Is a mortgage a useful stepping stone when trading one house for another?
April 20, 2012 2:22 PM   Subscribe

Should I consider a mortgage when I want to sell my paid-off house and buy a new one, outright?

We would like to sell our house, which we have paid-off, and buy a new home (for slightly less than we get for this one) in a new town. My wife wants to take out a mortgage to buy the 2nd house (budget based on a conservative estimate of what this one is worth), and then worry about selling our current home. I want zero risk, and do not want to give a dime to the financial companies if I can avoid it. I would like to hear arguments on both sides. I am open to the idea that my lemonade-stand understanding of economics is overly simplistic, and mortgages can be useful tools in times like these. At the same time, I fear she is not being cautious enough about the possibility of this home not selling, and is wanting to gamble with our home.
posted by mantid to Work & Money (7 answers total)
We would like to sell our house, which we have paid-off, and buy a new home (for slightly less than we get for this one) in a new town.

Have you thought through the logistics of leaving your first home when it's sold, shopping for a new home, and putting a bid on the new home, going through the inspection and closing process, and then moving to the new home? How many thousands of dollars in rent are you budgeting for the in-between time?
posted by deanc at 2:31 PM on April 20, 2012

Don't forget the possibility of renting out the first house for a while if it doesn't sell in the current market.
posted by emilyw at 2:37 PM on April 20, 2012 [1 favorite]

You should investigate the tax write offs for having a mortgage vs not. It might be beneficial to have one depending on your situation.

Alternatively you could wait until your current place is under contract and negotiate a long closing or rent back and then immediately start looking. It's not zero risk, but will give you an idea of how easy to sell your place is.

Also the risk here is driven massively by the housing market where you are. There are some parts of the country where you would be insane to buy before selling your old place. Also being a cash buyer could put you in a very good position to buy.
posted by whoaali at 2:53 PM on April 20, 2012

Do you have the cash or other resources to put a down payment on a new house, without the proceeds from the sale of your current house? I too would prefer zero risk, but failing that I would feel better with a larger down payment/smaller mortgage than a minimal down payment/larger mortgage.

Building on emilyw's suggestion above, could you arrange it so you don't put in a firm offer on a new house until you'd lined up (and perhaps vetted) renters for your current one?
posted by homelystar at 2:57 PM on April 20, 2012

Have you considered a contingent sale? You list your home, it sells -- contingent on you purchasing a new home within 60 days or whatever. If you don't buy a new home, your current home sale falls through. It makes your home less attractive to buyers, so probably lowers the price a bit, but might fulfill both of your needs.
posted by Eyebrows McGee at 3:00 PM on April 20, 2012 [4 favorites]

You know, we just pondered some of these issues about whether to buy an investment property with cash or a mortgage. After we ran the numbers in our case, cash was a better proposition. And let me tell you something... paying with cash meant for an incredibly easy and cheap closing. We were able to close in about a week, all completely electronically (we live out of town), and our closing costs totaled $710 (not including the home inspection). Much of pro-mortgage advice, especially in this time with super low interest rates, usually contained the words "conventional wisdom" with regards to the return on investment of available cash vs having it "tied up" in a house. We decided that conventional wisdom no longer applies in this market.
posted by kimdog at 3:20 PM on April 20, 2012 [4 favorites]

First: the mortgage interest deduction should generally only factor in to a buying v. renting analysis, not a mortgage v. cash analysis. The deduction can make buying relatively less expensive than renting, but a mortgage is *always* more expensive than cash.

Second, the logistical issues here are not to be underestimated. Unless you can buy your next house with cash on hand, you're going to need to close on your current home before you get a dime out of it. If nothing else, having a mortgage for a few months can help with temporary liquidity. You can always pay it off when your current home sells.

Third, notwithstanding point one, having the mortgage means you have fewer assets tied up in your home. If your mortgage is sufficiently cheap, you might be able to actually make money by taking the capital in your current home and investing it. Municipal bonds are probably ideal, because in addition to lowering your effective mortgage rate with the mortgage interest deduction, you'd be benefiting from the tax-free status of most municipal bonds. Given that mortgage rates are hilariously cheap right now while there are still muni bonds going for 5%, if you play your cards right you could wind up netting a few points a year on the deal.

But fourth, you *really* gotta crunch the numbers before you try that. As others have indicated, paying on cash can reduce or eliminate certain not-insignificant closing costs. If you save $3,000 or whatever in costs by paying cash, that changes the calculus.

All in all, I'd say your best bet is to just get the mortgage and pay it off right away. This will cost you some money, but it will likely make your transition a lot easier. You have to decide how much you're willing to pay for that convenience.
posted by valkyryn at 6:14 AM on April 21, 2012 [1 favorite]

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