# Financially, what's the better decision?
**URL:** https://boards.straightdope.com/t/financially-whats-the-better-decision/307559
**Category:** Factual Questions
**Created:** [June 9, 2005, 3:47am UTC](https://boards.straightdope.com/t/financially-whats-the-better-decision/307559 "2005-06-09T03:47:07Z")
**Posts on this page:** 7
**Page:** 2
### Author:  [@rpinrd](https://boards.straightdope.com/u/rpinrd)
#### Post date: [June 9, 2005, 6:18pm UTC](https://boards.straightdope.com/t/financially-whats-the-better-decision/307559/21 "2005-06-09T18:18:07Z")
> [@Exapno Mapcase](#):
>
> 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).
Isn’t the rule that you avoid the capital gains tax if you put the gains into the next house. So what **Queen Tonya** was getting at was that, when chosing between putting the $20k towards the new house or using it to pay off other debt, you have to consider the tax issue. If he uses the profit to pay off the credit cards, he’s going to get taxed on it.
If my understanding is correct, this would absolutely decide the issue - the money should be used for down payment.
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### Author:  [@Mama\_Zappa](https://boards.straightdope.com/u/Mama_Zappa)
#### Post date: [June 9, 2005, 6:29pm UTC](https://boards.straightdope.com/t/financially-whats-the-better-decision/307559/22 "2005-06-09T18:29:36Z")
> [@rpinrd](#):
>
> Isn’t the rule that you avoid the capital gains tax if you put the gains into the next house. So what **Queen Tonya** was getting at was that, when chosing between putting the $20k towards the new house or using it to pay off other debt, you have to consider the tax issue. If he uses the profit to pay off the credit cards, he’s going to get taxed on it.
>
> If my understanding is correct, this would absolutely decide the issue - the money should be used for down payment.
No - that’s the way it _used_ to work. That changed back in [1997](http://realtytimes.com/rtcpages/20020128_taxbill.htm). With the new rules, you can exclude up to 250,000 of capital gains (500,000 if you’re married).
Prior to that, any gains could only be deferred if you bought a new house w/in 2 years. Though there wasn’t any requirement that you had to use the cash itself as part of the down payment, just that the house cost more than the selling price of the older one. i.e. it didn’t matter whether the 20K went for bills, or down payment, the new house simply had to be worth \>= the selling price of the old one.
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### Author:  [@Zulema](https://boards.straightdope.com/u/Zulema)
#### Post date: [June 9, 2005, 6:37pm UTC](https://boards.straightdope.com/t/financially-whats-the-better-decision/307559/23 "2005-06-09T18:37:39Z")
The money you borrow from a mortgage is usually paid back over 30 years. Even with the mortgage interest being lower than the interest on your other debt you will, in the long run, pay out much more if you put it into your mortgage even taking into acount the extra interest you will get to deduct on your taxes with the larger mortgage amount.
The people who bought our house when we moved a few years ago had no money down and ended up paying much more in interest and a huge amount more in closing cost (I think some of the closing costs were interest).
We have a policy of only using money from a house for another house, we are way ahead financially than lots of our friends who have used house equity to pay off other bills. The big reason is because every time they borrow money on the house, or refinance with other debt put on the loan they lenghten the payoff time of their old debt.
I have friends who owe over 80, 000 dollars on a home they paid 54,000 for 20 years ago. That’s an extreme case, but if they had just been able to have the discipline to pay off all their other debt they would almost have a paid for house.
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### Author:  [@Queen\_Tonya](https://boards.straightdope.com/u/Queen_Tonya)
#### Post date: [June 9, 2005, 7:36pm UTC](https://boards.straightdope.com/t/financially-whats-the-better-decision/307559/24 "2005-06-09T19:36:17Z")
> [@Anaptyxis](#):
>
> 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.
Right, that’s exactly what I meant. IANAFinancial guru, and I think the rules on this have finally started to change, but the _other_ evil dark side of PMI was that you had to reach 20% to be able to drop it.
Sure, makes sense, except for a few things:
-if you’ve rolled your PMI payment into your monthly mortgage note, it’s often forgotten about by the time you actually reach 20% and can drop it so you continue throwing money away.
-with amortization, you’re paying mostly interest at the beginning of a mortgage, so reaching that 20% can take much longer than it should.
-if you actually keep track and think you’ve amassed that 20% equity and want to drop the PMI, most mortgage companies will charge you for the appraisal to make sure you’ve actually got that, which is another coupla three hundred down the drain.
There’s zero return on paying PMI, doesn’t add to your equity, isn’t tax deductible, nada. So yes, you can get a second mortgage before ever closing on the first, it’s commonly done just to avoid wasting that money.
Sounds like the new place is a real find, if you’ve got the time and knowledge to fix it up. Good luck!
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### Author:  [@congodwarf](https://boards.straightdope.com/u/congodwarf)
#### Post date: [June 9, 2005, 7:45pm UTC](https://boards.straightdope.com/t/financially-whats-the-better-decision/307559/25 "2005-06-09T19:45:59Z")
I’m really liking this piggybacking idea. Since the house is only 105k, 20% is going to be about what we should have after the sale. If we pay 10k and get a second mortgage for the other 10k, we can still pay off a huge chunk of the Other Bills. Hell, we could even save some of the other 10k.
Thanks for all your knowledge guys!
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### Author:  [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)
#### Post date: [June 9, 2005, 8:01pm UTC](https://boards.straightdope.com/t/financially-whats-the-better-decision/307559/26 "2005-06-09T20:01:00Z")
> [@SP2263](#):
>
> We have a policy of only using money from a house for another house, we are way ahead financially than lots of our friends who have used house equity to pay off other bills. The big reason is because every time they borrow money on the house, or refinance with other debt put on the loan they lenghten the payoff time of their old debt.
>
> I have friends who owe over 80, 000 dollars on a home they paid 54,000 for 20 years ago. That’s an extreme case, but if they had just been able to have the discipline to pay off all their other debt they would almost have a paid for house.
You are ahead financially not because you separate house loans and other debts, but because you can control your finances and spend within your means. Refinancing to pay a higher rate debt is a sound move _as long as you actually pay off the debt_. Too many people just refinance and then continue to pay the minimum payment. Even worse, they continue to run up high interest debt and eventually have to roll that into their house again.
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### Author:  [@Zulema](https://boards.straightdope.com/u/Zulema)
#### Post date: [June 10, 2005, 12:04am UTC](https://boards.straightdope.com/t/financially-whats-the-better-decision/307559/27 "2005-06-10T00:04:07Z")
> [@iamthewalrus(:3=](#):
>
> You are ahead financially not because you separate house loans and other debts, but because you can control your finances and spend within your means. Refinancing to pay a higher rate debt is a sound move _as long as you actually pay off the debt_. Too many people just refinance and then continue to pay the minimum payment. Even worse, they continue to run up high interest debt and eventually have to roll that into their house again.
What you say is exactly true, but human nature being what it is rolling debt over into a mortgage gives people the opportunity to not pay off debt as fast. It’s just too easy to not pay extra for one month and then another until they’re going with the lowest payment.
We don’t have that much more self control than anyone else so we admit it to ourselves and keep as much money as we can in hard to get at places.
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