Should I take Mortgage with Higher Rate?

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Rob54keep
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Should I take Mortgage with Higher Rate?

Post by Rob54keep »

I am in the process of selling my existing house and buying a new house. The timing on this combination is obviously important. My goal is to sell my existing home (good market and house paid for) and use the proceeds to pay for the new house (thus no debt). In theory and with the right conditions/buyers it should work.

However as a backup plan, I am already qualified for a mortgage. If this occurs I would retain the mortgage for 2021 because it will align with my federal tax strategy for 2021 (no state tax). I could reduce my closing costs (by $4500) by taking a 4.25% instead of a 3% mortgage but have $2500 more in interest for 2021. However this additional interest would result in additional $500 refund in fed taxes (itemizing for 2021). In January 2022 I pay off the mortgage (no pre-payment penalty)

The risks. I cannot sell my existing house and I have a 4.25% mortgage. Other risks I’m missing?
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Quirkz
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Re: Should I take Mortgage with Higher Rate?

Post by Quirkz »

1. Do you already itemize, and are you already beyond the basic exemptions? If you don't, that deduction isn't worth anything to you.

2. Second edit: Wait, I don't think I was reading right. You're asking if $4,500 in savings - $2,500 in fees + $500 in tax recover = +$2,500 to you is worth the risk of temporarily having higher interest rates? It's a weird quirk, but it sounds like it might actually be a win. (I misread because I was expecting the more typical "spend $2,500 to save $500" logic that usually comes with this analysis, which is not a win. I hadn't factored in the closing cost savings.)

Edited to add: I once bought a second house expecting to sell quickly, and had 12 hellish months before that plan worked out. I'm extremely gunshy about that, even though I also know markets are significantly different these days. You're probably okay unless you live in an odd market, but could you handle 6 months of two payments if deals fell through?
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Rob54keep
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Re: Should I take Mortgage with Higher Rate?

Post by Rob54keep »

First house is paid for. Thus the only liabilities is upkeep and taxes/HOA. Yes the higher interest mortgage would save me $4500+$500 = $5000 (minus th $2500 in interest, which I would deduct in 2021). Yes I plan on itemizing in 2021 as I do lump charitable contributions every other year via a DAF.

I have never done anything like this so its good to talk and seek other opinions.
presto987
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Re: Should I take Mortgage with Higher Rate?

Post by presto987 »

If you're planning to pay off the mortgage in a short timeframe, it generally makes sense to take the higher interest rate in exchange for lower closing costs. There are plenty of examples of people doing this in the refinance thread. When I bought my house, I could have had a 2.5% ARM but opted for 2.625% in order to get more lender credit. I am now refinancing and am happy to increase my rate to 3% or even more if I can collect the additional lender credit, because I am not planning to be in the house for more than a year from now.

The only thing that is surprising about your case is that 3% to 4.25% is a big rate increase for $4500. Is your loan amount somewhere in the $100-150k range? If so, that would explain it.
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Rob54keep
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Re: Should I take Mortgage with Higher Rate?

Post by Rob54keep »

Thanks for the input, I'll check the refinance threads. Loan amount is around $300k. Closing credit will add in landscaping costs after move-in.
kaudrey
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Re: Should I take Mortgage with Higher Rate?

Post by kaudrey »

We are in the middle of doing exactly this. Closed on a house last week, and our current house is going on the market next week. Our interest rate is 3.5%; with the lowest closing costs we could get. We plan to pay it off as soon as well sell our house.
exigent
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Re: Should I take Mortgage with Higher Rate?

Post by exigent »

Rob54keep wrote: Sun Oct 18, 2020 5:43 pm I am in the process of selling my existing house and buying a new house. The timing on this combination is obviously important. My goal is to sell my existing home (good market and house paid for) and use the proceeds to pay for the new house (thus no debt). In theory and with the right conditions/buyers it should work.

However as a backup plan, I am already qualified for a mortgage. If this occurs I would retain the mortgage for 2021 because it will align with my federal tax strategy for 2021 (no state tax). I could reduce my closing costs (by $4500) by taking a 4.25% instead of a 3% mortgage but have $2500 more in interest for 2021. However this additional interest would result in additional $500 refund in fed taxes (itemizing for 2021). In January 2022 I pay off the mortgage (no pre-payment penalty)

The risks. I cannot sell my existing house and I have a 4.25% mortgage. Other risks I’m missing?
Why not save the $4500 and kill the mortgage asap instead of keeping it for the year? If the transactions go off without a hitch, you'd save $4500 while incurring minimal additional interest costs. Sure, though are deductible, but that savings is only a fraction of the added cost. Or am I missing something?

Yes, I realize that there is a risk that you will get stuck with it. I'm just questioning the wisdom of deciding to keep the mortgage for a year for tax purposes.
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Rob54keep
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Re: Should I take Mortgage with Higher Rate?

Post by Rob54keep »

I had to check my projected 2021 fed taxes. It looks like I would still itemize in 2021 even without the mortgage interest. I believe you are correct but I'll have to see how everything plays out as time progresses. The key would be to minimize the closing costs as much as possible. Thanks for the insights.
humblecoder
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Re: Should I take Mortgage with Higher Rate?

Post by humblecoder »

exigent wrote: Mon Oct 19, 2020 3:50 pm
Why not save the $4500 and kill the mortgage asap instead of keeping it for the year? If the transactions go off without a hitch, you'd save $4500 while incurring minimal additional interest costs. Sure, though are deductible, but that savings is only a fraction of the added cost. Or am I missing something?

Yes, I realize that there is a risk that you will get stuck with it. I'm just questioning the wisdom of deciding to keep the mortgage for a year for tax purposes.
When I read the original post, I had the same thought. Why not pay off the mortgage as soon as you sell the house, as opposed to keeping it for all of 2021? Paying $2500 in interest to get a $500 deduction doesn't make sense to me. If you pay the mortgage off as soon as you can, you'll not only save the $4500 on closing costs but also the $2500 on interest. Win-win!

I do agree with your concept of taking out a higher rate mortgage in order to minimize closing costs in your case, since you don't plan to hold the mortgage for long. That part makes perfect sense.
Goal33
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Re: Should I take Mortgage with Higher Rate?

Post by Goal33 »

I don't get it. Why won't your house sell? Take the higher rate and sell the house? If it doesn't sell, you're asking too much. Lower the price. It will sell.
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Rob54keep
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Re: Should I take Mortgage with Higher Rate?

Post by Rob54keep »

It's not that it won't sell, it's the timing of the sell of the house with the completion & closing of the new house. Hopefully the stars will align and no mortgage will involved. However if I have to move forward with a mortgage, I will reduce closing costs by taking a higher interest mortgage. Once the current house sells, I pay off the mortgage.
fittan
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Re: Should I take Mortgage with Higher Rate?

Post by fittan »

Rob54keep wrote: Mon Oct 19, 2020 6:42 pm It's not that it won't sell, it's the timing of the sell of the house with the completion & closing of the new house. Hopefully the stars will align and no mortgage will involved. However if I have to move forward with a mortgage, I will reduce closing costs by taking a higher interest mortgage. Once the current house sells, I pay off the mortgage.
That's the way to go. Since you will pay off mortgage soon, the interest rate is really irrelevant. Just make sure you don't pay any upfront, closing cost or point, etc. In a nutshell you're using the bank to give you a bridge loan for like 2 months.
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