Q. My wife and I will retire in five years. Our combined incomes will be about $12,000 per year. Our present combine income is $30,000 per year. We have a $6,000 certificate of deposit in a savings and loan institution with a six-year term at 7.75 per cent annual interest. Our automobiles are paid for and we have no other substantial obligations. We presently own a home a valued at $69,000. It has a first mortage of $19,000 at 5.75 per cent interest, and a second mortgage of $9,000 at 10 per cent interest. Our present monthly payment on both mortgages (principal, interest, taxes, insurance) is $441. Our plan is to take advantage of today's prices and interest rates and to immediately purchase our retirement home by seeking 80 per cent refinancing of our present home at an 8 per cent or 8.5 per cent interest rate. This would produce approximately $55,000 cash, minus the $8,900 per cent mortgage pay-off, leaving $46,000 cash to purchase the retirement home. The monthly payments of the $55,000 refinanced, 30-year, first mortgage (principal, interest, taxes, insurance) will be about $510 per month.
At the end of five years we will sell our present home and move to our retirement home about 40 miles away. We intend to rent out our retirement home through a realtor for five years on a year-to-year basis. We should be able to rent our retirement home for about $400. This income would offset the mortgage payments on a $10,000 or $20,000 first mortgage for our retirement home. Moreover, all expenses of renting out the retirement home, being an investment, would be tax-deductible and would substantially reduce the taxes on our present income.Would you please give us your opinion as to the advisability and soundness of this plan?
A. Assuming the basic figures you give me are accurate, I find what is apparently an error in your calculations. As I understand your figures, you have a principal balance of $19,000 on your first mortgage, $89,000 or your second. If you refinance your present home with an 80 per cent of market value ($69,000) mortgage, the cash left to purchase your retirement home after settlement costs and paying off the first and second mortgages is going to be about $23,000 to 24,000, not $46,000. Moreover, I wonder whether deductibility of the expenses of renting your retirement home will "substantially reduce" the taxes on your present income. You will get some tax shelter, however. Subject to the foregoing, your plan seems sound.
Earl A. Snyder answers questions only in this column. His address 14909 Kalmia Dr., Laurel, Md. 20810.