“Move Up Buyers” – Making the largest down payment will keep your expenses the lowest right? Wrong!January 21, 2019

A move-up buyer is just as the name describes – someone who owns their home currently and wants to sell it to buy something bigger or better.  Many move-up buyers plan to use all of the proceeds from the sale of their current home towards the down payment on their new home.  The goal is to borrow less and therefore have a smaller mortgage payment.

But, there are a couple issues with that strategy:

  1. A mortgage is the only good kind of debt out there.
  2. Your mortgage is only one component of your total expenses each month.
  3. Unless your salary is increasing, you need to keep your total outflow of cash similar to what it is now.

Let’s address each one.

Car Loan = pretty bad debt.

Student Loans = bad debt.

Credit Cards = really bad debt.

A mortgage is considered a good debt, because the interest is tax deductible.  Plus, it’s an investment that earns you returns in the form of amortization (equity gained by making your payment) and appreciation (equity gained by values in your neighborhood increasing).  So, depending on what your total debt picture looks like, borrowing the least amount in terms of your mortgage might not be the best goal.

Estimate your net profit from selling your home.  Then look at your debts.

This is where I get promoted from loan officer to mortgage advisor.  Let’s look at how much money you will have to work with after selling your home.  Then we’ll play with putting all of that down on the new house and see how much the mortgage payment plus all of your other debts add up to.

Next, let’s try putting less down on the new house.  We pay off your auto loan and two credit cards instead.  Ok, add up all the monthly bills again.  Is the number less?  If yes, this could be our strategy.

The key is that we need to look down the line – what do the upcoming years hold for you?  Will your income be increasing and will you have other opportunities to pay off your debts?  If so, we can make a larger down payment now.  If not, we need to get creative with this big opportunity we have now.  It’s all about researching the best possible strategy to accomplish all of your goals – not just your housing expense.