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Down payment for the next home?
Old 03-16-2012, 01:48 PM   #1
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Down payment for the next home?

Hi everyone - My wife and I purchased our first home two years ago. When we bought it we looked at it as a 5 year house with the intention of moving to a bigger/nicer house. We bought a house that was well within our budget and have also had significant increases in salary over the past two years. This has left us with extra money every month to either pay down the mortgage or save.

I am looking for advice on what to do for the next house and how others have managed the sale and purchase of one house to the next.

I was originally thinking that we would save 20% (approx. $100K) for the next house since our equity would be tied up in the sale of our first house. With our mortgage just below 5% I feel like I am throwing money away keeping everything in cash and not paying down the mortgage.

What have others done in this situation?

Thanks
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Old 03-16-2012, 02:07 PM   #2
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Years ago, we used the proceeds of a Bridge Loan Definition | Investopedia as a down payment on the new place, until our current house had sold.

When the old house was sold (about 6 months later), the proceeds were used to pay off the bridge loan.

During that time, only interest payments were due on the bridge loan, which kept it financially "doable"...

Just remember that this was done many, many years ago. I don't know how it would work out in today's RE market and your ability to sell your current home within a reasonable timeframe.
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Old 03-17-2012, 05:45 AM   #3
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I've been in a similar situation....

We had sizeable bonuses the past two years. We were already maxing out 401k plans and TIRA to Roth conversions, and saving some in After-tax accounts too...so what to do with the money?

We could simply "save" it, but we agreed in the end that paying down the mortgage was the right thing to do. We were at 5 3/8% at the time, on a 15-year fixed. We didn't have quite enough to pay "all" of it off, but we paid a big chunk, and then opened a no-fee HELOC at a different bank. The HELOC served two purposes.

1) Allowed us to pay off the remaining piece of the first mortgage, at a current rate of 3.5% (it is variable, but we are on a schedule to pay that portion off in less than 2 years)

2) Purchase rental properties

That was all done one year ago. Looking back, it was a good decision for us. We're now 1 year from REALLY paying off our primary residence via the HELOC. We also now have 2 rentals, one of which is fully paid for, the other which we owe about $30k on and plan to have paid off in about 3 years or so.

You will lose the tax deduction on paying off the house, but that's ok.

One tip for you, although my next statement is for Indiana...so your state may be different. If you pay off your mortgage completely, you may lose the mortgage exemption on your property taxes. For us, this would have cost us about $250/year. With the HELOC, we're able to maintain that deduction so long as we have a balance. Certainly I won't keep using the HELOC only to get that exemption, but it's one more small factor to consider.

Good luck!

Edit: One other piece of advice. Make sure to keep liquidity somehow. IMO that means a 6-9 month of expenses emergency fund and a good anticipation of any large future expenses (remodel, car, new house, big vacation, more rentals etc.).
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Old 03-20-2012, 10:53 PM   #4
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Quote:
Originally Posted by Finance Dave View Post
Edit: One other piece of advice. Make sure to keep liquidity somehow. IMO that means a 6-9 month of expenses emergency fund and a good anticipation of any large future expenses (remodel, car, new house, big vacation, more rentals etc.).
Good advice! Once you have a solid emergency fund, I would max out Roth IRAs, 401-Ks if you have them, then plug the rest on the house. There is nothing sweeter than no home loan. It is like a weight lifted off your shoulders. You realize you can do things you would not have dreamed before. For us we were also happier in our jobs because we knew we were choosing to work there instead of feeling like we had to. If you are close to retirement especially, having the house paid off is a really good idea.

We were completely debt free for about a year. We ended up with a loan again, but this one is considered an investment since our retirement homes are paid for.

Cass
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Old 03-21-2012, 01:33 AM   #5
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How you approach paying off the house early (or not) is such a personal decision. So, what any of us did may or may not be what you want to do.

That said, my choice was to pay off my house. When I buy the next house, I'll take the proceeds from this house and use it to buy another house. I won't have to be especially concerned about any decrease in the value of my home because the next home would also be decreasing in value. Someone in my position who wants a bigger, nicer house (I don't), could use the entire proceeds of the sale as a down payment.
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