Pay off mortgage, or sell and roll into the dream home.

[brainwrap1980]

We currently live in a starter-house we built 2 years ago. Currently we owe $153,000 on it. We have a goal of a "final" home in the price range of $300,000 - $350,000. In 3 years we will have saved up $158,000. What would you do? We are set on getting out of this neighborhood, so thats not up for discussion. I'm just not sure how easily we will be able to combine the money we save up with the money we will make from selling the current home. Currently this home is worth around $170,000. Should we pay off this mortgage? Would that make things easier or harder? Can I expect a good deal going in with that much cash upfront? How will inflation effect everything? This is a unique situation that I can't find anywhere online and can't discuss with anyone I know. Please, any suggestions are welcome. Thank you.

[Occupier]

I would talk to a couple of mortgage brokers. The reason why I said "a couple" is if they agree they are more likely to be right. My impression is they will tell you that paying off the present house now wont help you that much when you want to buy another in a couple of years. 1) On time payments for the next couple of years will improve your credit more than not having any debt. 2) If inflation breaks loose you will get leverage that you would not have with the house paid off. Also you can save without worrying as much about inflation with a short term TIPS fund. 3) Look at your current loan document called the Note. Before you think about paying it off you want to see if it has a prepayment penalty. Dave

[Grt2bOutdoors]

You barely have any equity in the current home. Save your cash - chances are whatever home you purchase in the future will require a mortgage to finance it and pay off the current home. This is the one time I don't recommend pre-paying, when you are about to sell - if you need to bring cash to the closing, you will have it - if you sink the money in there and then you can't sell, what then? Preserve your liquidity. Since you don't like the current neighborhood, are you sure you will be able to sell the current home at any price? Have you seen sales occurring in the recent past (last 6 months)?

[ShowMeTheER]

You barely have any equity in the current home. Save your cash - chances are whatever home you purchase in the future will require a mortgage to finance it and pay off the current home. This is the one time I don't recommend pre-paying, when you are about to sell - if you need to bring cash to the closing, you will have it - if you sink the money in there and then you can't sell, what then? Preserve your liquidity. Since you don't like the current neighborhood, are you sure you will be able to sell the current home at any price? Have you seen sales occurring in the recent past (last 6 months)?

Agree. Cash is king. Save now to give yourself flexibility on the next buy regardless of what is happening with the current house.

[finley]

I am not sure I 100% agree with the above advice. Is buying the new home dependent upon selling the house you live in? Meaning, do you have to sell the current home you live in before you purchase the new home. Most people would not be able to afford two mortgage payments (or want to). Assuming buying the new home is contingent upon selling your current home, a good argument can be made to pay off your current mortgage completely. This gives you a guaranteed return on your money of your current mortgage interest rate that is likely higher than a CD or money market. When you are ready to move to a new home, wait until the old home is sold before putting in an offer on the new home. The money you receive from selling it will give you the necessary money for a downpayment and then some. If you are ok with carrying two mortgage payments at the same time, then I agree that it is probably better to not pay off the mortgage and keep the liquidity for a downpayment.

[brainwrap1980]

Thanks for all the responses. I'm thinking I will hold onto the cash rather than pay off the mortgage. Nobody said anything about whether or not coming in with that much cash would give me any edge as far as a discount is concerned. Seems like if the builder (I most likely will have to build) would be willing to bring down the price if he was giving a large amount up-front. Does anyone have a view on this?

I'm not sure how it will work with selling this home and building the next. Assuming my home will sell, I'm not sure how that will work with building a home and selling the one I'm living in. All the cash needs to be upfront to get that monthly payment as low as possible. Has anyone done this and have any tips to offer?

[ShowMeTheER]

More cash doesn't necessarily equal bigger discount. ALL cash has a better chance of getting a lower price since some sellers will like that you can close more quickly without having to involve a lender.

You are right that that monthly payment situation will be based on cash you can bring up front. Add'l cash that would come in later would need to be included in a refi in order to bring the monthly payment down... but of course the add'l payment to principal will shorten the life of the loan payback.

[finley]

Thanks for all the responses. I'm thinking I will hold onto the cash rather than pay off the mortgage. Nobody said anything about whether or not coming in with that much cash would give me any edge as far as a discount is concerned. Seems like if the builder (I most likely will have to build) would be willing to bring down the price if he was giving a large amount up-front. Does anyone have a view on this?

I'm not sure how it will work with selling this home and building the next. Assuming my home will sell, I'm not sure how that will work with building a home and selling the one I'm living in. All the cash needs to be upfront to get that monthly payment as low as possible. Has anyone done this and have any tips to offer?

I have had colleagues sell a home, close on it, move into a short term rental, and then build a new home. I am not sure of the specifics of how they did it and I am sure it was a major headache to move twice, but it can be done. It might not be best for you though. If you are buying a home (not building), you arrange the contract to close on the new home after you
close on the home you are selling.

[sesq]

T Seems like if the builder (I most likely will have to build) would be willing to bring down the price if he was giving a large amount up-front. Does anyone have a view on this?

Do not give a builder a "large amount" up front. A reputable builder can finance the land acquisition, materials and labor and sell you a finished product, WITH A CLEAN TITLE. So many bad stories about builders going belly up, subcontractors have liens on properties, etc.

I would RUN from that guy, even (especially?) if it is a friend.

[brainwrap1980]

Do not give a builder a "large amount" up front. A reputable builder can finance the land acquisition, materials and labor and sell you a finished product, WITH A CLEAN TITLE. So many bad stories about builders going belly up, subcontractors have liens on properties, etc.

I would RUN from that guy, even (especially?) if it is a friend.

No, nobody offered this. I'm still three years away from taking any action towards building. I just wondered if bringing cash to the table would give me any leverage for negotiating a lower price.

[Grt2bOutdoors]

Do not give a builder a "large amount" up front. A reputable builder can finance the land acquisition, materials and labor and sell you a finished product, WITH A CLEAN TITLE. So many bad stories about builders going belly up, subcontractors have liens on properties, etc.

I would RUN from that guy, even (especially?) if it is a friend.

No, nobody offered this. I'm still three years away from taking any action towards building. I just wondered if bringing cash to the table would give me any leverage for negotiating a lower price.

It likely will not give you leverage - let's say the builder tells you the price is $300K, and his profit is 40% of that. If the builder obtains construction financing, it will be on 180K, not $300K - if it takes him 6 months to build it, might cost him $6,200 in interest - lets say $10K in financing cost. His profit is still 38% (likely higher - if he cuts corners or gets volume discounts). It's not like you are buying volume from him/her.

And I would not purchase a new home until you sell the first home - unless you can carry 2 mortgages and the associated headaches that come with it.

[brainwrap1980]

It likely will not give you leverage - let's say the builder tells you the price is $300K, and his profit is 40% of that. If the builder obtains construction financing, it will be on 180K, not $300K - if it takes him 6 months to build it, might cost him $6,200 in interest - lets say $10K in financing cost. His profit is still 38% (likely higher - if he cuts corners or gets volume discounts). It's not like you are buying volume from him/her.

And I would not purchase a new home until you sell the first home - unless you can carry 2 mortgages and the associated headaches that come with it.

It will cost me less to carry two mortgages than to pay for storage, rent, and moving fees if I sell my home first. Apartments are going to charge more than what I currently pay for a month-to-month, so I won't be saving there.

I will go to a builder in 3 years and begin construction of my new home. Once the home is a month away from completion I will put my current home on the market. If someone immediately wishes to buy my home, waiting a month for me to move into the new place shouldn't be an issue. If the home doesn't sell for several months after I move out of it, I'll be fine paying both mortgages until it does sell. I can even consider renting it out at some point. My income will handle two mortgages with only the growth of my long-term savings being the victim. I will still have my emergency fund and liquid savings so I feel fine doing that. Unless, there are complications beyond the point-blank cost of the two monthly mortgage payments that I am not thinking of? How resistant are lenders if they know its temporary while you try to sell?

That actually posses another question of renting. Does anyone have opinions or advice on the option of renting my current home if it does not sell?

[Grt2bOutdoors]

It likely will not give you leverage - let's say the builder tells you the price is $300K, and his profit is 40% of that. If the builder obtains construction financing, it will be on 180K, not $300K - if it takes him 6 months to build it, might cost him $6,200 in interest - lets say $10K in financing cost. His profit is still 38% (likely higher - if he cuts corners or gets volume discounts). It's not like you are buying volume from him/her.

And I would not purchase a new home until you sell the first home - unless you can carry 2 mortgages and the associated headaches that come with it.

It will cost me less to carry two mortgages than to pay for storage, rent, and moving fees if I sell my home first. Apartments are going to charge more than what I currently pay for a month-to-month, so I won't be saving there.

I will go to a builder in 3 years and begin construction of my new home. Once the home is a month away from completion I will put my current home on the market. If someone immediately wishes to buy my home, waiting a month for me to move into the new place shouldn't be an issue. If the home doesn't sell for several months after I move out of it, I'll be fine paying both mortgages until it does sell. I can even consider renting it out at some point. My income will handle two mortgages with only the growth of my long-term savings being the victim. I will still have my emergency fund and liquid savings so I feel fine doing that. Unless, there are complications beyond the point-blank cost of the two monthly mortgage payments that I am not thinking of? How resistant are lenders if they know its temporary while you try to sell?

That actually posses another question of renting. Does anyone have opinions or advice on the option of renting my current home if it does not sell?

I am an involuntary/not willing to sell at fire-sale prices landlord as well as homeowner. I speak from experience, don't buy a new home until you have sold the one you are living in now. Even if you can carrry both homes, why would you want to? Is the neighborhood where you currently live, that bad?

[brainwrap1980]

I am an involuntary/not willing to sell at fire-sale prices landlord as well as homeowner. I speak from experience, don't buy a new home until you have sold the one you are living in now. Even if you can carrry both homes, why would you want to? Is the neighborhood where you currently live, that bad?

What are the mysterious reasons I should not pay two mortgages if I can handle the cost?

And no, the neighborhood is not that bad. But that's not the point. I don't plan on staying in this house for the rest of my life and wish to build one that I do, which is again, besides the point.

Why should I sell my current home, move my family into an expensive, inconvenient apartment, rent a storage unit for extra items I can't fit in the apartment, and then pay to move everything twice. I know that you would, but I don't know why. I need to know so I can make the best choice.

[finley]

I am an involuntary/not willing to sell at fire-sale prices landlord as well as homeowner. I speak from experience, don't buy a new home until you have sold the one you are living in now. Even if you can carrry both homes, why would you want to? Is the neighborhood where you currently live, that bad?

What are the mysterious reasons I should not pay two mortgages if I can handle the cost?

And no, the neighborhood is not that bad. But that's not the point. I don't plan on staying in this house for the rest of my life and wish to build one that I do, which is again, besides the point.

Why should I sell my current home, move my family into an expensive, inconvenient apartment, rent a storage unit for extra items I can't fit in the apartment, and then pay to move everything twice. I know that you would, but I don't know why. I need to know so I can make the best choice.

The obvious answer to me is that carrying both mortgages might be more expensive than renting an apartment and storage space. Imagine a scenario where you can not sell your current home. You will still have to pay the mortgage. Who knows, maybe it works out better financially to carry both mortgages for a short time until the current home sells. If you want to turn it into a rental, that is a different story.

My in laws just purchased a new home in the not too distant past. In the process of trying to sell the first home, it suffered major water damage from a pipe on the second floor breaking when nobody was living there. It was insured so the damage was covered, but it resulted in the house taking well over a year to sell. So they ended up paying two mortgages much, much longer than they anticipated. Make your own decision that is best for you, but personally I would shy away from two mortgages at the same time (unless I plan to rent the first home).

[brainwrap1980]

The obvious answer to me is that carrying both mortgages might be more expensive than renting an apartment and storage space. Imagine a scenario where you can not sell your current home. You will still have to pay the mortgage. Who knows, maybe it works out better financially to carry both mortgages for a short time until the current home sells. If you want to turn it into a rental, that is a different story.

My in laws just purchased a new home in the not too distant past. In the process of trying to sell the first home, it suffered major water damage from a pipe on the second floor breaking when nobody was living there. It was insured so the damage was covered, but it resulted in the house taking well over a year to sell. So they ended up paying two mortgages much, much longer than they anticipated. Make your own decision that is best for you, but personally I would shy away from two mortgages at the same time (unless I plan to rent the first home).

When I look at the cost - I will spend more selling and living in the apartment for 6+ months. If my house fails to sell then I plan on renting it. I was just curious if there were hidden costs of having two mortgages. Taxes? Insurance?

[finley]

Just double both. Everybody situation is different and it sounds like you might be better off carrying both mortgages for a short period, but you need to be prepared to carry the mortgage for longer than you think if something unexpected happens.

[bottlecap]

There's no way I would build a starter home, live there 2 years, sell and build a dream home, unless maybe I hit the lottery. Just the building and moving alone are too much hassle and stress within a span of 2 years. Assuming you are young, you may not even know what your dream home looks like at this point, either.

However, I would hold onto a reasonable down payment on the dream home and probably use the rest of the cash to pay down/off the mortgage on the present place, assuming you have all of your other ducks in a row.

Good luck,

JT

[bkslainte]

I am nearing the end of a similar situation. We purchased a house right at the end of 2012 without selling our previous house. The previous house was a duplex and we took a few weeks to consider renting our unit or selling it. We ultimately decided to sell the duplex and we will close in mid-March.

In my situation, the motivation was a bit different. We were able to make more aggressive offers(no contingencies) on the new houses in which we were interested and on our own schedule.

There are no "hidden" costs but there are a lot of costs. Double everything(garbage,utilities, taxes, landscaping). Plus, if you are moving into your "dream home", there will also be the need to buy the dream refrigerator, dream washer/dryer, dream furniture, you get the picture. All while paying 2 mortgages, one for a house which is empty.

It can be done but its quite a drain on resources and I'm glad its only lasting 2-3 months in my case.

You might also think about getting into contract with your previous place but asking for a long lease back period(3-6 months) where you can still live in your house while the new house is constructed. This might turn off certain buyers but just a thought for your situation.

[brainwrap1980]

So I think it's time to back up a little bit and tell more of the situation so I can get your opinion on what you would do.

For 5 years we have been aggressively attacking our debt. In 7 months we will be debt free, excluding mortgage. I created a post-debt budget that was awesome. Gave us lots to play with and several levels of savings. We were super excited about it. Then we started looking at what our goals were. For so long now the goal was, to be debt-free. And now that it's about to happen and we thought... now what? So the talk about a "final home" came up. Dream home is the wrong title. All we're doing is improving on the flaws of the current home we live in. This is not going to be a glamorous mansion. We just want a home large enough for everything we do and practical for growing old in (no upstairs).

Our options are to switch over to the glorious post-debt budget and enjoy that for a minimum of 10 years, then eventually switch over to the final home, or keep our tight budget and aggressively save up for 3 years. Our children are young and not in school yet. If we were to have to move to another school district, it would be nice to do so before they started. Also, we plan on having a third child. Obvious costs with all that. Plus, we'll need another vehicle, and that's a large purchase that would cut into the final home savings. So, even though we will be in a good place financially, and capable of purchasing these things. It will always hurt knowing it's pushing the final home down the line.

So the thought is - get it over with. If we save another 3 years and get into the final home, we would finally be able to play with our money without sacrificing any log term goals.

But clearly my mind is not set, because I'm here on this site.

[Default User BR]

I've gone on record numerous times that long-term low-rate mortgages secured in the current rate environment provide a cheap hedge against future inflation and rate increases. If you have a good rate currently, I would not pay it off early at all. If you don't, refinance. When you buy the new one, assuming rates are still in these ranges, pay down the minimum to get a good rate and avoid PMI.


Brian