Here’s the scenario:
A young couple, with no kids and two incomes, are looking to sell their house. They can expect a minimum of $20,000 profit on the sale. They want to buy a new home. They also have about $15,000 in other debt.
Now, their choices are: Use the profit to pay off all the other debt and buy the house with no down payment. OR, put the whole profit into the mortgage and keep the other debt - while gaining a new mortgage.
Which is the better decision? The other debt consists of a loan with a 9% interest rate, credit cards with about a 10% interest rate, and medical bills - with no interest rate.
One of the people has a stellar credit history. The other has improved over the last few years to a fair rating.
Will having no down payment affect the new mortgage interest rate?
What other factors should be considered?
In this case - that’s not an option (cause we wouldn’t be moving it if it was).
We will be able to afford the mortgage and the debt as long as we don’t buy an overly large, expensive house. We just don’t have enough saved up for a down payment and we don’t have time to save it before we move.
I would prefer to pay off all the debt (cause of the higher interest rates). My fiancee would prefer to put all the profit on the down payment (to get a lower monthly payment).
My fiancee insists that we will get a better interest rate if we have a larger downpayment. I don’t think that is totally the case.
I think we’ll save more money by not having the other debt than we would by having a smaller mortgage.
And, there’s always the possibility that I’m making myself look like an idiot for having been a homeowner for 4 years and still not understanding this crap.
In the real world, one of three things is gonna happen. We’re gonna put all the money on either the debt or the mortgage. We’re gonna split it between the two and save some. Or, we’re gonna say screw it all and rent - it’s just easier.
At the moment, I’m mainly interested on clearing up a disagreement.
Pay off the debt and rent cheaply for a few years so you can save enough to pay off the first mortgage and then maybe start thinking about buying a new house. That’s what I’d do. But then, I don’t have any plans to ever buy a house because it’s expensive and risky and requires lots of maintenance. So YMMV.
The interest you pay on a mortgage is deductible, the interest on the debt isn’t, right? So the conventional wisdom would be pay off the other debt and piggyback mortgage loans to avoid PMI and have debt that works for you.
But how does capital gains figure in? Does rolling the 20K profit from the sale into the next mortgage help you avoid the capital gains tax but using it to pay off bills not do so? If that’s the case, and you’ll lose a substantial portion of the 20K and wind up still having some debt and no down-payment, maybe you’re better off using it for the new mortgage and not to pay down the other debt.
You get the best mortgage rates and save money by not having to pay mortgage insurance if you can put 20% of the cost of the house as a downpayment. Assuming you can do that, what I would do is go ahead and put everything you can into the downpayment. Once you’re in the house, get a home equity loan and use that money to pay off the 9% and 10% interest rate loans. Typically, a home equity loan will be much less than 9 or 10% interest - I think ours is around 5%, plus it’s a tax writeoff.
Alternatively, see if you can get any of those zero-percent interest credit cards. I seem to get offers for them all the time - they’re zero percent for a fixed time (typically a year). You just have to keep track and move any remaining balance to a low interest (or another zero percent interest rate) card before your time is up.
I completely disagree with this. A home is a great investment, as long as you buy a house you can afford. Most people will make more money off the equity in their home than any other investment they can make; by all means, buy a decent house and use the equity you build wisely.
There are no capital gains taxes when moving from one owner-occupied house to another (if one has lived there at least two of the previous five years).
Sorry to disagree with you Athena , but I don’t see a home as an investment at all. Well, not anymore. I’ve owned 1 home or another for 20+ years now and my thinking on this has changed dramatically. Investments are things you can sell. It is nearly impossible to sell your home when or if you needed to, while getting out the equity you’d be looking to use. If you sell this particular " investment ", where do you then live? And the interest payments on the loan? What about property taxes, insurance, repairs, utilities, general upkeep and maintenance? And mobility… you can’t just up and leave your “investment” unattended for a month or more. You’ll have to pay dearly for someone to do upkeep on it while you are away. Nope nope nope, a home is not an investment, it is a money pit even if it started out in decent condition. If you run an amortization schedule on your home loan and see what the final figures are for what you actually ended up paying… and add in all those costs like property taxes I mentioned above… are you really seeing much of a return on investment?
I’ve got about 10 years left on this current mortgage, then it is sell it and rent from then onward. [I had my epiphany a bit late]
And that would be my advice to the OP. Sell home, pay off debts, rent.
I would suggest you be cautious as far as expectations of profit. How long can you carry two mortgages? If you are moving because you have no choice, are you going to be under some pressure to sell, possibly for less than your expected price? What if the best offer you get on the house is not what you are hoping for? I have had friends go into similar situations where they have not gotten the offer they had expected.
In general, pay off the highest interest rate loans first. A mortgage right now is nominally about 6%, but because the interest is tax-deductible, you’re actually paying more like 4%-ish (is that too unclear?). So in general, you’d rather have a larger mortgage and pay off the credit cards.
But larger downpayments can get better mortgage rates, and since the mortgage is larger than the other debt, lowering the rate even a little can have a big financial impact, so really, you need to do the math. Find a good mortgage guy, and ask him what rates would be for different down-payments.
My off-the top of my head guess is that 10% down is a goal, with the idea of a mortgage for 80%, and a secondary mortage for the other 10%. The secondary mortgage allows you to avoid PMI; it will be at a higher interest rate than the real mortage, but probably way less than the rate on your credit card.
We cannot answer the question intelligently without more information.
Where is this hypothetical couple?
If they’re in Detroit their property values will move in one fashion.
If in Miami, yet another. What are annual incomes for both persons?
What is the average APR on their current debt load?
Is the rest of their current debt load secured or unsecured?
Do they hold any substantial non-real-estate investments?
Correction - there would be no gains as long as the profit is less than 500K (for a couple; 250K for a single person). That sounds like this is not a problem here
I’d also suggest paying off the debt, then piggybacking the mortgages on the new place (main mortgage 80%, second mortgage whatever is needed for the rest of the down payment); the rates on those mortgages are sure to be lower than the 9-10% on the other debts, you can pay off that second mortgage early if at all possible, and its interest is deductible. Avoid PMI if you can, that’s a trap that’s very tough to get out of.
With the credit rating: you may have better luck getting a mortgage in one person’s name only to avoid the impact of the partner with only “fair” ratings; if you can qualify to do it that way, it’s worth considering.
I don’t know the details of where you live or what your costs are, but it seems strange to me that you would wait until the house was paid for to sell it and then rent. That would seem to make sense if your expenses (maintenance, taxes, insurance) are very large. That may be the case, but if so, why wait 10 years?
Still new enough or unpracticed enough that I don’t know how to quote a previous post.
The question back at me was why I would wait 10 years before I sold existing home. Well, that is somewhat a flexible timeline. I could/would consider selling much earlier than that, but I do have the following considerations.
The mother in law lives with us. She sometimes has issues with dementia, possibly Alzheimers. Now would not be an ideal time to change her environment until we absolutely have to.
I’m at that point in the loan where a decent chunk of payment goes to principal. That feels nice. Although it still doesn’t mean we aren’t paying goodly sums of property tax, insurance, utilities etc.
As mentioned, I only recently had epiphany. The old me, the “own a home” me is still struggling in there.
So, if I was able to do it over again (like the OP), I really wouldn’t hesitate to rent. But rent at an amount that would still allow me to set aside monies that would have gone to such things as interest, taxes, insurance and such into a financial war chest. So amended advice to OP… don’t rent a place so expensive that you don’t save -any- money. Put the difference away into an interest bearing account of some sort that you then don’t touch. And keep putting it in there as if you were paying a mortgage. Enjoy life debt free. Imagine, totally debt free.
Your findings totally contradict mine. I own a house (ok, I pay the bank for it). To rent something even close, I’d be paying at least as much as my current mortgage. So no savings there. Also, a big chunk of each of my mortgage payments is tax deductable, so I’m getting money back each year.
In addition, the value of my home has gone up about 45% in the last 6 years. Yes, 45%. That’s conservative, based on the recent sales of my neighbors. Have I spent money on the house? Yes. Have I spent as much as it has increased? No. 10 years ago, we bought our first place with 10K down. If I sold today, I could reasonable expect to walk away with $100k. If I wait a few more years, the number goes up even more.
Why does it make sense to sell in 10 years? You state that you will be able to sell the house, rent and be debt free. But in 10 years, you will be debt free anyway. The mortgage will be paid off. Now if you are able to find a place to rent, for less then the cost of your house taxes and repairs, maybe. But good luck with that.
For those of you who want it, here are more details. We live in Massachusetts. We have to move further east in the state. We are pretty confident about how much of a profit we can get simply because every condo in our complex has sold for around the same amount - withing 5k or so. Based on how much we owe, and all the fees associated with selling, we should be able to make about 20k. We’ve lived here for almost 5 years. Oh yeah, every house in my neighborhood which has sold recently, has sold within 3 weeks. In my row of 4 condos, one was sold in one week and one was sold in 2 weeks. The third owner isn’t selling her unit any time soon. The one that sold in one week had no updates and didn’t look very nice. We have a remodeled bathroom and brand new windows.
As for the new property: We have a chance to buy a very nice little house in a small town. The house is on a lake. Now, the current owner started remodeling the house but never finished. He seems to be doing a good job though. He already bought most of the material. So, the house comes with sheetrock, enough laminate flooring for the whole house, and the new kitchen cabinets. The bathroom has already been remodeled - ceramic floor and a jacuzzi tub. It just needs paint and decorations. We would have a lot of work ahead of us if we bought this house. It’s livable but not very pretty. But, the house is listed at 105k. After the house is done, we could easily sell it for over 160k (other houses in the neighborhood go for that or more). With some good landscaping, we could get even more. My fiancee still has to see the house and obviously it needs an inspection but it’s still very tempting.
Now, what’s this PMI of which you speak? Why would I need two mortgages to avoid it? How exactly does that work? When you mention piggybacking the mortgage, do you mean the current one and the new one? Or the new one and a second one? Why would I get a second mortgage on a house we just bought?
The easiest way is to click on the ‘reply’ button that is at the bottom right of the message you want to reply to. If you do that, the entire message is already inserted into your reply with the appropriate tags. The you can edit it to quote only what you want to address.
As a renter, you’ll still be paying for things like property tax, insurance, utilities even though some of them will be transparent to you. As for being totally debt free, how is owning your home free and clear but still owing the monthly obligations for property tax, insurance, utilities, etc. any different than owing the monthly obligation for rent and renters insurance?
In my area, renting at an amount that would allow me to set aside funds that would otherwise be put towards a mortgage would put me in a house that would not be as nice or be in a worse neighborhood. In addition, I wouldn’t be able (or willing) to improve the property to suit my needs. Renting may or may not be something that the OP would want to consider, but there is one situation where I would consider it; when I sold my house and did not yet find a new house to buy. I don’t like being rushed to buy a home.
As for the OP, do you have a plan to pay down your debt, even if you don’t sell your house? I don’t see much point in paying off your debts if you are likely to run them up again. You have enough cash to do one thing, but you want to do two things. That’s fine, but you need to have a plan to pay for the second thing too.
Based on that, as long as the house passes inspection and doesn’t have major problems, than I’d go for the house, and keep some of the cash to pay for the expenses of remodeling. These is a bit of risk involved, but as long as you have enough cash coming in to pay all the bills and don’t keep running up the credit cards, I think it’s worth it. Work out a budget and see if you can do that. You’ll be stretched for a while, but it’s a reasonable risk to take.
If you buy a house with less than 20% down, mortgage companies will charge you Private Mortgage Insurance until you have paid enough principal to get to 20%. PMI is money down the drain - it is not tax-deductible. One way to avoid this is to take out two mortgages. It works thusly: You pay 10% down to Mortgage Company A, which is all equity. At the same time, you take out a home equity loan from Mortgage Company B for that same 10%, and it gets paid to Mortgage Company A. So Mortgage Company A has been paid 20%, and you avoid PMI. Meanwhile, you have two loans to pay off, both of them with tax-deductible interest.
I am not a banker, etc., but just did this home-buying thing for the 1st time last year and took the above route.
Oh, and congodwarf, email me if you want a recommendation for a mortgage broker.
The loan is a 4 year loan with less than 2 years left on it. It is the bulk of the Other Debt. I have every intention of continuing to pay it off and no intention of ever taking out a new one. The only reason we took it out in the first place was to repair the bad decisions I made when I was 18. We consolidated my (4)18-30% interest rate bills in to one 9% loan. We also paid off my car because it had a 18%. I then lowered my insurance on my car from $200 per month to $80 per month. We even threw in one of my fiancee’s credit cards just for the hell of it.
The medical bills are because I just had back surgery. With any luck, those will never ever ever come up again. The credit card debt comes in the form of 2 of his cards and two of mine.The credit card debt actually isn’t the problem. We actually have a very low amount credit card debt.
