Take out mortgage vs cashing out Roth IRA

[nwa-non]

This is for an uncle and aunt of mine ...

Husband and wife, both over 65. Both still working in part time jobs. Looking to downgrade their primary residence. Cost of new place $350k. Old place will probably sell for $400k. The funds from selling will obviously cover the new residence. But they want to buy first, move in, and then de-clutter their old place and sell.

They don't want to take out a mortgage, as the fees associated with a mortgage will easily run over $10k. All the closing fee at mortgage origination and even when paying off the outstanding balance in a month or so.

They are thinking to liquidate their Roth IRAs for the purchase. They have about $300k combined in their Roth. Remaining $50k from savings.

Other assets: About $400k in trad IRA, $200k in brokerage, $50k in savings/CD.

Would this be the optimal move?

These are the pros and cons I can think of ...

Pros of not taking a mortgage out but liquidating Roth IRAs
- Not paying any costs associated with a mortgage
- Potential saving on the new place if a slightly reduced all cash offer is made and accepted
- No taxable event to liquidate the Roth accounts
- Peace of mind


Cons of liquidating Roth IRAs
- Proceeds from sale of current home cannot be lumpsum-ed into another Roth. Only can put in $15k every year. Rest goes into savings/brokerage but taxes on growth and earnings
- Loss of tax free earnings on the existing Roth accounts

I think, just from a pure math perspective, taking out a mortgage and then paying it off in a month will be the winner. But the peace of mind to do things at their pace and terms cannot be ignored.

Thoughts?

[secondcor521]

The optimal move in my opinion would be to declutter, sell the old place, move out, rent if necessary, then buy the new place.  Somewhat inconvenient but gives them everything else they want and preserves the Roth.

If they won't do that, then I agree with you - a mortgage, even with $10K in fees, is much better than giving up decades of tax free growth in the Roth.  The "peace of mind" could easily cost them multiples of $10K in lost tax free growth.

[clifp]

They should do more/better shopping for a mortgage.  I just put their numbers assuming good but great credit, into Schwab Banks, mortgage calculator and they showed closing costs of $3900 for 280K loan (assuming 20% down.  2 years ago I paid $3600 in closing cost for $270K loan on a rental property in Vegas, via a mortgage broker so I  know it's possible.  My gut level is they should be able to get a mortgage for under $5K in closing costs.  There are $1,000-$2,000 in closing costs, (Title insurance, escrow, doc fees) that you pay to buy a house mortgage or no mortgage.

Normally, I try and minimize the interest payments, in their case they should care about the interest rate since they won't have the loan very long, and instead focus on points 0-.25% points are possible, especially if they go with an adjustable.

[RWD]

I really question that it will be $10k to get a mortgage. We just closed on a house roughly twice as expensive and we only paid $1,250 to the lender for origination. There was an additional $100 for pulling our credit and a $600 appraisal which are only because we were getting a mortgage (though maybe an appraisal would be prudent anyway). So under $2k total as a consequence of the mortgage. Everything else was title/escrow fees and proration for insurance and taxes.

[secondcor521]

If they do go the mortgage route, they could look into negative points.  That's where the lender pays them to take a higher interest rate.  If they pay it off in a few months the math could work out well.

If I were going down the negative points route, I would check to make sure there are no restrictions on paying the loan off early, and I would make sure that the points paid can be used to offset the other closing costs.