Q. My monthly mortgage payment is slightly over $500 a month. It varies yearly with cost of taxes and insurance. I pay an extra $100 each month on the principal. Is this a good idea? ---P.M., by email
A. Yes, it is a very good idea. It is extremely likely that your mortgage brings no tax benefits. The combined total of your real estate taxes, mortgage interest and other deductions is probably less than the standard deduction. So you may be earning 2 or 3 percent on your savings and paying taxes on that interest. At the same time, you are probably paying nearly 6 percent interest on your mortgage, but getting no tax deductions. Basically, any extra principal payment will do two or three times as much for you as putting the same money into new savings.
Q. I will be 59 1/2 in June. My wife passed away at age 65 last year. I’m concerned about tax liabilities and growth of assets. I have little debt--- a $75,000 mortgage on a Texas home with tax and insurance expenses of $5,000 a year and a $20,000 note on a one-year-old car. No other debts or obligations other than a Southern California timeshare that costs $1,600 a year. The children and grandchildren are doing very well. I’m in very good health and have medical insurance. My credit score is 800. My work position is very stable as long as I want to continue working.
Current assets include my late wife’s TIAA-CREF retirement fund, $400,000; my retirement fund, $100,000 (each account split 60/40 stocks/bonds, modified Couch Potato). My income is $40,000, savings $25,000. My wife’s life insurance proceeds are currently split between two FDIC-insured accounts of $225,000 each at 2.25 percent APR.
My wife was receiving $1,764 a month in terminal disability Social Security payments prior to her death. I currently qualify for $1,223 a month at age 62. Should I increase my salary to increase future Social Security benefits? We have always enjoyed Southern California, and I am considering purchasing a second home there. This would require a 30-year fixed mortgage at 4.875 percent, a $210,000 loan, and about $200,000 down. Is that a wise option for enjoyment and tax deductions? Should I put more down for a larger unit even closer to the ocean? ----JC, by email
A. It may be time for someone to start buying California real estate, but it's not clear that it should be you. According to your figures, you've got about $975,000 in financial assets, a house with a small mortgage in Texas, $40,000 of current work income and about $15,000 of future Social Security income if you retire at age 62. The question is whether you can afford to buy a second home, financing $210,000 after a down payment of $200,000.
The big problem with money is that you can spend the same dollar only once. Most of us want to spend it at least twice. That's what you may be doing when you think about buying a second house. Here's why. While you are still working, and without having bought the second home, your income looks pretty powerful--- about $80,000, divided evenly between work income and investment income. That makes it easy to support your house in Texas. You might even be able to support a second home in California, provided you don't spend much on food, clothing, transportation or healthcare.
Your two mortgages would absorb about $23,000 of your income, and you'd have to reduce your investment income by about $8,000 because you would have committed $200,000 for a down payment. So $23,000 comes off the top of $72,000 of income. As a single man, you can probably do that, as long as the operating expenses on the two houses aren't too high.
The problem comes when you retire. That could be in as little as 3 years. Then you'll have about $46,000 of income (investment income plus Social Security) to support the ongoing $23,000 in mortgage debt plus operating expenses for two houses. Not too likely.
Unless you work a long time--- like until you are 70--- increasing your salary will have only a small impact on your Social Security benefits.