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Conference nyoss1::market_investing

Title:Market Investing
Moderator:2155::michaud
Created:Thu Jan 23 1992
Last Modified:Thu Jun 05 1997
Last Successful Update:Fri Jun 06 1997
Number of topics:1060
Total number of notes:10477

1049.0. "Buying new house before selling old" by PCBUOA::BAYJ (Jim, Portables) Fri Jan 24 1997 16:06

    I think this is an appropriate conference for this question, because
    the financial calculations seem pretty daunting, at least to me.
    
    I think I've just discovered what they mean by "creative financing"
    when they talk about purchasing a home.  A common scenario when buying
    a home is to transfer all assets at once, typically by executing a P&S
    agreement containing a contingincy based on being able to sell a
    property that is already owned.  For a variety of reasons, I'd like to
    go a different route.  
    
    Here's what I'd really like to do:  buy a new home, move in gradually
    and fix up the old place over several months, then at my leisure, sell
    my old home, and have the monthly payment of the new mortgage reduced
    as if I had applied the money received from my first home to the
    principle when I bought the new home.  I my be cynical, but I don't
    think I'll be able to work such a deal with the bank.
    
    So I started considering how to do this on my own.  Let me offer an
    example scenario that might help clarify...
    
    Original home is worth $100,000 (hypothetically), and I still owe
    $50,000.  New home sells for $200,000.  I purchase the new home
    (probably with some token down payment), then six months later, I sell
    my first home for its market value.  I now have a WICKED big mortgage
    on the second home, and $50,000 cash burning a hole in my pocket.
    
    Since the bank dosen't think much of refinancing after six months, how
    do I leverage reducing my mortgage using this $50K?
    
    My thinking is that I could divide the $50K into appropriate sized
    chunks, and invest them in vehicles with terms such that the monies
    will earn interest, but become liquid over time as needed.  I will then
    use the monies to supplement my normal income so that they reduce my
    mortgage payments.  
    
    My first thought was to spread it out over the life of the mortgage
    (15-30 years), but it then occurred to me that I might even adjust the
    payout over a different time period, like a 10 year schedule, if I
    don't plan to be in the new home after 10 years.  In this way, my
    $1,500 mortgage would be effectively reduced by as much as half,
    depending on how quickly I tapped the reserve.
    
    After a year or so, refinancing might make sense, so I could then
    "simplify" things considerably if it seems wise.
    
    Now, I know at least one ramification is that I'll pay taxes on the
    interest earned by my "escrow" account.  But I'm wondering if this type
    of thing makes sense, or if I'm just asking for trouble?  If I can earn
    in interest approximately what I would pay in interest on the mortgage,
    would this be a sensible thing to do?
    
    If you were in a similar situation, where you wanted to defer selling
    your house, but wanted to re-invest the proceeds into your new/current
    home, how would you do it?  How do banks react to this sort of thing?
    
    jeb
    
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1049.1GEMGRP::WEISSMANFri Jan 24 1997 16:547
assuming that there's not prepayment penalty in your mortgage, you could just
make an additional principal payment of the $50,000 as soon as your receive it -
this doesn't require any refinancing of the mortgage.  I believe in this case
the bank will simply reduce the length of your mortgage rather than the monthly
payment but this might be negotiable. One issue to consider is the tax
implications.  If you had a capital gain on the house you are selling, you have
a limited period of time to roll it into a new house and defer the gain. 
1049.2GEMGRP::WEISSMANFri Jan 24 1997 17:014
one other issue is whether you'll be able to qualify for the mortgage on the new
house without first selling the old house - will you be able to make a
sufficient down payment and is your income sufficient to cover the 2 mortgage
payments each month.
1049.3PADC::KOLLINGKarenFri Jan 24 1997 18:045
    Wouldn't it be simpler to fix up the old house first?  As to the
    mortgage, mine allows me to pay up to 20% of the original mortgage
    amount any quarter without penalty;  your mileage may differ, of
    course.
    
1049.4bridge mortgage?DECCXL::WIBECANThat's the way it is, in Engineering!Fri Jan 24 1997 19:037
Many people are unable to sell their old home prior to purchase of the new
home, and they have to move anyway.  What some do is get something called a
"bridge mortgage", usually with an unfavorable interest rate, to help them pay
for the second house without selling the first one.  Maybe this is what you
are looking for?

						Brian
1049.5Xref2155::michaudJeff Michaud - ObjectBrokerFri Jan 24 1997 20:002
    20  GLDOA::LAETZ         24-JAN-1992     8  Paying off Mortgage
							- Pros and Cons
1049.6ALFSS2::BEKELE_DWhen indoubt THINK!Fri Jan 24 1997 20:183
    ...and don't forget the connection between 20% down payment and PMI.
    
    
1049.7DECCXL::OUELLETTEFri Jan 24 1997 21:003
Nor forget the TWO property tax bills, electric bills, water bills, oil
bills...  If you need to sit on it for a number of months, an unused
house gets very expensive.
1049.8And check with your insurance companyTLE::TALCOTTMon Jan 27 1997 09:328
Ours dictates that you have one primary residence and one vacation home, on
which the bill for full coverage is *much* higher since as a vacation place
it'll be unoccupied most of the time. Getting full coverage on the 2nd home
could be done but was going to cost big bucks.  If we had moved, the company
would have retained full coverage on the old home without a higher rate for only
30 days.

			Trace-who-bought-before-selling-in-1995
1049.9PCBUOA::BAYJJim, PortablesMon Jan 27 1997 20:2566
    Thanks for all the information.  
    
    I guess my real interest here is ensuring low monthly payments.  Though
    my confidence in the economy isn't low, I have come to feel that the
    best route is to keep my monthly payments low, and keep my assets
    diversified.  
    
    For example, one of the most important stipulations I had for my
    mortgage was that I be able to pre-pay up to the full outstanding
    balance with no penalties.  I routinely make extra payments as finances
    allow, but at any time I can drop back to a very affordable mortgage. 
    That way I have the flexibility to pay off quickly, or fall-back and
    recoup if the situation warrants.  I bought at the trough, so I'm not
    being decimated by high interest payments (nor do I get much tax
    advantage, since my interest payments are so low).
    
    However, putting a huge lump down on a large mortgage wouldn't help me. 
    Essentially it would tie up a large portion of my assets in a single,
    non-liquid place.  As I said in .0, what I'd really like to do is
    refinance within 3-6 months.  I'd be willing to make big payments for a
    few months if I felt that those payments would drop quickly in the near
    future.  Making a lump sum might make me feel less indebted, but
    wouldn't change my cash flow at all.  The goal is to buy myself some
    time for repairs, but not sacrifice my low monthly mortgage payment.
    
    And, as I mentioned in my scenario, I can do it "on paper", by simply
    financing my mortgage payment out of a carefully staged series of, say
    CDs, so that I continue to earn 5-7% on the money "in escrow".  But
    from a cash flow point of view, I'd essentially pay the mortgage out of
    a sort've special account, and not impact my everyday finances.
    
    At least one disadvantage I can think of is more of a credit-worthiness
    issue.  Obviously, despite the fact that I think of the invested money
    as being in escrow against the mortgage, the bank would still see me as
    being mortgaged to the hilt.  As a previous entry mentioned, at any
    time (if the bank allows) I could drop in a lump sum to reduce my debt,
    but I just wouldn't do that unless it somehow inproved my cashflow,
    like if I refinanced my home, but for a lower principle amount.
    
    But I was wondering about other ramifications.  Someone mentioned that
    if I have a capital gain, and don't roll the money back into my new
    primary residence, that I will then have to pay taxes on that -
    definitely bad.  Perhaps sufficiently bad that I have all the
    information I need.
    
    But these are the types of things I'm interested in.  I don't like the
    idea of sitting on that chunk of money.  I'm not a high-finance kind of
    guy, and I prefer a fairly simple investment picture.  Can anyone think
    of any other gotchas that this approach might contain?
    
    Re: last few
    
    Not qualifying for a second mortgage is a good point.  On the other
    hand, my current home is a very rentable property, which has always
    been my backup strategy.  I'm convinced I could easily rent it at a
    profit, which should calm the fears of any banker.
    
    The dual payments might be rough in the short term.  I'd have to
    consider this one carefully, but again, a tenant-at-will might resolve
    things till I could find a buyer.
    
    I'll defininitely look into the "bridge mortgage".  That might indeed
    be what I need.
    
    jeb
    
1049.10What does the first mortage say?SUBSYS::CARLETONA paradigm shift without a clutchTue Jan 28 1997 12:4718
    > Not qualifying for a second mortgage is a good point.  On the other
    > hand, my current home is a very rentable property, which has always
    > been my backup strategy.  I'm convinced I could easily rent it at a
    > profit, which should calm the fears of any banker.
    
    The first mortage holder on your existing house may not like the idea 
    either.  You would be turning a mortage on a primary residence into a 
    mortage on an investment property.  The banker may have wanted a higher
    interest rate or larger down payment for an investment property and may
    have put words in the mortage that can require you to refinance if
    you want to do this conversion.
    
    If the goal of keeping both houses is to allow you to fix up the old
    one, will you be able to find a renter who would be willing to live
    there while the fix-up is in progress, when you don't want to be living
    in the house yourself?
    
                          
1049.112155::michaudJeff Michaud - ObjectBrokerTue Jan 28 1997 13:5521
> The first mortage holder on your existing house may not like the idea 
> either.  You would be turning a mortage on a primary residence into a 
> mortage on an investment property.  The banker may have wanted a higher
> interest rate or larger down payment for an investment property and may
> have put words in the mortage that can require you to refinance if
> you want to do this conversion.

	I don't think it's standard practice to have such language
	put in the mortgage agreement.

	For example, 5-6 years ago I bought a 2-family house and
	got a residential mortgage because I would be living in one
	of the units (owner-occupied).  At the closing I went through
	the papers before I signed them line by line, and specifically
	asked the banks lawyers about this.  The only requirement on
	me is that I must initially occupy the property, and do so for
	6 months or whatever it was.  I could of then moved elsewhere
	and rented out both units.  I would only be in violation if
	I never occupied the property.

	But like .10 says, check your mortgage to be sure.
1049.12PCBUOA::BAYJJim, PortablesTue Jan 28 1997 14:3218
    >The banker may have wanted a higher interest rate or larger down
    >payment for an investment property and may have put words in the
    >mortage that can require you to refinance if you want to do this
    >conversion.
    
    Hmmmm!  Very good information.  I'll check my mortgage.
    
    >will you be able to find a renter who would be willing to live there
    >while the fix-up is in progress, when you don't want to be living in
    >the house yourself?
    
    Actually, its a timing thing.  We know of a place we'd like to buy, but
    it will probably be off the market by the time we do the fixups we need
    to get top dollar for the old place.  Basically, the fixups will cost
    relatively little, but will dramatically increase the property value.
    
    jeb
    
1049.13HYDRA::SCHAFERMark Schafer, SPE MROTue Jan 28 1997 17:154
    and check insurance.  If I remember correctly, I had to switch the
    homeowners policy.
    
    Mark
1049.14Extend term of mortgageNEWVAX::BUCHMANRosalie's UncleFri Jan 31 1997 18:3022
    Dual mortgage payments are definitely a killer. When I got married, my
    wife and I both owned houses; with the help of an in-family loan, we
    went ahead and bought our new house, while putting the old ones on the
    market. Turned out to be tougher to sell than we expected, and for a
    few harrowing months, we had THREE mortgage payments to manage! This is
    a situation where time really does mean money: you have less leverage
    to command a high price for your property when you're overly eager to
    unload it. Plus you leave yourself vulnerable if economic factors
    dry up the housing market, even temporarily.
    
    Do you think you can get returns on your cash surplus equal to the
    interest rate of your mortgage? That seems counter-intuitive, unless
    you're willing to incur some risk on your investment.
    
    What term were you thinking of? If you were considering a 15 or 20 year
    mortgage, one approach would be to take a 30-year mortgage instead.
    This will get you the lower monthly payment that you want. Later, when
    you get the cash from your old house, you can throw most of it into 
    the principal and effectively shorten the term by 8 or 10 years.
    
    Good luck!
    			Jim
1049.15Some other ideers (as they 'round heaaa)SOLVIT::CARLTONMon Feb 10 1997 19:2034
    Jay, some other ideas from one who's been there...
    
    	- Sell your property NOW and rent it back from the new owner for
    the period of time you estimate you'll need to fix up your new place. 
    You'll lock in your sale (and price) and can use the interest on your
    proceeds to help pay the short-term rent.  You are the easiest and best
    tenant to find for your own property.
    
    	- Purchase an option for the property you want to buy.  Say, 3 to
    6 months that is deductible in whole or in part from the purchase
    price.  Meanwhile, try to sell your property.  Worst case, you can't
    sell (or choose not to because you can't get the price you want) and
    you're out the option cost only.  No double mortgages and financial
    jeopardy due to double housing costs.
    
    	- Purchase the new house with a contingency in the contract that
    you sell your old house.  I did this once and managed to get 6 months
    "rent" for my old property from the seller of the new property in lieu
    of having it sold by the closing of my new property purchase.  This
    kept me floating for the time I needed to sell my old property (almost
    7 months) while I was paying for 2 properties simultaneously (and our
    income dropped in half due to my wife going on parental LOA)
    
    	- Get very aggressive about selling your current property NOW!  Any
    property can be moved very quickly at an aggressive price.  I might
    cost you a few thousand dollars, but my save you that much or more (and
    much sleep/health) in the long run.  Whether you use a broker (I
    would/did) or not, get good comparable market/sales info. and put your
    property at the head of the pack; priced competitively.  WHen I did
    this, I got immediate results (after lackluster results for many
    months).  Given you're not on a toxic waste site, the question is how
    much you can sell it for, not if you can sell it...
    
    Good luck, Jay!
1049.16IRA waiver of cap gains applies if new house > oldMKOTS3::BREENSans DouteWed Feb 12 1997 19:0113
    Unless it's changed and I don't believe it has the capital gains
    stipulation for IRS purposes is that you have to buy a new house for
    more than the old house sells for minus investment in the old house. In
    your case I think you can continue to waive the capital gains using
    that exception.
    
    Have you considered the arithmetic of a refinancing of the old house
    and putting the cash into the new house minus your repairs?  Using your
    50k figure that may take care of 25k and then using an initial longer
    term mortgage combined with early principal payment you'd come out even
    on monthly payments and life of loan.
    
    Problem would be getting the credit in this case.
1049.172155::michaudJeff Michaud - ObjectBrokerWed Feb 12 1997 21:397
> Unless it's changed and I don't believe it has the capital gains
> stipulation for IRS purposes is that you have to buy a new house for
> more than the old house sells for minus investment in the old house.
                                          ^^^^^^^^^^

	and fwiw, "repairs" aren't usually considered improvements
	when you go to adjust the basis.