Your Mortgage: Hold on to your money

Mike Miles

By Mike Miles

When people sell and then buy a home, they tend to get on auto-pilot regarding the net profits they made from the sale. What I mean is this … people who sell a home frequently assume the best thing to do is to roll that money into the down payment of a new home. It’s a sensible decision, but is it always the right thing to do? Maybe. Maybe not.

Here are three things to consider that may make you want to hold on to your money from the sale of a home:

  • Use the money to pay off/down unsecured and/or personal debt.

What is the benefit of using sale proceeds to reduce the amount you need to borrow for a new mortgage loan if you have thousands of dollars in other debt? Every $1,000 financed is equal to about $6 worth of a monthly mortgage payment (on a 30-year note). So, if you rolled $40,000 of sale proceeds into your new house (and financed $40,000 less than you needed) you would save about $240 per month. However, if you have $40,000 in consumer debt (credit cards, car loans, student loans … etc.) the payments associated with those will far exceed the $240 mortgage payment reduction. What’s better for you? Having a lower mortgage payment but still having significant consumer debt or having little to no consumer debt but with a slightly higher mortgage payment?

  • Use the money to update/upgrade your new home.

Most buyers buy existing homes versus new construction. That means there is a significant chance that buyers would want to change something about the house … carpet, paint color, new patio … etc. Wouldn’t it be nice to make the great new home you purchased a perfect home? Saving your proceeds can fund these projects and could also improve the value of the asset you just purchased. What’s better for you? Having equity in the home without much money leftover to fund upgrades or having a perfect home without much equity?

  • Use the money for fun and the future.

This idea probably won’t be very popular but I’m going to say it anyway. Interest rates are really low right now, making home ownership pretty affordable (overall). Many of us focus so much of our attention on the future and most of that focus deals with building net worth/value to help us when we retire. Why not do both? Use the funds to focus on the now … splurge and buy something for yourself/family, fund an exotic vacation or throw an epic party with all your friends, neighbors, and family. Use the rest to focus on the future … pay down long-term debt or invest the stock market.

The purpose of this post isn’t to minimize the significance of using sale proceeds as the down payment of a new home. That may be the smartest move you can make. However, don’t let it be an auto-pilot decision. Take some time and think about your options.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268