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Question for the Money Doctors

Question submitted on Sep 10, 2011.

Question

My husband and I plan to retire in 6 years (ages 56 and 61) and would like to buy a retirement home in Florida while we are still working. We have 45,000. remaining on current mortgage (at 4.8% interest). We max out a 401(k), 403 (b) and 457 (b). We have enough money in our savings account to pay off the mortgage and make a 25% down payment on a house in Florida and still have 25,000 in the savings account. Is this the way to go? or should we take out a mortgage on a house in Florida while continuing to pay our current mortgage?

Answer

Obviously your ability to save for retirement and pay off your current mortgage lets me know that you are very disciplined with your finances.  I would like to know things before making a recommendation such as:

What is your annual income?

When do you plan to retire?

What other debt do you have?

You will probably do well, regardless of which approach that you take. 

Assuming that you have very little other debt and the mortgage on your primary residence will be paid off before you retire, you should consider borrowing to purchase the home in Florida.  While interest rates are at a 50 year low I would suggest that you maximize the amount that you can borrow on a mortgage now without paying any mortgage insurance protection or points at closing.  Current rates are less than 4.00% depending on whether you want a 15 year or a 30 year mortgage.  This would give you maximum flexibility with your cash reserves.  In the event that interest rates rise in the next few years, which many people believe will happen, you may be able to invest at a rate that will exceed your mortgage rate. Even if rates don't rise anytime soon, you may be able to earn more in the stock market than you are paying on the mortgage on the Florida property.


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