How Much Mortgage For A Second Home Can We Afford?

We will be buying a second, winter home for when my wife retires in two years. I haven't found a formula for how much mortgage we can afford in our case. Those I found are applicable to still working couples with less assets; the 28% of income rule doesn't seem reasonable when net worth far exceeds the mortgage.
Assume, for instance, in round numbers,
$2M net assets $500K of that is real estate $100,000/yr income from all sources no debt 5% to 6% mortgage rate
We have been targeting a $500K house with a $400K mortgage but subject to change.
The second home will be outside the US with southern Europe or Central America the leading contenders. Does that matter?
Thanks, Gary
Reply to
Abby Brown

You can afford the mortgage if you're able to pay it off with your liquid assets.
I think that is about what you need to spend in many areas of the country for your financial situation.
Are you looking at condos since you won't always be there?
What is the real estate that you now own? Is it your current home or a rental property?
It's likely that you won't be able to get a mortgage on a home outside the US. Don't take a risk, rent when outside the US.
Do you consider living outside the US to be a learning experience? Wouldn't it make sense to go to a different location each year?
Have you tried RVing? That is a way to see the US and parts of Canada.
-- Ron
Reply to
Ron Peterson

to be a better option. You don't seem to be highly familiar with the regions as they are so disparate. As everywhere, there are wonderful choices and excretable ones. Getting financing as a foreign citizen can get quite complicated. Some places won't even let a non-citizen buy for cash.
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Why incur the expense of a mortgage when you have sufficient assets to buy the second home outright?
There is no way to determine how much mortgage your can afford from the information given. Formulae and rules of thumb do not consider individual circumstances which can vary widely from family to family. The real question is how much disposable income do you have after deducting your estimated living expenses in retirement. When you itemize your living expenses don't forget to include the taxes, insurance, maintenance, etc. on the second home.
Next comes the problem of inflation. Your living expenses, including the taxes, insurance, maintenance, etc. on the second home, will increase over time. If some of your $100k/yr income is is not inflation indexed then you need to consider where you will be 20 years from now if your living expenses increase at the rate of inflation and some portion of your income remains fixed. Also remember that taxes must be considered. In particular, if you have significant funds in tax sheltered accounts you may find yourself with much larger tax expenses when you reach age 70 1/2 and the RMD (required minimum distribution) rules require you to withdraw these funds and pay the taxes due.
My favorite tool for doing this analysis is Dr. Lawrence Kotlikoff's Economic Security Planner (
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). It is comprehensive, easy to use and inexpensive.
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What you need to do is a budget with and without the new house. That is the only thing that can tell you if you can afford it. As others have pointed out, if you are living on investment income, a mortgage is usually a bad idea. -- Doug
Reply to
Douglas Johnson

Having a mortgage is better than pulling money out of a Roth or IRA, or realizing capital gains on other assets.
-- Ron
Reply to
Ron Peterson

How much of the $2M net assets is producing income (exclude primary residence) and at what rate? (Congratulations, BTW) How much do you need a year to live on? Are you assuming 3% inflation? What is the most number of years your money needs to last (assuming you spend down to $0 the day you die)? A certain amount of money will last so many years at a certain income level assuming a certain rate of inflation. Happy Retirement!
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Just as a note, you'll have problems getting a US bank to loan money on a non-US property. If you intend to buy off shore, try mortaging your current home and using that money to pay cash for the non-US place overseas. Mortage exemption against US taxes, willingness of bank to loan, ect. R. Wink
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Rather than a foreign mortgage, I suggest you refinance your current home. That way the interest is deductible and rates are favorable. Also foreign debt includes currency risk.
As a cash buyer abroad, you are in a stronger position.
Watch House Hunter International on the Home & Garden channel.
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