| Advice needed on Home Mortgage |
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billjonespc
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Location: Panama City FL
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| Advice needed on Home Mortgage |
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I am 85 and I want to simplify the execution of my will.
I have zero indebtedness. My estate value is approx $1.5 Million.
The problem is that 85% of my estate value is my home equity, which was $1.2 Million market value in 2005 before the real estate market tanked. Liquid cash accounts now total $225,000 and is increasing at about $6000 per month.
If I die before the real estate market recovers, then the executor of my Will will have to sell the home under duress and that might take over a year. The difference in selling under duress or waiting until recovery can be as much as $500M to my beneficaries.
I am contemplating taking out a 25 year fixed rate mortgage of about $400M in order to allow more cash distribution to my beneficiaries and giving more time for the execution of my Will. I would invest the $400M in CD's. There will be no problem in servicing such a loan, and my interest income will be sufficient to service the mortgage.
In the meantime, should the Real estate market recover, I might be able to sell at near the 2005 value, pay off the mortgage and there would be no problem. BillJonesPC
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Sat Aug 25, 2007 10:22 pm |
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austin
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| Confused |
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I'm a little confused as well. If you have 225k it seems that would be enough to float the house for a year as far as paying for taxes and any needed repairs. If your heirs can wait a year everything should be fine.
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Sun Aug 26, 2007 2:40 am |
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billjonespc
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| Advice needed on Home Mortgage |
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Thanks Tim. You made some good points;
--duress = sale of real estate in a slow degraded market-- also caused by the need to liquidate the estate within the State probate time limit, which I believe is 2 years in Florida without court extension for a justifiable reason. At this time the sale time for high value real estate exceeds two years. Also there is a factor of rapid depreciation of unattended property subject to vandalism, theft, maintenance cost, etc. In general, a Will needs to be probated as promptly as can be reasonably done (months instead of years), and such duress requires reducing the price to far below actual value.
In such a sour market as today, I might need to Will the property to a person with a mortgage on it and divide the cash assets amongst the other three beneficaries.
Yes, I know that the spread between negetive mortgage interest and CD gain is a negative 2% or so. I agree that from a money investment angle it it does not make sense and the longer the period the worse it gets, but the cost is probably worth lessening the percent of total estate assets tied up in home equity.
If I go that route, I will apply all of my residual income each month to reduce the mortgage principal (about $6000 per month), and who knows, I might live to be a hundred? If I live 7 years the mortgage will be paid off.
I never thought that free and clear real eatate ownership would be a such a problem. It is unique problem, isn't it? Actually a $400M mortgage would be more like renting money until the Real Estate market recovers while reinvesting it at 5% in CD's and accellerating pay off.
Actually, it appears that the interest cost of the $400M mortgage over an accellerated payoff period of 7years at 6.5% is about $118M, while the accumulated CD gain on $400m at 5% over the 7 years is $158M, for a net gain of $40M to the estate, plus the $400M, equals an estate growth of $440M over the 7 year payoff period.
But, If I do not take out a mortgage and instead invest my residual income of $70000 in 5% CDs the growth will be $583,914 in 7 years. So, it appears that having the $400M up front as insurance will cost about $144M in less estate growth over 7 years.
Help me decide if senility is my problem instead, BillJonespc
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Sun Aug 26, 2007 3:13 am |
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efflandt
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When people think in terms of kilobytes and megabytes, "M" might be assumed to be a million (unless units of 1/1000th like mm or ml). I am sure you don't mean a $400,000,000 loan on a $1,200,000 property.
Since your home is already paid for, a loan against it does not qualify as a home acquisition debt. So unless the money is used to improve your home, the loan would be considered "Home Equity Debt", which for tax deductablility is limited to the "smaller" of $100,000 ($50,000 if married filing separately) or FMV minus outstanding home acquisition debt (not less than zero). So you may only be able to deduct interest for the first $100,000 of the loan. For details see http://www.irs.gov/publications/p936/index.html
Did you figure federal income tax for CD interest in your calculations, or that it might increase your tax bracket? That could reduce your effective interest rate by 25% or more depending upon your tax rate.
The net effect is that you could be paying about 3% to the bank and Uncle Sam to borrow your own money.
Wouldn't it make more sense to deposit the ~$6000/mo to a money market account with your heirs as beneficiaries (or payable on death) at about a 5% taxable interest or 3.4% tax free interest, depending upon your tax bracket?
Is one of your heirs willing and able to obtain their own financing to refi your loan, and can they afford the property taxes and insurance?
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Sun Aug 26, 2007 11:49 pm |
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eaf
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Seems that if you're going to have one of your kids buy the home, you could owner-finance it. That's perfectly legal. Course, there are capital gains to deal with, but I think there are ways to structure the deal so that you paid the cap gains only as the loan is repaid. This would be a matter for a professional accountant type.
When the estate goes into probate, you wouldn't have the home anymore, just a note of payments receivable. That could probably be carved up and distributed. Again, this is a matter for a professional.
Still, though, it seems like you could set the home aside in a trust and avoid having to sell it.
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Mon Aug 27, 2007 3:58 pm |
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billjonespc
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Location: Panama City FL
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| Advice needed on Home Mortgage |
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Hey Tim,
$1M=$1000.
Thanks for hanging in with me. You have added more to the problem parameters and convinced me to consult with a CPA before changing my Will.
Complicating the problem, my heirs are scattered between VA, NC, and South Florida. None can afford nor do they want the home, except possibly one and for him to buy it at near market value would exceed his ability to pay off a mortgage to his siblings or to a bank.
Tomorrow I'll be off to see my CPA and see what she can come up with.
I thank you very much.
Best wishes,
BillJonespc
It's a long way to Tiparie and when you get there what will you do? 
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Tue Aug 28, 2007 1:12 am |
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billjonespc
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Absolutely Tim!
I have a lawyer constructed Will, but I'm not satisfied with it. I will turn that over to my CPA with these comments of yours. It will take a while for her to sort out all angles. Then I'll come back and post the results. I hope it will be a smiley.. 
Bill
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Tue Aug 28, 2007 1:49 am |
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