Pay? Save! Pay! Save?

January 2, 2017 9:04 AM

My wife and I own a condo that is shrinking in size with every leap our daughter makes. We're hoping/planning to buy a house this fall. Between now and then, are we better off using any extra cash to pay down our condo mortgage, figuring we'll get it back when we sell the place, or socking it away until we're ready to buy the house? (We're very lucky to have no other debts.)

As an aside, if you thought Trump was likely to send the economy into a 2008-style crater, would that influence your answer?

posted by chimpsonfilm to Work & Money (17 answers total)

Can you rent out your condo or is that not allowed by your HOA? Are you in a very tight housing market? If the economy goes south, how likely are you to keep your jobs?
posted by amanda at 9:10 AM on January 2, 2017

Response by poster: We're allowed to rent out the condo, but we'll be depending on the sale proceeds to form the bulk of our down payment.
posted by chimpsonfilm at 9:12 AM on January 2, 2017

figuring we'll get it back when we sell the place = that seems like a gamble, depending on your market. Cash is the safer bet!
posted by ThePinkSuperhero at 9:13 AM on January 2, 2017 [16 favorites]

As an aside, if you thought Trump was likely to send the economy into a 2008-style crater, would that influence your answer?

If you really expect that, sell the condo ASAP while the market is high, rent until the housing market craters, and then buy a house at the bottom.
posted by Blue Jello Elf at 9:18 AM on January 2, 2017 [10 favorites]

I'd sock it away (somewhere safe, with a bit of extra kick, like a money market account, or a CD).

Paying down the mortgage feels like you'll get it back later when you sell (IOW, saving), but that all depends on what happens to real estate prices in your area and mortgage interest rates broadly with a Trump economy. Regardless what happens with the RE market, you'll be moving your savings into a not very liquid savings account -- your condo -- and you can't access it until the condo sells. Finally, if your condo rises in value this year you'll reap the rewards whether you shrunk your mortgage debt with your savings or not. Better to keep the cash outside of the condo.
posted by notyou at 9:19 AM on January 2, 2017 [14 favorites]

Real estate is typically for longer term investments. Since you're talking months and not years here, unless you're currently playing some insane interest rate on your condo's mortgage, keep the cash. If you want, invest in in something very short term.
posted by cgg at 9:27 AM on January 2, 2017 [2 favorites]

Best answer: The interest you'd be saving by paying down your current mortgage is undoubtedly at a higher rate than you'd earn by putting the money into a CD. Plus, as what you owe on the condo decreases, an increasingly larger portion of your payment will be applied toward principal. If you're early in your mortgage, this admittedly doesn't make as much difference as it would if you were several years in. And if you'll need the proceeds from selling the condo to make the house down payment, it won't really matter that you have what could have been savings tied up in the condo since you won't be able to own both at the same time.
posted by DrGail at 9:28 AM on January 2, 2017 [2 favorites]

Best answer: Without a doubt, cash. If nothing else, more cash = better interest rate / avoiding pmi on the new mortgage.

Banks don't count illiquid equity in another property in your down payment, even if your mental math uses it. And you don't want to buy a house, then sell the condo, then refinance, because transaction costs, and because interest rates are rising.
posted by Dashy at 10:14 AM on January 2, 2017

This totally depends on the rest of your financial picture. If you have plenty in savings to cover any repairs required to sell the condo, any assessment that might occur before you sell, any work you want done on the new house, all the money you'll need for closing both properties (including down payment), and any other surprises life brings then go ahead and put it towards mortgage. Otherwise, the flexibility of having it in savings is probably more valuable than any benefit you'll get from applying it to the existing mortgage.
posted by jshort at 10:18 AM on January 2, 2017 [4 favorites]

Start by calculating how money you would theoretically gain by paying down the mortgage. (9 months of interest on the incremental savings less the value of the tax deduction on the mortgage interest). Compare that to the after tax value of the interest (if any) of a conservative savings of the same amount. My guess is that the number you get is relatively small.

On the other hand, when you apply for a new mortgage, assuming that you haven't yet completed the sale of the condo, money in the bank probably counts for more towards your credit worthiness for a new loan than the assumed equity in the condo. Furthermore, if the sale of the condo doesn't go as planned and you need a bridge loan then you will definitely want the extra money in the bank. Then add in the flexibility of having extra cash to cover other kinds of surprise expenses and I think (but don't know for sure for you) that keeping in the bank will be the better option.
posted by metahawk at 1:27 PM on January 2, 2017

Agreeing with DrGail. paying down the mortgage saves the most money. The projected sale price of the condo doesn't enter into it.
posted by SemiSalt at 1:48 PM on January 2, 2017

The problem generally with a condo is that if the economy stalls or goes south you may have other people in your building who will want to sell at the same time and then you could be competing on price alone in order to move your asset which can mean lower sale price than you want all the way down to a loss. I feel like an asset like a condo can be more of a liability than other real estate property so I'd be inclined to save cash. If you really can't decide, why not split the difference? Have you already maxed out available retirement vehicles?
posted by amanda at 3:58 PM on January 2, 2017 [1 favorite]

DrGail's advice only makes sense over several years; the extra value of liquidity to you is worth the loss in interest.

Liquidity = higher down payment = lower or no PMI and lower interest rate.
Liquidity = more options.
Liquidity = emergency funds.
posted by Capri at 4:32 PM on January 2, 2017 [3 favorites]

Best answer: A lot of the answers about the uncertainty of getting your money back here seem outrageously wrong to me. People seem to be making a bizarre leap from "housing prices are uncertain" to "therefore you can't count on getting your money back" without actually thinking it through. It is true that there's some real uncertainty in the price you are going to get for your condo, but what is not uncertain at all is that if you put an extra $1,000 towards your mortgage today, when you sell the condo you will get $1,000 (plus the interest that would have accrued on that $1,000) more back than you would have otherwise. Or to put it another way, owing $1,000 less to the bank makes you $1,000 richer whether your house sells for a tenth or a hundred times what you bought it for. The only situations that would prevent this are also situations (an underwater mortgage, some personal financial catastrophe) where your whole plan would be infeasible.

No one can really give you the answer to this without detailed knowledge of your financial situation, but I suspect DrGail is right as far as the numbers go. If your goal is to maximize your safe return on investment, assuming no catastrophes strike, then you're best off directing as much of your saving toward paying down the mortgage as possible, because the only investments that will return a higher interest rate than you're paying on your mortgage carry an unacceptable level of risk.

But the catch is that "assuming no catastrophes strike". Savings in the form of paying down debt is not very liquid. So ask yourself:

Will I need this money for transaction costs for the house swap (including all the expenses associated with moving and possibly including repairs or renovations to both the old and new places)?

Will I need this money for other expenses? Do I need this money in my rainy day fund in case I lose my job, or get deathly ill, or some other financial crisis happens? Do I have a buffer of 3-6 months of living expenses in case any of those things happen?

As for your question about a 2008-level economic crisis, I think the main thing you would need to worry about is if the housing market where you are collapsed to the point where you were underwater on your mortgage (i.e. you owed more than the market value of your condo) in which case you'd be stuck either living in the condo and paying down the mortgage until it was paid off, or walking away and losing any money that you had put in.
posted by firechicago at 4:56 PM on January 2, 2017 [6 favorites]

Best answer: It completely doesn't matter except for some small interest rate differentials.

Let's say you have two assets right now:
Bank Account $100
Condo worth $200k

and one liability
Condo mortgage $100k.

between now and the sale of the condo you're going to have $500 extra in cash.

If you put the money in the bank, in a year you're going to sell the condo and have (market price of condo-100k in condo mortgage) PLUS $100 in bank PLUS $500 extra you put in bank. Let's call market price of condo $300k, so you have $200k from condo proceeds plus $600 ($100 you started with in the bank plus the $500 you deposited). So you have 200,600 to invest in the new place.

If you put the money toward the mortgage, in a year you're going to have (market price of condo - 99,500 in mortgage debt (since you retired $500 in debt) plus the $100 you had in the bank. Again assuming you sell for $300k, you have 200,500 in sale proceeds plus the $100 you originally had for a total of 200,600 available for investment in new place.

There are some (slight) interest advantages depending on assumed deposit rates, tax benefits to mortgage debt, etc, but they're de minimus with regards to this decision. Do whatever the hell you want with the cash, try to find a good realtor for the sale and the purchase, and go from there. The use of intermediate cash flows is of tertiary importance at best.
posted by limagringo at 6:43 PM on January 2, 2017 [1 favorite]

I think you also have to consider how your behavior may change in each scenario. For example, if you use the money to pay down your mortgage, will you be more inclined to accept a lowball offer on the condo, figuring "we'll still get money back at closing"? If so - keep the cash. Or maybe you're the type who feels cash burning a hole in your pocket and you'd rather put it towards debt so you have no option of spending it on stuff you don't need.

Are you in a non-recourse state, meaning if the worst happens and you have to let the bank foreclose, they can't go after your other assets for any deficiency? If so - keep the cash.

You're talking about less than a year, so you aren't going to save very much interest in that time. I think these other factors are much more important.
posted by mama casserole at 7:00 AM on January 3, 2017 [1 favorite]

One factor to consider is that buying and selling real estate comes with costs. Many of them can be rolled up into your new mortgage, but not all of them. You may need earnest money to go with your offer on the house. You may need cash on hand when you eventually list your current place to spruce it up or stage it. You'll need moving expenses. You'll likely have some initial repairs and expenses of acquiring things that you need for a house (garden equipment, etc) that you don't need in a condo. So, although putting the money into the mortgage is likely to make the most sense in terms of overall cash savings, having liquidity might actually be more important.
posted by jacquilynne at 5:24 PM on January 7, 2017