"Starter House" - to pay off or not?

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pepperz
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"Starter House" - to pay off or not?

Post by pepperz » Sun Nov 12, 2017 7:46 pm

Please help me analyze if this mortgage is worth paying off?

We have $140K left on the mortgage at 5% interest. If we were to sell today we could probably get $260K.

Paying off the home would take pretty much all our non-retirement assets... but my thinking is we could get a HELOC (on the paid off house) to serve any potential emergency / investment opportunities we would have otherwise made with cash.

Here's the thing:
We're only planning on living in this home for 2 more years, after which we will upgrade to a bigger home.

I'm not sure at this point whether we'd need to sell the home (probably so) or if we'd be in a position to keep it and potentially rent it out for cash flow.

We haven't considered paying off the mortgage a priority because we always planned on upgrading.

I'm just wondering if this is a smarter move. Please let me know.

mortfree
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Re: "Starter House" - to pay off or not?

Post by mortfree » Sun Nov 12, 2017 7:51 pm

I wouldn’t pay it off if you you will be buying another home in 1-2 years.

You would be tying up your cash reserves in the house and would probably be forced to sell in order to have a down payment on the next home. This would force you to have a contingency on the sale of your home when placing the offer on the next one.

Disclaimer: maybe some details were left out that voids the above suggestions. Mainly being that you said you might not have to sell the current place.

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cchrissyy
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Re: "Starter House" - to pay off or not?

Post by cchrissyy » Sun Nov 12, 2017 7:55 pm

I say no.
if you're going to sell that soon, the interest saved by pre-paying isn't so significant. you may seriously wish you'd kept the liquidity.
and if you end up keeping it as a rental, that would changes the equation a lot, it would be better to save the decision until you really understand the impact of rent and expenses on your taxes and then decide how to proceed.

student
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Re: "Starter House" - to pay off or not?

Post by student » Sun Nov 12, 2017 7:59 pm

I also think that not paying it off gives you more options later.

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Watty
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Re: "Starter House" - to pay off or not?

Post by Watty » Sun Nov 12, 2017 8:23 pm

Using the HELOC as an emergency fund is a bad idea since it can be frozen at any time and if you laid off then it would likely be frozen and you would not be able to draw any more from the line of credit.

It is unlikely that keeping your current house as a rental when you move would make sense do you might want to take that out of considerations for now. The reasons are;
1) If you rent it for more than a few years you will lose the homeowners capital gains exclusion.
2) Your depreciation and taxes will be more complex and likely less favorable than if you bought the identical house next door as a rental.
3) You would need to come up with a separate downpayment for your next house.
4) Until you have a good rental history the lender for your next mortgage may count little if any of your rental income when considering your loan application. That may make it to have enough income to qualify for your next mortgage.
5) You don't have a great interest rate.

Instead of paying it all off one possibility would be to check with your lender to see if they will "recast your mortgage"(Google this) if you paid off 75% (or whatever makes sense) of your loan balance. They are not required to do this but they usually will for a processing fee of a couple of hundred dollars. The way this works is that if you do this then your required mortgage payment will be reduced by the same percentage. The length and interest rate will stay the same which could be important if something happens like you are laid off or interest rates go up a lot.

pepperz
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Re: "Starter House" - to pay off or not?

Post by pepperz » Sun Nov 12, 2017 9:53 pm

mortfree wrote:
Sun Nov 12, 2017 7:51 pm
I wouldn’t pay it off if you you will be buying another home in 1-2 years.

You would be tying up your cash reserves in the house and would probably be forced to sell in order to have a down payment on the next home.
But wouldn’t having a HELOC allow us to use that to make a down payment without having to sell in order to do so?

Even if we did decide to sell we’d still get enough to pay off the hypothetical down payment we borrowed and have the same profit.

What am I missing here?

JGoneRiding
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Re: "Starter House" - to pay off or not?

Post by JGoneRiding » Sun Nov 12, 2017 10:55 pm

Either way I would do a refi now.

berg
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Re: "Starter House" - to pay off or not?

Post by berg » Sun Nov 12, 2017 11:14 pm

I did not and would not.

We recently bought and sold. Having that extra cash on hand gave us flexibility. We were able to close on the new house first and sell the other three days later. This made the move a lot less stressful.

I debated this myself and the amount I lie through the interest was worth the flexibility to have choices.

mortfree
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Re: "Starter House" - to pay off or not?

Post by mortfree » Mon Nov 13, 2017 5:32 am

pepperz wrote:
Sun Nov 12, 2017 9:53 pm
mortfree wrote:
Sun Nov 12, 2017 7:51 pm
I wouldn’t pay it off if you you will be buying another home in 1-2 years.

You would be tying up your cash reserves in the house and would probably be forced to sell in order to have a down payment on the next home.
But wouldn’t having a HELOC allow us to use that to make a down payment without having to sell in order to do so?

Even if we did decide to sell we’d still get enough to pay off the hypothetical down payment we borrowed and have the same profit.

What am I missing here?
I’m looking more at your time frame. In order to move in 2 years you will have to first take out the HELOC 2-3 months before you put your house on the market. Are there fees for the HELOC?

Also, Thinking about real estate transactions in general. Do homes in your area sell quickly (less than 60/90 days) or do they sit for a few months?

If you want to move 2 years from now you may need to back up 3-6 months for everything to fall into place. So in 18 months you would turn around and apply for the HELOC. For me, that isn’t worth it.

Is your current home move-in ready? Making improvements and fixes might be a better use of the money.

sophie1
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Re: "Starter House" - to pay off or not?

Post by sophie1 » Mon Nov 13, 2017 8:57 am

I was thinking the opposite of what you propose: if your bank can be convinced that your income is enough to cover two mortgages, do a cash-out refinance now for 80% of appraised home value - you may even get a lower payment. When you start home shopping you'll have easily enough for a down payment on your new home and will only need a mortgage contingency on the contract. Having a contingency to sell your current home is deadly in a competitive market, not to mention a major life inconvenience if something happens to screw up the timing (ask me how I know).

Otherwise, I'd leave well enough alone.

Rupert
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Re: "Starter House" - to pay off or not?

Post by Rupert » Mon Nov 13, 2017 9:05 am

pepperz wrote:
Sun Nov 12, 2017 9:53 pm
mortfree wrote:
Sun Nov 12, 2017 7:51 pm
I wouldn’t pay it off if you you will be buying another home in 1-2 years.

You would be tying up your cash reserves in the house and would probably be forced to sell in order to have a down payment on the next home.
But wouldn’t having a HELOC allow us to use that to make a down payment without having to sell in order to do so?

Even if we did decide to sell we’d still get enough to pay off the hypothetical down payment we borrowed and have the same profit.

What am I missing here?
What you're missing is that HELOCs are not guaranteed to exist when you need them. Banks often freeze them or shut them down when the economy sours. This happened to many people during the recent housing crisis. You should not view a HELOC as your entire emergency fund or house downpayment fund.

NorCalDad
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Re: "Starter House" - to pay off or not?

Post by NorCalDad » Mon Nov 13, 2017 9:13 am

Agree with not paying it off. We were more competitive buying our second home because we had a lot of cash on hand rather than tying it up in our home. You'd rather not be a contingency buyer. If you really only plan to be there for 1-2 years, I'd consider a no-closing-cost ARM to get your rate closer to 3%.

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JupiterJones
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Re: "Starter House" - to pay off or not?

Post by JupiterJones » Mon Nov 13, 2017 10:07 am

I'd sort of split the difference if I were you. Actually, I'm not even being hypothetical--this is exactly what we're doing ourselves:

Assuming there is no other financial goal you need to prioritize (paying off debt, saving for a car or college or a baby, etc.), then I'd tap into the savings a bit each month to begin paying off your house more aggressively. Double payments, for example (or even triple if you can swing it). You're not dumping a big pile onto the mortgage all at once, but rather you're slowly shifting your assets from savings to home equity. (Sort of a DCA-style plan.)

You already have equity in your house today that you'll probably need to tap into in order to buy your next house. So you're going to have a contingency either way. It's just a matter of how much of that down payment on the next house will come from savings vs. equity.

Under no circumstances would I tap into the "emergency fund" portion of my savings in order to pay down the mortgage.
Stay on target...

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MP123
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Re: "Starter House" - to pay off or not?

Post by MP123 » Mon Nov 13, 2017 12:45 pm

I wouldn't pay it off if you plan to move in 2 years. This is a case where cash is king. You can make a more competitive offer on your next home, plus maybe put down at least 20% to avoid PMI.

I agree that you shouldn't count on using the HELOC for your down payment 2 years from now. Check the fine print carefully, they can often be adjusted by the bank, have fees, and a limited duration. Very useful for some things but generally you'll need to pay it off pretty fast. I certainly wouldn't consider it part of my "emergency fund".

Who knows what the housing market will look like in 2 years? If prices drop but you have a good cash position you might do just fine. If you're leveraged with a HELOC and trying to buy another house could be trouble.

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