It is not a straightforward decision: People plan to sell their houses sooner or later and purchase a new one a couple of years from now. They have extra funds coming in every month. Should they spend that extra money on their lending firms with every payment to whittle down the principal balance of their housing loan before it is time to sell their properties? Or does it make a lot of sense to save these funds so people can use them for more significant down payments (DPs) or to cover closing costs on their next housing debentures?
Not surprisingly, the answer to these questions depends on various factors: How much funds do individuals already have in their bank accounts? So they owe more on their housing debenture compared to what their house is worth? Are property owner’s upsizing or downsizing with their next residence? There are a lot of factors people need to consider. And sometimes, emotions can be a hindrance or can get in the way. Individuals get pretty emotional over their properties. And sometimes, these emotions become very important to them instead of facing actual financial facts.
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Liquidity is very important
According to real estate experts, it almost never makes a lot of sense for property owners who are prepared to buy and sell to pay the principal balance of mortgages instead of saving funds. That is because purchasers usually need huge amounts of money during the property purchasing process, even if they are selling the house at the same time.
There is a good chance that people might expect to make a good amount of profit on their sales, earnings that they can invest in down payments (DPs), and closing costs on new mortgages. But the timing usually does not work out: How can people cover their closing costs or DP if they have not yet received the money from their property sale? There are a lot of needs for liquidity during the sale process.
Even if people are going for a low-down-payment, low-cost housing loan, individuals will never know what they are going to need funds for. Maybe property owners will need repairs on their new house. Perhaps the closing costs and fees are going to be a lot higher compared to what they thought.
There are other costs like moving fees to worry about. We never hear individuals say that purchasing a house was less expensive compared to what they thought. And if they have money saved to help them cover these costs that can make a lot of difference.
Experts also said that today’s low housing loan rates mean that it makes a lot of sense to save money than to pay off a housing debenture. If the person’s home loan has an IR of 3% or 4%, and that home loan interest is tax-deductible, paying the debenture’s balance might not provide them enough financial benefits to make it worth their effort time, and energy.
No equity – whether negative or positive – and buying up?
There are always exceptions. People who lack the equity in their houses – they might owe on their debenture that their property’s current value – or who plan to purchase more expensive and larger houses with their subsequent purchases might do a lot better to pay more on their current housing loan principal balance every month.
These purchasers might want to put down a bigger DP on their next and a more expensive house so that their new housing debenture is not too large. Homeowners who pay down their existing loans can build equity as well as earn more funds during the sale.
They can then put these proceeds into a bigger DP. According to professionals, these owners could choose to save their extra money in savings accounts or other investment platforms. However, the problem is that if these individuals want to sell in two or three years, there is a good chance that they might not have enough time to earn high enough returns on their deposits to make their time worthwhile.
If homeowners are looking at a short-term and the beste forbrukslån option in the market today, even the best of money-market or savings accounts are paying interest rates of less than 1%. Putting the money into this kind of housing loan might provide people with a significant impact.
Tons of equity?
Homeowners who already have a considerable amount of property equity have more flexibility when it comes to the extra cash they are receiving every month. It is especially true for homeowners who have enough home equity to cover closing costs and DPs on their next housing debenture.
And if they have tons of equity and they are downsizing, purchasing a less expensive and smaller house will provide them a lot of options when it comes to extra funds coming in every month. These homeowners need to resist the temptation to pay their housing debentures and instead use their spare cash in other ways.
These “other ways” might mean investing these funds in a savings platform, funds that homeowners can tap to help them furnish their new house sooner or later. Are people maximizing their savings like retirement or personal savings? If not, they can use the extra fund to add more to these savings. Do they need to save for their kid’s college tuition fees? If they are going to have enough home equity, it makes a lot of sense to use the extra fund for other financial needs, not to pay even more on their housing debenture.
In the middle?
What if the homeowner is in the middle? They have home equity, but not too big. They will make some profit on their house sale, but not enough to cover their closing costs or DP on the next house they are purchasing. According to financial professionals, homeowners need to be very cautious: save their extra money in case of emergency instead of sinking them into bigger monthly amortizations.
The reason for this is because they will never know when something in their house will fritz that is pretty expensive. What if the water heater breaks or there is a sudden leak in their plumbing? People will need to fix these things before they can sell the house.
Homeowners need to have their house in its best possible condition. It can be pretty expensive. If they do not have enough savings, something like broken water heaters can cause a lot of financial problems. We can never predict when things will go wrong with houses, even if we are the kind of person who remains very vigilant with maintenance and servicing our property’s expensive appliances.
It feels pretty good to pay more on a mortgage. People understand the feeling of accomplishment that brings to minimizing their debts. But we always get nervous when we do not have a safety net. If we do not have enough money in savings, what will we do if something bad happens before we put our house on the market? Individuals might need to resort to putting these repairs on credit cards with very high-interest rates.