Author Topic: Need advice on home buying scenario  (Read 2468 times)

svtt

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Need advice on home buying scenario
« on: December 12, 2016, 09:31:53 AM »
We own a house worth $400k that is paid off. We put in a contract on a new house at $570k that will be complete in June 2017. We are planning to take out a mortgage of $415k or $455(jumbo) depending on which rate is better and put in the difference as down payment, on the new house . We have been qualified for 3.75% for a 15 yr , 415k mortgage . But we are worried that by the time we are at the closing stage, the interest rates would have increased. We are planning to rent out our current house.

We are thinking of a strategy that will help us keep our rates low and beneficial for us in the long run. So far, this is what we have.

Do a cash out refinancing for the current home and take out 80% (320K) of the value. No idea about the rate right now. Hold on to the cash until closing  and use it along with the planned down payment amount as the new down payment (320K + 155k/115K) and get a mortgage for the remaining amount. Or if the interest rates are low at that time, just put 155k/115k as planned and invest the rest.

Do you think this is a good plan? Or are there any other better strategies you guys can think of?

onlykelsey

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Re: Need advice on home buying scenario
« Reply #1 on: December 12, 2016, 11:17:29 AM »
The biggest problem I see is that you lose a lot (or all) of the mortgage interest deduction, if that's relevant to you.

svtt

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Re: Need advice on home buying scenario
« Reply #2 on: December 12, 2016, 11:27:28 AM »
Why will I lose on mortgage interest deduction? Can't I take it on the one I refinanced?

onlykelsey

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Re: Need advice on home buying scenario
« Reply #3 on: December 12, 2016, 11:30:11 AM »
Why will I lose on mortgage interest deduction? Can't I take it on the one I refinanced?

I'm sure there's someone more qualified than me around to answer this question, but I believe the home mortgage interest deduction is only for your residence. https://www.irs.gov/publications/p936/ar02.html#en_US_2015_publink1000229900  Scroll down to "Qualified Home".  If you're keeping both houses, you can't rent either house out full time and still get the deduction.

VoteCthulu

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Re: Need advice on home buying scenario
« Reply #4 on: December 12, 2016, 11:34:21 AM »
Are you planning to keep the current $400k house, sell it, or rent it?

Knapptyme

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Re: Need advice on home buying scenario
« Reply #5 on: December 12, 2016, 11:44:33 AM »
I may be doing my taxes incorrectly, but I'm pretty sure you can deduct your mortgage interest on your rental income Schedule E as an expense during the year. Or, if you create a business, whether sole proprietor or otherwise, you could deduct it on Schedule C as an expense.

To me, this created a loop hole of sorts as I mortgaged my main home to pay for the rental home in cash (for a better interest rate on the loan) and can deduct the mortgage interest on either Schedule A or Schedule E.

I would also second onlykelsey in that there is someone more qualified than I to tell you about the tax implications, but from my experience, if you fear rising interest rates by June 2017, refinance now and let that cash reserve grow somehow in the interim. Then, as you said, run the numbers again in June and see what's best. I will add that getting a new mortgage might be more challenging and may come with a higher interest rate if you are carrying the 80% loan from your current home.

talltexan

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Re: Need advice on home buying scenario
« Reply #6 on: December 12, 2016, 12:33:38 PM »
I think Knappytime has this one right: being able to carry the debt-load on your income is going to swing things more than whatever increase in rates might occur in this short time frame.

onlykelsey

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Re: Need advice on home buying scenario
« Reply #7 on: December 12, 2016, 12:34:57 PM »
I think Knappytime has this one right: being able to carry the debt-load on your income is going to swing things more than whatever increase in rates might occur in this short time frame.

Yeah, that's a good point.  Do you know how your lender(s) calculate debt-to-income ratio? 

svtt

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Re: Need advice on home buying scenario
« Reply #8 on: December 12, 2016, 02:13:39 PM »
Thanks everyone for your responses.

I'm not sure how they are calculating the debt ratio. But I'm assuming if we put the proceeds from the first house plus the down payment., our final debt will be the same. Basically we are shifting the mortgage from the second house to the first. Only if we plan to invest it we could run into issues.       

svtt

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Re: Need advice on home buying scenario
« Reply #9 on: December 12, 2016, 02:37:08 PM »
I may be doing my taxes incorrectly, but I'm pretty sure you can deduct your mortgage interest on your rental income Schedule E as an expense during the year. Or, if you create a business, whether sole proprietor or otherwise, you could deduct it on Schedule C as an expense.

To me, this created a loop hole of sorts as I mortgaged my main home to pay for the rental home in cash (for a better interest rate on the loan) and can deduct the mortgage interest on either Schedule A or Schedule E.

I would also second onlykelsey in that there is someone more qualified than I to tell you about the tax implications, but from my experience, if you fear rising interest rates by June 2017, refinance now and let that cash reserve grow somehow in the interim. Then, as you said, run the numbers again in June and see what's best. I will add that getting a new mortgage might be more challenging and may come with a higher interest rate if you are carrying the 80% loan from your current home.

My case will be opposite to yours. We will be having a mortgage on the rental home and not the primary home. Can we still do what you are doing?

matchewed

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Re: Need advice on home buying scenario
« Reply #10 on: December 12, 2016, 06:55:17 PM »
Maybe more of a real estate section of the forum question?

waltworks

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Re: Need advice on home buying scenario
« Reply #11 on: December 12, 2016, 07:59:41 PM »
How much is the $400k house going to rent for? It better be a LOT, or you're making a big mistake holding onto it and unnecessarily complicating the new house purchase in the bargain.

-W

svtt

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Re: Need advice on home buying scenario
« Reply #12 on: December 13, 2016, 10:56:53 AM »
The house will rent for 2200 - 2500. But property taces are 7500 and insurance is 2500.

waltworks

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Re: Need advice on home buying scenario
« Reply #13 on: December 13, 2016, 11:03:45 AM »
Yeah, that's a money loser of a rental. Even without including maintenance, vacancy, or management costs, you're only making $20k/year on a $400k investment. Include even minimal amounts for those and you're in the 2-3% return range at best.

I'd sell it even if I *didn't* need the money for another place.

-W