[sanddollarmama]

We are in a weird position and was hoping for some advice. We currently own a house which we don't plan on staying in, we will possibly lose money if we sell it but it won't be a huge amount. We put 20% down so we will hopefully get some of that back... But who knows.

We do not have any other debt, no car payments or credit cards and we do have six months of living expenses saved. Our income has increased since we bought the house so would you pay off the home we don't plan on staying in or put that extra money towards a down payment the on the next place? It will be at least next summer before we sell and the school district is great, I was just steam rolled into purchasing this by others and it's not somewhere I would want to stay.

So what do you think?

 

[Nadders11]

Save the money.

 

[nodmicks]

What is the interest rate on your mortgage loan?

 

[sanddollarmama]

What is the interest rate on your mortgage loan?

It's 5% even.

 

[nodmicks]

I'd be inclined to say at 5 percent too pay down the loan and save some cash for closing on the new one.

 

[ambroseya]

I would save until you have 25% of what you want to buy, and then put any further money into the current house. In order to actually sell you might have to take more of a loss (depending on the house), so it would be a good idea to have "separate money" for the new house. I wouldn't actually buy another house until you've sold that one though, to not risk 2 mortgage scenario.

 

[Greebo]

It's a moot question.

Whatever the house sells for, if it's less than you owe, you need the cash up front to close the sale. If you pay down the mortgage you owe less but you also have less cash when you sell. If you save the cash you owe more, so you still end up with less cash when you sell. Either way, you end up with the same amount of cash.

Now - there is ONE upside to paying the mortgage instead of saving the cash.

5%

The more you pay on the mortgage the less interest you accumulate and therefore the faster you pay the mortgage down the next time. So if you save the cash, you'll put yourself slightly behind where you would be if you paid down the mortgage. Not a huge amount of difference, and there are probably psychological bonuses to having the cash on hand, so... flip a coin?

 

[Greebo]

I would save until you have 25% of what you want to buy, and then put any further money into the current house. In order to actually sell you might have to take more of a loss (depending on the house), so it would be a good idea to have "separate money" for the new house.

In the end it's all down to how much the house sells for, so really, saving money "separately" doesn't matter.

I wouldn't actually buy another house until you've sold that one though, to not risk 2 mortgage scenario.

THIS! 100%

 

[sanddollarmama]

It's a moot question.

Whatever the house sells for, if it's less than you owe, you need the cash up front to close the sale. If you pay down the mortgage you owe less but you also have less cash when you sell. If you save the cash you owe more, so you still end up with less cash when you sell. Either way, you end up with the same amount of cash.

Now - there is ONE upside to paying the mortgage instead of saving the cash.

5%

The more you pay on the mortgage the less interest you accumulate and therefore the faster you pay the mortgage down the next time. So if you save the cash, you'll put yourself slightly behind where you would be if you paid down the mortgage. Not a huge amount of difference, and there are probably psychological bonuses to having the cash on hand, so... flip a coin?

It would be sold for more than what we owe. We owe 98,000 and could sell it (according to a realtor) for 130-140. We bought it for 128 and put 20% down. So after closing costs we would likely lose the cash we originally put in it.

Either way, your reply is helpful so thanks!

 

[sanddollarmama]

We've only owned it for two years... It was a bad decision but as I said a great school district so we don't HAVE to move. Id just prefer to be in a house I like lol

 

[Greebo]

It would be sold for more than what we owe. We owe 98,000 and could sell it (according to a realtor) for 130-140. We bought it for 128 and put 20% down. So after closing costs we would likely lose the cash we originally put in it.

Either way, your reply is helpful so thanks!

Yes, either way it still works out the same. Every dollar you pay early lowers your balance *and* the net interest you pay. Every dollar you save costs you a little in net interest.

 

[CookieLee]

We are mortgage-free and don't plan to stay here forever. There are multiple benefits to being mortgage-free. Like you pointed out, you don't have to sell your house and you might sell it next year in order to find something you prefer more. Since you're not being forced into selling, I'd go with paying off your mortgage. Doing so increases the flexibility you will have in looking for another house.

By your own admission, your house would sell for approximately the original purchase price. The concept that you might lose money on this deal is moot because the differences are so close.

 

[kate0558]

We were wondering the same thing although we are probably 5 years off from having to worry about this... But what worried me was If you were relying on money from your first home - wouldn't you have to close on the sale of your first home before you closed on the purchase of your second? I figured if we saved it then we wouldn't have to worry about getting the money from our 1st home before we could close on the second. I am not quite sure how that works with how and when you'd get the money back from the sale of a home when you are purchasing another. - I just feel safer having the cash in hand rather then the bank holding onto it for me. Just in case.

 

[ambroseya]

We were wondering the same thing although we are probably 5 years off from having to worry about this... But what worried me was If you were relying on money from your first home - wouldn't you have to close on the sale of your first home before you closed on the purchase of your second? I figured if we saved it then we wouldn't have to worry about getting the money from our 1st home before we could close on the second. I am not quite sure how that works with how and when you'd get the money back from the sale of a home when you are purchasing another. - I just feel safer having the cash in hand rather then the bank holding onto it for me. Just in case.

It's not actually in hand, you *owe* the value of the other house. You are paying a *debt*. If you can't sell the house for the mortgage value then you owe the bank the difference. It's not like it's a restricted savings account, it's paying down a debt.

There are pros and cons both ways, but please don't think of paying off a debt as "letting the bank hold onto it for you."

 

[Greebo]

But what worried me was If you were relying on money from your first home - wouldn't you have to close on the sale of your first home before you closed on the purchase of your second?

You could make your purchase of #2 contingent upon the sale of #1. You could potentially also be approved for whole second mortgage, without settling the first, if your income were high enough and your mortgage small enough. (I have 3 mortgages. They're all on different properties, so... proof in point...)

I figured if we saved it then we wouldn't have to worry about getting the money from our 1st home before we could close on the second.

That's true. Then you have two mortgages to worry about. Whee!

I just feel safer having the cash in hand rather then the bank holding onto it for me. Just in case.

As someone else pointed out - that's a false sense of security. You still owe the money and if you buy a 2nd home w/o selling the 1st the bank can still take the 1st home, destroy your credit, and depending on the state, come after you for the balance after foreclosure...

 

[CookieLee]

I can assure you that it is wonderful to not have banks involved in the buying and selling process when it comes to real estate. When we bought this house we could have just paid for it but opted to take a small mortgage because we didn't want to completely liquidate all our cash assets. The bank delayed our close date by almost 2 weeks simply because they added extra requirements to the purchase contract and couldn't get their side of the paperwork correct.

My original answer hasn't changed ... it is nice to be mortgage-free so I go for paying off the house whenever possible even if you decide you're going to sell and buy another house sometime in the future.

 

[frugaljen]

How about a compromise? How about you take 50% of your extra money and save it. Take the other 50% and put it towards the mortgage. Then you are paying down the interest and also saving. f you set a cap to the savings when you reach it you could put it all towards the mortgage.

We found we always would need something when we saved....ya know like a vacation. It depends if a lot of extra money in the bank tempts you. We had a lot saved for a new house and we decided to just stay put for a few more years and take a nice vacation. six months later and we are back to wanting to sell this house and move.

 

[kate0558]

Yeesh this is so confusing -

I get that either way you have the money but don't you not actually get the money in hand until the official closing date on the sale of the first home?

If the closing on the purchase of the new home was say a month earlier - would the bank write up the new mortgage based upon the pending down payment money we will give them once we get the check from the sale of our first home a month later?

As long as offers are accepted - if your depending on recieving money from the first - then do you have to close on the sale of the first home before closing on the purchase of your second?

I'm assuming theres leeway here that i don't know about or everyone would be homeless for a time.

It just seems like if i had the cash in hand rather then waiting for the sale of my current home - then as long as i had an accepted offer i dont have to wait to close and can give myself time to make the move out of my old and into the new. Additionally I wouldn't have to cloud up offers with exact closing dates.

 

[nodmicks]

You have to have money in hand to close. Accept offers fall through all the time.

For example : we closed at 9am on the house we sold. Our agent took the check to the title company for our closing. I went to the bank and got a cashier check for the balance. We closed on the home we bought at 11am. The people we bought from needed our money to close on their new home at 4pm at their bank. Had we decided to back out they wouldnt have had the $ to close on their new place.

 

[sanddollarmama]

Thank you all so much for your responses.