Retiree needs advice with housing strategy

DEAR BRUCE: I plan to retire in six months at full retirement age. My monthly Social Security check will be $1,800, enough money to live on. I have $90,000 in my 401(k) plan and a 5.8 percent mortgage, with a balance of $70,000. I have no other investments. Should I pay off my house with the 401(k) plan (which will deplete the funds after taxes), make an annual house payment from my 401(k), or try to make the house payments from my Social Security check (which could prove to be difficult)? — C.E., via e-mail

DEAR C.E.: You didn't explore another alternative — selling your home. I would not be comfortable depleting your liquid assets in the 401(k); on the other hand, you deserve to have some kind of a life. If you have to pay off the mortgage, even though the interest rate is favorable, and have nothing left, what kind of a life will that be? If you were to dispose of the house — I'm assuming it's worth considerably more than $90,000 — you would have extra cash to produce income rather than eat it, as well as to help subsidize a rental payment. While you may be attached to the house, the idea of selling it merits your attention.

DEAR BRUCE: I am looking to purchase a single-family house in the next six months. I think an interest-only loan (30-year fixed) is a great tool to use in real estate. My credit is excellent, and I have good debt-to-income ratio (around 30 percent) if I were to purchase. I also intend to stay in the house forever. I believe that I should take the monthly cash-flow savings from not paying principal and invest it in something that earns more than 6.5 percent. No one (friends and family) understands the concept, and everyone thinks it is a bad idea. What do you think? — Paul, Fort Lauderdale, Fla.

DEAR PAUL: I am glad that you have good credit and a good debt ratio. While you may intend to stay in the house forever, things happen and that philosophy may have to change. Furthermore, you must be aware of all the problems in the real-estate industry right now, especially for people who do what you're discussing in good faith and find themselves in serious trouble. You are not building any equity other than appreciation (if such appreciation takes place), and depreciation could eat away at your equity. I don't believe it's a sound way to go.


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