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      Members Only Fluid Forum View   08/08/2017

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Barony

Stock/ house purchase question

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Difference of opinion between siblings. Mom and dad are buying a house in town and keeping the farm in the country (15 mile drive) that they will someday sell. Advice by one sibling was given to sell mutual funds to pay for the house in full in town. I advised that they take out a conventional home loan, hang onto the stocks until the market comes back and then sell the stock as needed. I feel that they would more than recover the closing costs in a few years and have an interest write off. Parents are in late 60's/ early 70's. Am I off base?

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They have the house. Should they borrow money to buy/keep stocks? That is a tough question, given what is going on as I type. What's the story with the farm? will they be selling that someday? And what percentage of their assets is the house loan?

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It's (the new house) will be about 1/5 of their assets. Farm is paid for and will someday sell. They are staying on the farm until some work has been done on the house and then moving, so it may be a few months. It should be an easy sell (the farm).

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The way I see it is pretty cut and dried, but of course there are many complicating factors. I'm not a financial adviser by any means.

Mortgage interest is tax deductible. If you sell your financial holdings you may have to pay taxes on your capital gains. Then you would pay off the house with what was left, only to have something that is not appreciating very well right now.

Mortgage is a pretty "good" debt to have if there is such a thing. Let their investments continue to earn money in a well diversified account. They are at an age where they are drawing out so the more they can leave in, the more earns interest. Reducing the principle in their retirement money to buy a new house is a poor idea.

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...buying a house in town,keeping the farm in the country that they will someday sell.

Option 1 - sell mutual funds to pay for the house in full in town

Option 2 - conventional home loan, keep mutal funds for awhile, sell when needed. Feel option 2 will recover closing costs....

Parents are in late 60's/ early 70's.

Well, you or a financial advisor need to do some calculations. You need to process the tax implications of selling the mutual funds vs mortgage interest deduction vs closings costs. As well as factor in various ROI's for your mutal fund investments.

You also need to look at the mortgage options. This is one case where an interest only mortgage can make good sense. Say a 5 year interest only loan (gives time for some recovery if there is any, plus time to sell farm) looking at minimizing all closing costs. What you're looking at trying to do is setting up bridge financing to handle the transition from the farm to the in town house. To be successful you need to be serious about getting the farm ready for sale and then market it. Just remember, there is no guarentee that the paper losses in the mutal funds will recover in the near term and your folk's are at the stage where they should have the floor raised on their investments (i.e. more cash, bonds, short term securities instead of stocks and other long term investments). I guess your goal is to evetually use the procedes of the farm sale to pay for the house in town. An interest only loan may be the least expensive way to accomplish this while being tax efficient. Unfortunately this form of financing has been greatly abused the last few years and it may be hard to find a lender.

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