am also interested in this and have subscribed to the thread....
"A part of all you earn is yours to keep" | | -The Richest Man in Babylon
KlangFool
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by KlangFool »

OP,

Why renting the second home for 3 months out of a year is not an option? It is cheaper and less maintenance effort on your side. Financially, it is less risky too.

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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

It is an option. Thanks. While I appreciate it, I don't want to get this thread sidetracked into my financial options outside of my original question. Out of my 4 options I listed, what are the downsides and upsides of each? Thanks again.
exodusNH
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by exodusNH »

Homeby5 wrote: Wed Dec 14, 2022 2:15 pm It is an option. Thanks. While I appreciate it, I don't want to get this thread sidetracked into my financial options outside of my original question. Out of my 4 options I listed, what are the downsides and upsides of each? Thanks again.
Reverse mortgages are typically more expensive than other loans.

HELOCs typically have variable rates, maybe after a short teaser rate period.

Home equity loans are similar to HELOCs, but are more similar to a regular mortgage. Out of these three options, this is probably the best.

However, the downside of the above is that something goes sideways, you've put your primary home in jeopardy for a second home.

A traditional mortgage on the new property is your best option, if you can qualify for it. You might need to work with a smaller bank to find an option that works. Perhaps you need to put down a larger down payment, taken from your IRA, to qualify for the mortgage.
exodusNH
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by exodusNH »

Homeby5 wrote: Wed Dec 14, 2022 2:15 pm It is an option. Thanks. While I appreciate it, I don't want to get this thread sidetracked into my financial options outside of my original question. Out of my 4 options I listed, what are the downsides and upsides of each? Thanks again.
If you drain your IRA, all of that would count as income in 2022, throwing you into a very high tax bracket and possibly costing you additional Medicare premiums or loss of other subsidies.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by HMSVictory »

Nope. I'm sorry but you can't afford a toy aka second home (valued at $400k).

If you'd like to sell your home to free up some cash to downsize the primary and buy the new place, go for it.

2 homes = 2 sets of expenses. If I was retired, I wouldn't want more than 30-40% of my net worth tied up in my home.
Stay the course!
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Admiral »

HMSVictory wrote: Wed Dec 14, 2022 2:38 pm Nope. I'm sorry but you can't afford a toy aka second home (valued at $400k).

If you'd like to sell your home to free up some cash to downsize the primary and buy the new place, go for it.

2 homes = 2 sets of expenses. If I was retired, I wouldn't want more than 30-40% of my net worth tied up in my home.
+100. Sell the $1.6m property and buy two less expensive ones. Or as KF said, rent the second one. Why do you even need to buy the second home? Sounds like a headache.

You cannot afford a $400k property. In my view all the options you list are bad. The least bad is a small mortgage, but that would require a large cash downpayment.
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

Thanks. Just wondering...What's the downside to a Reverse Mortgage? I mean...I'm sitting on soooo much equity, why not use a little to become a snowbird? I am having a hard time understanding why a second home somewhere else wouldn't be affordable in my situation? Not arguing...I just don't see it given my access to my equity?
Also...why sell my first home in the Keys when it's producing a $30K/year income for me? I mean...it's paid off and is an income producer.
And as I mentioned...I could move into the apartment side (which is nice for a retired couple living 6 months) and rent the larger side and bank $60k a year. Again...I'm not arguing, I just don't understand where I am messing up my math that would get me in trouble down the road.
Thanks
exodusNH
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by exodusNH »

Homeby5 wrote: Thu Dec 15, 2022 7:10 am Thanks. Just wondering...What's the downside to a Reverse Mortgage? I mean...I'm sitting on soooo much equity, why not use a little to become a snowbird? I am having a hard time understanding why a second home somewhere else wouldn't be affordable? Not arguing...I just don't see it?
Thanks
They typically have much higher fees. A home equity loan (vs HELOC) would typically be a less expensive option, though might be harder to get without a "normal" source of income.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Admiral »

Homeby5 wrote: Thu Dec 15, 2022 7:10 am Thanks. Just wondering...What's the downside to a Reverse Mortgage? I mean...I'm sitting on soooo much equity, why not use a little to become a snowbird? I am having a hard time understanding why a second home somewhere else wouldn't be affordable? Not arguing...I just don't see it?
Thanks
You answered this question in the original post: you have very little income and moderate savings (4% of $500k is only $20k/year as a safe withdrawal). I'm sure if you went over to Bigger Pockets they'd tell you to leverage your real estate. But Bhs tend to be more conservative. You are "house rich" and cash poor. (I'd also add that having an expensive home in the Florida Keys is a severe risk due to climate change, but that's another discussion.)

I think what many are saying is that it's fine to convert your $1.6m of equity into cash and then see if you can afford two homes (assuming you feel a need to buy two, which you've not quite explained). Putting all (or most) of your eggs into the real estate basket is non-diversified and thus a risk. You will be highly leveraged.

Most people do not get reverse mortgages to buy another home...they use the money to live, or to gift, etc. If you're going to borrow based on the equity you have to buy a new property, then you might as well just get a mortgage. But you cannot afford a $400k mortgage on your income.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by tigermilk »

KlangFool wrote: Wed Dec 14, 2022 10:25 am OP,

Why renting the second home for 3 months out of a year is not an option? It is cheaper and less maintenance effort on your side. Financially, it is less risky too.

KlangFool
That is what i would do as well. Wife and I have talked about that when I retire We live with an oppressive summer, so escaping north has appeal. Further, renting gives the ability to try a different city/state every summer.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by HDM1004 »

Sounds like you have made up your mind.

What kind of interest rates can you get on a HELOC or reverse mortgage?

This kind of thing is beginning to not be cost effective, a few yeas ago at 2.5% maybe.

Also think about taxes and insurance X2!
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Watty
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Watty »

With $70k in income I would be surprised if you would qualify for a large mortgage or a large home equity loan so those might not even be an option for you. If I am not mistaken you need to be 62 to qualify for a reverse mortgage so that could be an issue too.

Be sure to look into what you can actually qualify for before you start making plans.

A huge problem with depending on the rental income is that not only could you have normal vacancies but if the property is damaged in a hurricane, or unrentable for some other reason, then you would have no rental income at the same time you might have large repair expenses.

Also consider if your property taxes and home insurance will be different if the property no longer qualifies as being owner occupied.

At some point your wife will also likely stop working.

I don't see how you could afford an additional $400K property even if you can qualify for a loan.
MichDad
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by MichDad »

I'll join the chorus of Bogleheads advising you to not purchase a second home -- no reverse mortgage, no HELOC, no home equity loan, no IRA withdrawal, and no new mortgage. I recommend instead that you rent a place for the months you want to leave Key Largo.

We're retired and own a high valued and paid off home in the USA. We rent an apartment in Europe that we live in several months each year. This has worked out fabulously for us. If we ever decide to purchase a second home in Europe (rather than rent), we'll likely either take out a new mortgage from a European bank or take a home equity loan using our USA residence as security. However, we have higher income and more liquid financial assets than you.

MichDad
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Admiral »

Homeby5 wrote: Thu Dec 15, 2022 2:36 pm Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
I would not look at it this way. Renting gives you the opportunity to visit new (different) places, have new and different experiences, and find the place--assuming there is one--you like the best. It's also WAY less expensive. At some point you might (stress might) find the locale you like, and then at that point you can make a decision to continue to rent or perhaps sell your Keys home and move... and then rent in Florida.

In all likelihood you'll be saving money, not "throwing it away" by renting.
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

Admiral wrote: Thu Dec 15, 2022 7:21 am
Homeby5 wrote: Thu Dec 15, 2022 7:10 am Thanks. Just wondering...What's the downside to a Reverse Mortgage? I mean...I'm sitting on soooo much equity, why not use a little to become a snowbird? I am having a hard time understanding why a second home somewhere else wouldn't be affordable? Not arguing...I just don't see it?
Thanks
You answered this question in the original post: you have very little income and moderate savings (4% of $500k is only $20k/year as a safe withdrawal). I'm sure if you went over to Bigger Pockets they'd tell you to leverage your real estate. But Bhs tend to be more conservative. You are "house rich" and cash poor. (I'd also add that having an expensive home in the Florida Keys is a severe risk due to climate change, but that's another discussion.)

I think what many are saying is that it's fine to convert your $1.6m of equity into cash and then see if you can afford two homes (assuming you feel a need to buy two, which you've not quite explained). Putting all (or most) of your eggs into the real estate basket is non-diversified and thus a risk. You will be highly leveraged.

Most people do not get reverse mortgages to buy another home...they use the money to live, or to gift, etc. If you're going to borrow based on the equity you have to buy a new property, then you might as well just get a mortgage. But you cannot afford a $400k mortgage on your income.
Help me understand what I am missing. In four years when we reach age 62 (when I can qualify for reverse) my income will be conservatively $7k a month. That's with my SS, wife's SS and apartment rental in Key Largo. With hardly no debt, why would you assume I need to draw any money out of my $500k IRA to live? Again...I'm not arguing...I just don't see the "cash poor" scenario. Even if I did have to start dipping too far into my IRA's, worse come to worse, I could sell one of my homes or as I mentioned, live in the Key Largo Apartment and rent the main home out for another $3k a month. That would make my income over $100k a year with no debt. I realize I don't make income like many others but I positioned myself to not need much income.
We have been retired now for about two years and we live amazing, taking trips when wanting to, going out to eat and boating. Hell...we just bought a camper with some cash and spent 4 months in Alaska. My wife only works very little part time and only makes the same as she would when she starts to receive SS. I only mention this because we have lived like this for two years now in retirement and our asset worth has went up a couple hundred thousand over these retirement years, even with the recent market downturn and inflation woes. I agree it may not be the wisest move in order to grow my asset wealth but I planned this life for decades and don't really care if I spend some of my assets down to enjoy retirement.
So again...please understand...I'm not arguing. You may in fact be correct. I just don't see on paper how using a reverse mortgage to use 25% of equity to buy a $400k home to live in 6 months a year would put me in some financial peril when my assets are currently over $2mil with $70k of income and no significant debt. If I was buying a boat or something that depreciates...yeah, I would be more worried, but a house?
Last edited by Homeby5 on Thu Dec 15, 2022 3:06 pm, edited 1 time in total.
exodusNH
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by exodusNH »

Homeby5 wrote: Thu Dec 15, 2022 2:36 pm Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
Renting is not a waste of money.

Renting will save you

- income taxes from cashing out your IRA
- high fees of a reverse mortgage
- interest on a mortgage, if you can even qualify
- from putting your primary residence "on the hook" for the second home
- tying up $2.0M/$2.5M of your wealth in real estate, with most of that tied up in a house in a vulnerable part of the country
- all the costs of running a second house: maintenance, property taxes, insurance, utility fees not relates to usage, furnishing

Renting also allows you to "try out" different areas.

Buying a second home and renting it out is a royal pain, especially as you will be 100s to 1000s of miles away.
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

exodusNH wrote: Thu Dec 15, 2022 3:04 pm
Homeby5 wrote: Thu Dec 15, 2022 2:36 pm Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
Renting is not a waste of money.

Renting will save you

- income taxes from cashing out your IRA
- high fees of a reverse mortgage
- interest on a mortgage, if you can even qualify
- from putting your primary residence "on the hook" for the second home
- tying up $2.0M/$2.5M of your wealth in real estate, with most of that tied up in a house in a vulnerable part of the country
- all the costs of running a second house: maintenance, property taxes, insurance, utility fees not relates to usage, furnishing

Renting also allows you to "try out" different areas.

Buying a second home and renting it out is a royal pain, especially as you will be 100s to 1000s of miles away.
How is using a reverse mortgage to buy another home putting my main home "on the hook"? Is there a way I would default on my reverse mortgage that I am not understanding?

But I do like the idea of trying out other areas. We just bought a camper to "try out" different areas to see where we would like to have a second home. We just put almost 16,000 miles travelling this Summer checking out other areas. But I don't like the idea of renting for 6 months, IMO throwing away about $25k a year. But that's just me.
KlangFool
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by KlangFool »

Homeby5 wrote: Thu Dec 15, 2022 2:36 pm Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
Homeby5,

Assuming that you can rent it out and make a profit. What if you are not? What if you would to like to somewhere else?

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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by KlangFool »

Homeby5 wrote: Thu Dec 15, 2022 3:12 pm
exodusNH wrote: Thu Dec 15, 2022 3:04 pm
Homeby5 wrote: Thu Dec 15, 2022 2:36 pm Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
Renting is not a waste of money.

Renting will save you

- income taxes from cashing out your IRA
- high fees of a reverse mortgage
- interest on a mortgage, if you can even qualify
- from putting your primary residence "on the hook" for the second home
- tying up $2.0M/$2.5M of your wealth in real estate, with most of that tied up in a house in a vulnerable part of the country
- all the costs of running a second house: maintenance, property taxes, insurance, utility fees not relates to usage, furnishing

Renting also allows you to "try out" different areas.

Buying a second home and renting it out is a royal pain, especially as you will be 100s to 1000s of miles away.
How is using a reverse mortgage to buy another home putting my main home "on the hook"? Is there a way I would default on my reverse mortgage that I am not understanding?

But I do like the idea of trying out other areas. We just bought a camper to "try out" different areas to see where we would like to have a second home. We just put almost 16,000 miles travelling this Summer checking out other areas. But I don't like the idea of renting for 6 months, IMO throwing away about $25k a year. But that's just me.
Homeby5,

Please explain how you are not throwing away or spending more than 25K per year by buying?

KlangFool
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MichDad
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by MichDad »

Of all the options available to you for accumulating money to purchase a second home, I believe a reverse mortgage is the worst. I've always been a low fees person. This is one of the reasons why I like the Bogleheads forum so much. Reverse mortgages are anything but low fees. Reverse mortgages have many pitfalls. Many are described in this article:

https://www.whitecoatinvestor.com/the-p ... mortgages/

You look upon renting a second home as a waste of money. I look upon our European rental apartment as freedom. We're not there half the year and we don't have to maintain it. If we wanted to (which we don't at this time), we could terminate our rental and rent somewhere else or not at all. The costs would be minimal. We would have the costs of selling it and purchasing a replacement.

If you tie up your assets in a second home, you could encounter problems in the event you need cash. Suppose, for example, that one or both of you require long term health care. How would you fund it? As someone else mentioned, what if your Key Largo property suffers significant damage and you lose your rental income for a long period?

MichDad
KRP
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by KRP »

Homeby5 wrote: Thu Dec 15, 2022 2:36 pm Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
"hate" is an emotion, which gets in the way of doing the math.
One year's property tax (+ mortgage interest, and other "throwing away" costs) is likely to exceed 3 months rent, each and every year, don't you think?
If you rent, you also have the flexibility to not rent one year when needed, so flexibility is an added benefit.
Admiral
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Admiral »

Homeby5 wrote: Thu Dec 15, 2022 3:02 pm
Admiral wrote: Thu Dec 15, 2022 7:21 am
Homeby5 wrote: Thu Dec 15, 2022 7:10 am Thanks. Just wondering...What's the downside to a Reverse Mortgage? I mean...I'm sitting on soooo much equity, why not use a little to become a snowbird? I am having a hard time understanding why a second home somewhere else wouldn't be affordable? Not arguing...I just don't see it?
Thanks
You answered this question in the original post: you have very little income and moderate savings (4% of $500k is only $20k/year as a safe withdrawal). I'm sure if you went over to Bigger Pockets they'd tell you to leverage your real estate. But Bhs tend to be more conservative. You are "house rich" and cash poor. (I'd also add that having an expensive home in the Florida Keys is a severe risk due to climate change, but that's another discussion.)

I think what many are saying is that it's fine to convert your $1.6m of equity into cash and then see if you can afford two homes (assuming you feel a need to buy two, which you've not quite explained). Putting all (or most) of your eggs into the real estate basket is non-diversified and thus a risk. You will be highly leveraged.

Most people do not get reverse mortgages to buy another home...they use the money to live, or to gift, etc. If you're going to borrow based on the equity you have to buy a new property, then you might as well just get a mortgage. But you cannot afford a $400k mortgage on your income.
Help me understand what I am missing. In four years when we reach age 62 (when I can qualify for reverse) my income will be conservatively $7k a month. That's with my SS, wife's SS and apartment rental in Key Largo. With hardly no debt, why would you assume I need to draw any money out of my $500k IRA to live? Again...I'm not arguing...I just don't see the "cash poor" scenario. Even if I did have to start dipping too far into my IRA's, worse come to worse, I could sell one of my homes or as I mentioned, live in the Key Largo Apartment and rent the main home out for another $3k a month. That would make my income over $100k a year with no debt. I realize I don't make income like many others but I positioned myself to not need much income.
We have been retired now for about two years and we live amazing, taking trips when wanting to, going out to eat and boating. Hell...we just bought a camper with some cash and spent 4 months in Alaska. My wife only works very little part time and only makes the same as she would when she starts to receive SS. I only mention this because we have lived like this for two years now in retirement and our asset worth has went up a couple hundred thousand over these retirement years, even with the recent market downturn and inflation woes. I agree it may not be the wisest move in order to grow my asset wealth but I planned this life for decades and don't really care if I spend some of my assets down to enjoy retirement.
So again...please understand...I'm not arguing. You may in fact be correct. I just don't see on paper how using a reverse mortgage to use 25% of equity to buy a $400k home to live in 6 months a year would put me in some financial peril when my assets are currently over $2mil with $70k of income and no significant debt. If I was buying a boat or something that depreciates...yeah, I would be more worried, but a house?
How about:

A Cat 5 hurricane hits and destroys your primary home. Yes, it's insured. Assume: years of rebuilding and zero rental income. And then you get to deal with the reverse mortgage co that has lost their asset upon which they have lent you hundreds of thousands of dollars. And then: whoops, the value is no longer $1.6m but half that.

How does that sound? It sounds like a nightmare to me.

But, it's your life!
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HMSVictory
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by HMSVictory »

Homeby5 wrote: Thu Dec 15, 2022 7:10 am Thanks. Just wondering...What's the downside to a Reverse Mortgage? I mean...I'm sitting on soooo much equity, why not use a little to become a snowbird? I am having a hard time understanding why a second home somewhere else wouldn't be affordable in my situation? Not arguing...I just don't see it given my access to my equity?
Also...why sell my first home in the Keys when it's producing a $30K/year income for me? I mean...it's paid off and is an income producer.
And as I mentioned...I could move into the apartment side (which is nice for a retired couple living 6 months) and rent the larger side and bank $60k a year. Again...I'm not arguing, I just don't understand where I am messing up my math that would get me in trouble down the road.
Thanks
You can do what you like - we are trying to tell you what's wise.

Your plan of leveraging the houses and having almost no money doesn't sound fun to me. It sounds like a recipe for disaster, but do as you like.

You aren't grasping the risk of having all of your eggs in your houses or ~ 90% of your net worth in them.

A $1.6M asset "producing" $30k a year income is 1.875% return on your money (pre-tax). After tax is even less.

Not blowing my hair back. $60k is 3.75%.
Stay the course!
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

KlangFool wrote: Thu Dec 15, 2022 3:19 pm
Homeby5 wrote: Thu Dec 15, 2022 3:12 pm
exodusNH wrote: Thu Dec 15, 2022 3:04 pm
Homeby5 wrote: Thu Dec 15, 2022 2:36 pm Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
Renting is not a waste of money.

Renting will save you

- income taxes from cashing out your IRA
- high fees of a reverse mortgage
- interest on a mortgage, if you can even qualify
- from putting your primary residence "on the hook" for the second home
- tying up $2.0M/$2.5M of your wealth in real estate, with most of that tied up in a house in a vulnerable part of the country
- all the costs of running a second house: maintenance, property taxes, insurance, utility fees not relates to usage, furnishing

Renting also allows you to "try out" different areas.

Buying a second home and renting it out is a royal pain, especially as you will be 100s to 1000s of miles away.
How is using a reverse mortgage to buy another home putting my main home "on the hook"? Is there a way I would default on my reverse mortgage that I am not understanding?

But I do like the idea of trying out other areas. We just bought a camper to "try out" different areas to see where we would like to have a second home. We just put almost 16,000 miles travelling this Summer checking out other areas. But I don't like the idea of renting for 6 months, IMO throwing away about $25k a year. But that's just me.
Homeby5,

Please explain how you are not throwing away or spending more than 25K per year by buying?

KlangFool
Because I am simply using equity from one home and shifting it to real estate in another home. Either way, I still have the same percentage of my worth in real estate. If I rent, I am throwing it away because I won't get that $25k back.
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

HMSVictory wrote: Fri Dec 16, 2022 7:50 am
Homeby5 wrote: Thu Dec 15, 2022 7:10 am Thanks. Just wondering...What's the downside to a Reverse Mortgage? I mean...I'm sitting on soooo much equity, why not use a little to become a snowbird? I am having a hard time understanding why a second home somewhere else wouldn't be affordable in my situation? Not arguing...I just don't see it given my access to my equity?
Also...why sell my first home in the Keys when it's producing a $30K/year income for me? I mean...it's paid off and is an income producer.
And as I mentioned...I could move into the apartment side (which is nice for a retired couple living 6 months) and rent the larger side and bank $60k a year. Again...I'm not arguing, I just don't understand where I am messing up my math that would get me in trouble down the road.
Thanks
A $1.6M asset "producing" $30k a year income is 1.875% return on your money (pre-tax). After tax is even less.

Not blowing my hair back. $60k is 3.75%.
Yeah...but it's my home...not an investment tool. You seem to be looking at it as purely an investment. $30k of free money from my home is pretty good in my book. I'm not gonna sell my home because again...it's a home.
All I'm doing is taking some equity from one real estate home and transferring it to another real estate home.
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

Admiral wrote: Thu Dec 15, 2022 6:57 pm
Homeby5 wrote: Thu Dec 15, 2022 3:02 pm
Admiral wrote: Thu Dec 15, 2022 7:21 am
Homeby5 wrote: Thu Dec 15, 2022 7:10 am Thanks. Just wondering...What's the downside to a Reverse Mortgage? I mean...I'm sitting on soooo much equity, why not use a little to become a snowbird? I am having a hard time understanding why a second home somewhere else wouldn't be affordable? Not arguing...I just don't see it?
Thanks
You answered this question in the original post: you have very little income and moderate savings (4% of $500k is only $20k/year as a safe withdrawal). I'm sure if you went over to Bigger Pockets they'd tell you to leverage your real estate. But Bhs tend to be more conservative. You are "house rich" and cash poor. (I'd also add that having an expensive home in the Florida Keys is a severe risk due to climate change, but that's another discussion.)

I think what many are saying is that it's fine to convert your $1.6m of equity into cash and then see if you can afford two homes (assuming you feel a need to buy two, which you've not quite explained). Putting all (or most) of your eggs into the real estate basket is non-diversified and thus a risk. You will be highly leveraged.

Most people do not get reverse mortgages to buy another home...they use the money to live, or to gift, etc. If you're going to borrow based on the equity you have to buy a new property, then you might as well just get a mortgage. But you cannot afford a $400k mortgage on your income.
Help me understand what I am missing. In four years when we reach age 62 (when I can qualify for reverse) my income will be conservatively $7k a month. That's with my SS, wife's SS and apartment rental in Key Largo. With hardly no debt, why would you assume I need to draw any money out of my $500k IRA to live? Again...I'm not arguing...I just don't see the "cash poor" scenario. Even if I did have to start dipping too far into my IRA's, worse come to worse, I could sell one of my homes or as I mentioned, live in the Key Largo Apartment and rent the main home out for another $3k a month. That would make my income over $100k a year with no debt. I realize I don't make income like many others but I positioned myself to not need much income.
We have been retired now for about two years and we live amazing, taking trips when wanting to, going out to eat and boating. Hell...we just bought a camper with some cash and spent 4 months in Alaska. My wife only works very little part time and only makes the same as she would when she starts to receive SS. I only mention this because we have lived like this for two years now in retirement and our asset worth has went up a couple hundred thousand over these retirement years, even with the recent market downturn and inflation woes. I agree it may not be the wisest move in order to grow my asset wealth but I planned this life for decades and don't really care if I spend some of my assets down to enjoy retirement.
So again...please understand...I'm not arguing. You may in fact be correct. I just don't see on paper how using a reverse mortgage to use 25% of equity to buy a $400k home to live in 6 months a year would put me in some financial peril when my assets are currently over $2mil with $70k of income and no significant debt. If I was buying a boat or something that depreciates...yeah, I would be more worried, but a house?
How about:

A Cat 5 hurricane hits and destroys your primary home. Yes, it's insured. Assume: years of rebuilding and zero rental income. And then you get to deal with the reverse mortgage co that has lost their asset upon which they have lent you hundreds of thousands of dollars. And then: whoops, the value is no longer $1.6m but half that.

How does that sound? It sounds like a nightmare to me.

But, it's your life!
Well, I guess the world can fall out from under any asset but wow...you pulled out a rare, rare occurrence to make your point. If a hurricane destroys my Key Largo home, I'm hurting anyway...whether I have a second home or not. I don't see your point on how a catastrophic scenario would be better if I don't have a second home funded by equity on the first? To me it's the opposite. If I have a second home to live in, I'd be better off. I can live without the rental income while rebuilding.
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

KRP wrote: Thu Dec 15, 2022 4:13 pm
Homeby5 wrote: Thu Dec 15, 2022 2:36 pm Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
"hate" is an emotion, which gets in the way of doing the math.
One year's property tax (+ mortgage interest, and other "throwing away" costs) is likely to exceed 3 months rent, each and every year, don't you think?
If you rent, you also have the flexibility to not rent one year when needed, so flexibility is an added benefit.
I am lost on your math. I wouldn't have a mortgage and my property taxes would be about $1000 a year. How is that likely to exceed 3 months rent? And I never said I would only live in the second home for 3 months. I clearly stated I would live in the second home 6 months or so. That's a LOT of rent every year and RE taxes in no way even comes remotely close to that amount.
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

MichDad wrote: Thu Dec 15, 2022 3:30 pm Of all the options available to you for accumulating money to purchase a second home, I believe a reverse mortgage is the worst. I've always been a low fees person. This is one of the reasons why I like the Bogleheads forum so much. Reverse mortgages are anything but low fees. Reverse mortgages have many pitfalls. Many are described in this article:

https://www.whitecoatinvestor.com/the-p ... mortgages/

You look upon renting a second home as a waste of money. I look upon our European rental apartment as freedom. We're not there half the year and we don't have to maintain it. If we wanted to (which we don't at this time), we could terminate our rental and rent somewhere else or not at all. The costs would be minimal. We would have the costs of selling it and purchasing a replacement.

If you tie up your assets in a second home, you could encounter problems in the event you need cash. Suppose, for example, that one or both of you require long term health care. How would you fund it? As someone else mentioned, what if your Key Largo property suffers significant damage and you lose your rental income for a long period?

MichDad
I get you and can see the the fees being a big negative. I would have to figure the amount of fees when the time comes and weigh the options.
As far as your rental, I can see the lure of renting in Europe part time for some people in certain situations. But that's not what I desire and not what I am asking about. Renting is not a smart option for me at this point in my life. Maybe in the future yes. But now, I really want to set down roots somewhere else for 6 months out of the year and maybe more. I may just come to the Keys less and less as it's becoming more crowded. I am simply asking for the wisest way to fund this from the four options. But like most forums...the topic gets completely sidetracked from opinions that have nothing to do with the original question.
As far as health care...well...that's another topic and I don't see how transferring 25% of the equity form one real estate holding (my Key Largo home) to another real estate holding (the second home) would make any difference if I suddenly require long term care. It's not like I'm buying a depreciating boat or car or throwing money away by taking a vacation. And finally, what damage? I mean...my home is rated for 180mph sustained winds because it's newer. Even if a once in a lifetime catastrophic event happens I could live without the rental income if needed until the home is rebuilt.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by KRP »

Homeby5 wrote: Fri Dec 16, 2022 3:15 pm
KRP wrote: Thu Dec 15, 2022 4:13 pm
Homeby5 wrote: Thu Dec 15, 2022 2:36 pm Thanks. Renting a second place seems like a possibility. I just hate throwing money away renting 6 months when I could buy and rent the second home out if needed. I dunno...you guys gave me something to think about.
"hate" is an emotion, which gets in the way of doing the math.
One year's property tax (+ mortgage interest, and other "throwing away" costs) is likely to exceed 3 months rent, each and every year, don't you think?
If you rent, you also have the flexibility to not rent one year when needed, so flexibility is an added benefit.
I am lost on your math. I wouldn't have a mortgage and my property taxes would be about $1000 a year. How is that likely to exceed 3 months rent? And I never said I would only live in the second home for 3 months. I clearly stated I would live in the second home 6 months or so. That's a LOT of rent every year and RE taxes in no way even comes remotely close to that amount.
If no mortgage (fine), the math involves accounting for an opportunity cost: the house payment comes from assets which presumably earn an income stream and will cease to do so, upon purchase of the second home. Now perhaps you've got a house purchase worth of assets sitting idle, but that choice shouldn't really be entangled with the decision about a second home purchase (unless there is some fear regarding every type of asset use except home purchasing, in which case I would throw in the towel). Be mindful not to ignore those costs that aren't as visible (no explicit periodic payment), when judging which fork-in-the-road is throwing away less or more.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by HMSVictory »

May I ask why you are asking for our opinions and then arguing with all of us when we tell you its unwise?

We aren't colluding. You are literally getting dozens of people telling you the same thing in different ways. In my line of work that's a clue.

Those convinced against their will remain of the same opinion still. Gents I think we did all we can here! :oops:
Stay the course!
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by MichDad »

HMSVictory wrote: Fri Dec 16, 2022 7:00 pm May I ask why you are asking for our opinions and then arguing with all of us when we tell you its unwise?

We aren't colluding. You are literally getting dozens of people telling you the same thing in different ways. In my line of work that's a clue.

Those convinced against their will remain of the same opinion still. Gents I think we did all we can here! :oops:
You’ve expressed my sentiments only far more politely.

MichDad
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by HMSVictory »

MichDad wrote: Fri Dec 16, 2022 8:20 pm
HMSVictory wrote: Fri Dec 16, 2022 7:00 pm May I ask why you are asking for our opinions and then arguing with all of us when we tell you its unwise?

We aren't colluding. You are literally getting dozens of people telling you the same thing in different ways. In my line of work that's a clue.

Those convinced against their will remain of the same opinion still. Gents I think we did all we can here! :oops:
You’ve expressed my sentiments only far more politely.

MichDad
:D
Stay the course!
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Homeby5
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Homeby5 »

HMSVictory wrote: Fri Dec 16, 2022 7:00 pm May I ask why you are asking for our opinions and then arguing with all of us when we tell you its unwise?

We aren't colluding. You are literally getting dozens of people telling you the same thing in different ways. In my line of work that's a clue.

Those convinced against their will remain of the same opinion still. Gents I think we did all we can here! :oops:
Because most of the "opinions" being offered are not what I asked for. I specifically asked which one of three different funding tools would be good for a specific purpose. But then most of the answers were trying to talk me out of that purpose. My decision to by another summer home is no ones business and not what I asked. I only asked for advice on the pros and cons of three funding mechanisms. If you have advise on that specific question...then I'm all ears.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by barberakb »

If you are set on it, you could always buy the 2nd home with a 2nd home mortgage and then rent it out when you are not there.

Then maybe it basically pays for itself. Would depend on the rental market where you buy of course.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

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This topic is now in the Personal Finance forum.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Artsdoctor »

Homeby5 wrote: Sun Jan 29, 2023 3:28 pm
HMSVictory wrote: Fri Dec 16, 2022 7:00 pm May I ask why you are asking for our opinions and then arguing with all of us when we tell you its unwise?

We aren't colluding. You are literally getting dozens of people telling you the same thing in different ways. In my line of work that's a clue.

Those convinced against their will remain of the same opinion still. Gents I think we did all we can here! :oops:
Because most of the "opinions" being offered are not what I asked for. I specifically asked which one of three different funding tools would be good for a specific purpose. But then most of the answers were trying to talk me out of that purpose. My decision to by another summer home is no ones business and not what I asked. I only asked for advice on the pros and cons of three funding mechanisms. If you have advise on that specific question...then I'm all ears.
You can compare all of your interest rate options. You'll probably find that a mortgage on your second home would provide you with the most favorable interest rates. Then, you'll need to compare what type of loan you can get on the second home (30-year fixed, 15-year fixed, various ARMs, etc.). However, it's possible that you wouldn't qualify for a separate mortgage on your second home since you'll have to prove some sort of income from your investments.
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Re: Funding for a second home using a HELOC vs Reverse mortgage vs new mortgage vs IRA withdrawal.

Post by Carefreeap »

One other consideration is whether the reverse mortgage will allow you to rent any part of the property. I know for a fact that some lenders do an occupancy check via mail about every three months looking for folks who are cheating. I agree with others that they are generally more expensive with a lot more fees. They have their place but I would only do one if I had no other choice.

I don't like cross collateralizing properties so I would do a conventional mortgage especially if the new property is in a non-recourse state. I'm conservative in that I like 30 year fixed mortgages at the lowest rate possible.
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