Retirement home purchase

[tsdogs]

I'll be speaking with my financial advisor about this, but thought I'd first ping you experts on what to consider.

Background: Still working, owe about 55K on current mortgage (about halfway through a 10yr- 3.25%); house worth about 400K. Looking to retire, sell the house and move in about 18-24 months to a 55+ community.

We found a community we like and build times are about 12 months out. Total price will be about 400K. Prices are increasing at a quick rate. In fact, the house is about 30K more than when we looked in spring.

We're thinking about starting the build now. We can swing the inital payment out of savings. When it comes to mortgage, we had planned to sell the current house to fund the second house. With this plan, we'll be with two homes for a few months, unless of course we sell earlier and rent before moving. Not opposed to that.

Wondering specifically about how to swing the second home financing with the fewest expenses and drain on current investments. It feels wrong to tap from our savings to pay for the retirement home (down payment or in full) with mortgage interest rates so low. I'm wondering if we shouldn't take out a larger than planned mortgage on home #2? Should we carry both mortgages for a bit or sell primary home early? We could swing two mortgages with current cash flow (we're still working), but that means less into savings. Do we tap from savings for the down payment or use our HELOC? It seems a cashout refi isn't worth it since we'd be moving within a year or two.

If it's not clear, about a dozen scenarios are floating through my head about financing; not to mention- are we in a housing bubble, will prices drop? Should we be cautious and sell, then rent, then buy? ARGH.

What would you do?

 

[Golden sunsets]

Tsdogs; Our recent "house trade" isn't exactly the same but may give you an idea of how you could finance your scenario.

We owned our current home free and clear. Selling first was not really an option, as the market is crazy here and in order to stand a chance of winning a bidding war, we needed to make an all cash offer, with no contingencies. We have investments which could have been liquidated to fund the new home, but like you, we were reluctant to sell assets and incur capital gains or absorb early withdrawal penalties. We did have a chunk of cash that we were willing to use.

So we took out a HELOC, at 1.99%, on our existing home. We found our new home and made the all cash offer, which was accepted. We closed on that property on 12/30/21 using a combination of cash and a draw down on the HELOC. We placed our old home on the market as soon as the offer on the new house was accepted and signed a contract on the sale of that home within a couple of days. We close on the sale of the old house tomorrow on 1/31/22. So the borrowing cost for us to carry 2 homes for a month is 31 days of interest at 1.99%.

Perhaps a Heloc would work for you. Set it up now. Don't list your property until you are 60 to 90 days from taking occupancy on your new home, assuming you are in a hot real estate market. Or sell now and lease back. Many buyers are flexible.

 

[RetiredAndLovingIt]

Have you considered selling it while the market is hot and then renting it back if that might be an option till your home is ready?

 

[Souschef]

I did the same thing with a HELOC. Paid for our forever home and rented out the old place until the market recovered.
The nice thing was the interest was deductible as a rental.

 

[38Chevy454]

Since you're still working, either a new mortgage or HELOC can be done. Lots easier to qualify when you have paycheck income. HELOC is less hassles getting approved, but is a variable rate, whereas the new mortgage can take advantage of low fixed rates still around. It would be a construction loan for now until completion, keeping the costs lower.
Either way, once the new place is ready to move in, can sell current house and then pay off, or significantly reduce, the new mortgage with current house sale proceeds.

 

[tsdogs]

Thanks for all of the good insight. I'm learning so much on this forum!
We decided that we'll fund the new build with savings as the initial expense is lower than expected. Then a few months before completion we'll list the primary house. I'm betting it will sell fast but on the off chance it doesn't, we'll still be working and can manage two mortgages. We'll either rent the primary house back or move into a rental until we move permanently to the new build (it may be awhile depending on the youngest kid still in college). Then we'll use the primary house proceeds to lower or eliminate the new build mortgage.