How to Pay for Your Golf Home

by John Ruocco

     It is interesting that over the past few years, I have had several of my clients either buy second homes down South or simply pick up and move there. So, not surprisingly, one of the questions that has come up is how to finance the move: cash or mortgage? Do you sell your home up here and use the proceeds to buy a place down South or invest the proceeds and take out a mortgage? The answer depends on your own personal circumstances and your comfort level rather than number crunching, but here are a few things to consider.

The Bank Advantage

     First, let us consider the advantage of using a bank for this type of transaction. Sometimes when we apply for a bank loan or mortgage, we feel the bank is our adversary. Why are they asking so many questions? Why are they making me pay all these fees? Can't they understand that I have always paid my bills and I would pay this one too? Granted, it can be frustrating, but there is another way to look at it. The bank is really your partner.
     An example of this partnership from my own personal experience is when my daughter was recently trying to purchase a condominium. When I heard her offer was accepted, the first thing I told her was to get the financial documents from the condo association. The realtor involved assured her that these documents were forthcoming but,

By looking after their interests, the bank is actually looking after yours.

in the meantime, she should apply for the loan and get approved. After going through the arduous process of getting final approval, the bank finally got the condo docs three days before closing. The financials indicated that there was a high delinquency rate on the condo association fees. The bank immediately rejected the deal. If my daughter had purchased this place for cash, she may never have known that. In the end, she walked away from this property and bought another one in another town with a new, more knowledgeable realtor.

     The fact is that a bank is not only approving the mortgage based on your financial situation, but also is making sure there are no potential problems with the property. Of course, every couple of decades, the banks lose focus and lend to anyone who can fog a mirror but, for the most part, there should be some comfort that if the bank approves the transaction, the appraisal, the inspections, the termite report and the property liens have all been thoroughly checked. So you have a professional that fully understands finance and real estate looking after your interests because they are looking after theirs.

Advantage of Rate and Time

     In over 25 years that I have been advising clients, I have almost never suggested they borrow money to purchase a property when they could pay cash. But today's low interest rate environment can make a case for taking out a mortgage and investing the cash. For illustration and simplicity purposes, a $100,000 loan would only cost about $133,000 to repay at a 4% rate over 15 years. So if you were to invest the $100,000 it would need to grow to more than $133,000 for you to be ahead. Unfortunately, investing this money will always involve risk, and you have to be very confident in your abilities to manage your investments to minimize losses and make a solid return.
     Time is the biggest advantage. If we were to look at the simple S&P 500 index, we would be hard pressed to find 15-year time periods when the S&P would not have made money. The big exception would be going back to the depression years following the crash of 1929. Even the last 15 years, from the highs of the late 1990s through the dot-com bust, the tragedy of 9/11 and the more recent 2009 meltdown, the S&P ended up generating a positive return that would have made this strategy profitable. But all of that history is virtually meaningless because the past is no indication of the future. For this reason, we cannot conclude that just buying an S&P 500 index fund would be good enough. 
     Therefore, rather than spinning our wheels trying to figure this out, here is one way to implement this strategy. First, you need nerves of steel. You cannot panic if the market is not doing what you expected. Second, you have to be a believer in our economy. You have to be an optimist! You have to believe the markets will come back! Third, you cannot ever need this money for the full timeframe of the mortgage. If you think that the invested money will be a reserve fund and 5 years after purchasing your property you will raid it for a new roof or some sliding doors, then forget this strategy. Finally, you have to be able to pay the mortgage without much effort. The mortgage payment should not cramp your lifestyle. If it does, you should not have to agonize over a mortgage payment and what could be a volatile investment.
     The bottom line is that if you are lucky enough to not need the money you would otherwise use to pay for the house, the there is an opportunity to make money by taking advantage of current low interest rates. Plus, if you have a significant income and you are itemizing your return, you can write off the interest; that would actually have the effect of lowering your interest rate even more. One caveat is that you have to watch out for the new tax law and the limits on mortgage deductibility. In short, if you are thinking taxes, think tax advisor.


     For many, the most practical thing to do is to take a smaller mortgage that is reasonable and affordable. Instead of borrowing 75% of the value of the property, borrow 40% and feel comfortable that you have the ability to pay off the mortgage if you have to. Another strategy is to pay cash and then take out an interest-only line of credit or a fixed rate home equity loan after the closing. These loans are lower in closing costs and are usually less stressful to obtain. The answer is moderation not stress. It is important to remember that retirement is the time to relax and not stress over bills. If owing money stresses you out, then leave this strategy for someone else.     

     John R. Ruocco is sole owner of Asset Management Associates and has provided independent, fee-only investment advisory and portfolio management services for over 20 years. For more information and advisory fees, contact John R. Ruocco at 1-800-208-8588 or This email address is being protected from spambots. You need JavaScript enabled to view it. in South Windsor, CT. The first consultation is always free. Information, brochure, and form ADV part II is available upon request or log-on to John waives his fees for veterans and their spouses for the first six months of his services.

     The above is not a recommendation or solicitation of the S&P 500 as an investment or any other investment program. Please see qualified tax and or investment consult before making any decisions.