Real Estate / Equity Question

[throwittoblythe]

A question for the real estate and personal finance folks on the board. Barring a plunge in the real estate and/or job market (which we will ignore for the purposes of this question), we plan to sell our house next spring. We will be moving from a higher priced market (Minneapolis metro) to a lower priced market (outskirts of Des Moines metro).

Based upon current comps, we may have as much as 50% equity to put down on the future Iowa home. I'm looking for some input and advice on the following thoughts:

1) If the Iowa home needs some repairs, am I right in that we could liquidate some of that equity to use for that purpose? Say, we put 35% down and take 15% in cash for repairs/updates? From what I read, there aren't any tax implications here (we are below the $250k threshold)?

2) We may be able to afford a 15 year mortgage on the new place, given our equity position. Is this a worthwhile thing to do? Or, would it be better to go with the 30 year mortgage and just make extra payments. (Note: my wife and I are disciplined spenders/savers, so we would actually pay extra, not just say it). What are the pros/cons here, aside from lower interest rate and faster payoff?

 

[SCNCY]

Have you explored only putting 20% down and putting the rest of your cash in to other investments? If your interested in the best use of your money, this may be the way to go.

You could always put the 50% down and use a HELOC if you need to make repairs, but then your paying interest on your own equity/money in a way.

Also, if your worried about taxes, explore doing a 1031 exchange. Essentially all capital gains from your property wouldn't be taxed, but all of the capital gains from your property sale would need to be out into your new property purchase.

 

[DeereClone]

Shouldn't be tax issues on a personal residence if you are under the threshold.

I would set aside what you think you will need in repairs/updates so you can just write a check for those items. Then I would put the rest of the equity in the house.

If your 15 year note on the new place will be a similar payment to your 30 in MSP I would probably just do that, unless you have a strong desire to invest the difference in payment somewhere else (small business of your own, investment property, etc).

 

[spierceisu]

I would set aside the money needed for improvements and pay those in cash. If you can swing a 15 year mortgage I would do that. I have always heard that people say put it on a 30 and pay extra on it. The problem with doing that is most people think they will do that and don't end up doing it because of the discipline required. A 15 year mortgage also has lower interest rate.

 

[BCClone]

So many options which is nice. I would take 10, or 15 like you mentioned,percent and hold for a cushion. I would not lengthen what I have now for term. Which means if you are 10 years in, nothing more than a 20 year loan. 15 is best of you can. I like to invest but you will get tired of that house payment.

 

[isufbcurt]

Have you explored only putting 20% down and putting the rest of your cash in to other investments? If your interested in the best use of your money, this may be the way to go.

You could always put the 50% down and use a HELOC if you need to make repairs, but then your paying interest on your own equity/money in a way.

Also, if your worried about taxes, explore doing a 1031 exchange. Essentially all capital gains from your property wouldn't be taxed, but all of the capital gains from your property sale would need to be out into your new property purchase.

If it's the sale of the main home then there should be no tax implications if they satisfy the criteria.

 

[throwittoblythe]

If it's the sale of the main home then there should be no tax implications if they satisfy the criteria.

Thanks. This confirms what I've read. This is our main home, we've lived in this place for all of the last 5 years, and we're well under $250k in what we would potentially liquidate.

 

[CascadeClone]

First, congrats on getting out of MSP. My sister lives in Eden Prairie, and while it was a serious upgrade over STL, she still has snow in her yard well into May and less hours of daylight. Barf.

1. Yes you can do that. If the sale of your house nets you say $100k in equity that will come to you in cash and go into your account. When you buy a home later, you can set aside $X of that for repairs/upgrades to the new place. The balance you can use for your down payment (make sure to have 20% minimum to avoid PMI, but sounds like that shouldn't be a problem).

2. If you have zero fear of your 15 year payment (e.g. you are borrowing a small amount and the P&I is like $200 a month), then just do that. If you have any concern about it being too high, then do a 30 year, but make payments at the 15 year amount. Gives you 80% of the savings of a 15 year, but 100% of the "safety" of the 30 year.

I ran numbers on $100k loan and a 0.5% rate difference between 15 and 30 year. The "30 like 15" costs around $6k more than a straight 15. The straight 30 is about $24k higher than the straight 15.

Good luck and welcome back!

 

[isufbcurt]

Thanks. This confirms what I've read. This is our main home, we've lived in this place for all of the last 5 years, and we're well under $250k in what we would potentially liquidate.

Yeah you should be fine. Also, remember the 250K is profit not sales price for a single person. For a married couple it is 500K. I am sure it happens but I have never had a client make 250K/500K in profit on the sale of their house.

 

[throwittoblythe]

First, congrats on getting out of MSP. My sister lives in Eden Prairie, and while it was a serious upgrade over STL, she still has snow in her yard well into May and less hours of daylight. Barf.

Good luck and welcome back!

Thanks! This is great stuff. We live not far from Eden Prairie, actually. While we really have enjoyed Minnesota, we've been gone from Iowa for 12 years. It's time to come home. You know what we miss the most? Thunderstorms. It just doesn't get hot enough here to have those really great thunderstorms like you get in Iowa. While our chances for tornadoes are almost nil, which is nice, we don't get much more than a hefty rumble here and there.

 

[Cyclonepride]

Definitely go for the 15 year if you can comfortably swing it.

 

[isufbcurt]

Disappointed that no one has called the OP a failure in life because he can't buy the new house in cash like most CFers do.

 

[3TrueFans]

Disappointed that no one has called the OP a failure in life because he can't buy the new house in cash like most CFers do.

I assumed it was implied.

 

[Sousaclone]

Disappointed that no one has called the OP a failure in life because he can't buy the new house in cash like most CFers do.

They are probably all still busy making their fortune doing day trading with their incredible stock market expertise. They'll be around once the markets close for the day.

 

[KnappShack]

They are probably all still busy making their fortune doing day trading with their incredible stock market expertise. They'll be around once the markets close for the day.

The market always goes up

 

[oldman]

I'm doing a 15 year right now and still paying extra toward the principle.

 

[BACyclone]

I'll chime in with others..I'm not an expert, just experienced:

1) I wouldn't recommend putting more than ~20-25% down unless you are angling for getting a payment you need. In part, because in my opinion "house debt is good debt" if there is such a thing. Eliminate all other debts, then do house debt last. At least a house will generally appreciate.
2) Make sure you get a home insurance quote and figure that into your payment calc
3) If you are buying a previously owned home, assume the taxes are gonna go way up when they re-price your assessed value. Check taxes on comp houses that sold recently, not just the one you are looking to buy, to get a better feel for the real cost.
4) Paying off the home in 15 years is certainly preferable, but if you are planning renovations right away, I echo others and would prefer to finance 30 years and pay cash for the renovations first. Then when you are done, you have one clean mortgage and probably save money overall.

 

[AuH2O]

Echo what most say. You can get a 15 year for 2.5%. I would probably just Do 20% down. It’s not only a matter of investment, which long term you will beat that rate.

It’s also a matter of avoiding other higher priced loans, including having cash for emergencies. Pretty much anything else you might borrow money for will be at a higher rate than your mortgage.

 

[pulse]

You aren’t limited to 15 or 30, they have 20 years too.

 

[spierceisu]

You aren’t limited to 15 or 30, they have 20 years too.

I have a 20 year (started 3 years ago) because I didn't want to stretch myself that thin. I would go as short of a term as you are comfortable with while being aggressive in payoff. I would not like to start at a 30 year again if possible. I really don't want to have a house payment when I retire. I would like to have it paid off a ways before that if possible.