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Paid off mortgage -- how would new house purchase financing work?
March 9, 2014 7:23 PM   Subscribe

Me and my SO completely paid off our mortgage a couple years ago. So, we have full equity. That's great, we're happy w/the situation. Now, if for whatever reason we decide to uproot and move to an entirely new city and/or state, how would the financing work?

For the sake of argument, let's say that we find a buyer who will pay us pretty much what we paid for the house. If we sell for that amount, we get the full equity amount to put towards the new house (minus some fees, I'm guessing), correct? If we sell it for, say, $10K more than we paid, do we get to put that amount towards a new house as well? If a house we decide to buy is pretty much the same price as the one we sold, would using the equity to buy it outright be considered equivalent to a cash deal (assuming we had enough cash on hand to cover the difference)?
posted by anonymous to Home & Garden (8 answers total)
 
You could do whatever you want with the proceeds; it's your money. The buyer's bank would just wire the money into your account and you're done. You could then use that to buy a new house, save it, whatever.
posted by jpe at 7:27 PM on March 9 [2 favorites]


At closing, when you sell your house, you receive the difference between the sale price and your outstanding mortgage plus your closing costs. You don't have a mortgage, so you will get sale price - closing costs.

This is your money to do what you like with. Buy a house, buy a boat, put it all on black. The only potential issue is one of timing. If you want to use the cash from the sale towards a new purchase, you need to either close the sale of your home before closing the purchase of the other home, or get short term financing to cover the gap.
posted by payoto at 7:29 PM on March 9 [4 favorites]


Congrats!

I owned a mortgage-free house that I sold last year. Basically I had a realtor who handled it for me (this was a good idea for $REASONS) and at the closing I basically got a big check minus what I owed her and what I owed the lawyer and whoever else was getting a chunk of money from the sale (I paid some property tax, don't know what else). They basically handled the transaction and made sure I paid everyone that was part of it before I got paid. But then, yeah, it's just money in the bank. And if you sell the house for more than you paid then that is your money also. Be mindful of whatever the tax situation is. Depending on how long you have lived in your house you may owe taxes on various things including money you made on the sale of your house; check with your state tax agency.

In most cases, people will not take a house as equity to buy another house with. You could possibly do that but it would be unusual.

Folks will tell you that if you decide to buy another house the smart path is to put a chunk down and then keep some money for rainy day expenses and not have it all locked up in the house. Mortgage rates are pretty low and you could probably do better to invest some of the money than investing it in a house in a market that's not too hopping, unless you live somewhere where the market is hopping. But yeah it's your choice to basically do what you want with it.
posted by jessamyn at 7:29 PM on March 9 [3 favorites]


I'm not quite sure where the equity comes in; for the purpose of your typical mortgage, you either have cash in the bank or not. If you have enough cash to buy a new house upright, you're generally in a better negotiating position than someone who has to get financing, but if you are getting a loan, your bank wants to see that you a) have enough money to put down; and b) have enough income to handle your mortgage payments.
posted by snickerdoodle at 7:30 PM on March 9


If you sell your current house first, then buy the new house, you would get all of the money from the first sale as a check you can put directly into your bank account (or the person managing the closing will directly deposit it to your account.

If you are buying and selling at the same time, the person who handles the escrow will collect the money for the person buying your house and use it to pay the person the selling you the new house. If the stars are all aligned this can happen more or less at the same time. If the new house is less, you will get your extra money in your bank account. If the new house is more, you will have to make arrangements to cover the difference. In terms of the person selling the house to you, if you want to advantage of a "cash" offer, you need to have already sold your old house. A signed, firm contract that passed all the contingencies is good but a little risky if your buyer falls through.
posted by metahawk at 7:56 PM on March 9


Bridge loans are pretty simple and they're what you'd might want to use in this case if you have a timing difference between purchase and sale.
posted by the young rope-rider at 8:17 PM on March 9 [1 favorite]


Don't forget about the tax implications. You won't really have an issue unless your profit from the house sale exceeds $250,000 but it's something to be aware of.

http://www.kiplinger.com/article/taxes/T054-C000-S001-tax-planning-for-selling-your-home.html
posted by intermod at 8:25 PM on March 9 [3 favorites]


If you don't get the timing of the sale and buy lined up exactly, thats why rent-backs and bridge loans were invented.

You will need to sell the house first for it to be considered cash. Cash deals are a huge advantage if you are in a super-hot market, but otherwise an offer stating 50% down and 3-5% over asking is pretty darn good anywhere else too. Then you get to keep some money liquid for repairs, safety net, paying other debt, investment products with possibly higher returns, etc.

You'll need to keep in mind your age, housing needs in the future, and when you plan to retire. Any plans for kids/more kids? Losing income (semi-retire/stay at home parent)? Starting a business? In a lot of circumstances it makes more sense to buy an equivalent-priced house with a mortgage and keep some money liquid, or buy a cheaper house and netting the difference.

There are lots of tax implications of not putting profits from a sale of your primary residence into a new residence within a time period. If you're selling for what you purchased it for, you aren't making a profit.

There's also an argument to be made for becoming a landlord, assuming lots of things like you've got a downpayment for a new place, you have any interest in doing ongoing maintenance on two houses or paying for a management company, you've got a good rental market, etc. But you've got a situation where old house rent could pay the mortgage for new house.
posted by fontophilic at 6:15 AM on March 10


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