Pre-pay mortgage if you are going to sell?

[ktmarvels]

I know the general pros/cons about prepaying a mortgage. However, I wonder how the equation changes when you know you will be selling the house soon in the future (about 5 years or so).

I am curious about this question outside of our specific situation (things change all the time...), but to help guide the discussion: DH and I have two houses, ours and a rental with interest rates at 4.75% and 5.75% respectively. Our rental currently recoups our costs. The only other debt we have are my school loans 6.8% which we'll be starting to pay next month when I get my first paycheck. Other than that, most of our extra income has been going to savings account (1%), but we are looking to start investing outside of our retirement accounts.

Thanks!

[bjl584]

It may be better for you just to pay the minimum if you are planning on selling. Take whatever extra you were going to put toward the loan and save/invest it. That is a guaranteed way to get more out of your money. It could be argued that you will recoup the money that you used to pay extra on the note when you sell in the form of equity, but:

1) you don't know how long it will be on the market.

2) you don't know what you will be able to sell it for.

[disneysteve]

I would not prepay if I was planning to sell. Plus, in your situation, I wouldn't prepay no matter what. I'd be dealing with the non-mortgage debt first, building an emergency fund and saving for retirement.

Once you are debt-free except the house, have a 6-month EF and are saving at least 15% for retirement and money for other needs, then you can think about prepaying the mortgage.

[mcfroggin]

I would not prepay if I was planning to sell. Plus, in your situation, I wouldn't prepay no matter what. I'd be dealing with the non-mortgage debt first, building an emergency fund and saving for retirement.

Once you are debt-free except the house, have a 6-month EF and are saving at least 15% for retirement and money for other needs, then you can think about prepaying the mortgage.

Agreed. The 6.8% interest is your highest. Why not start there?

[Hector]

As others mentioned, I would not pre-pay mortgage and would focus on attacking student loan at 6.8%.

[mcfroggin]

I'm curious about this. I've seen a number of times on these forums and elsewhere that people recommend not prepaying if you're planning on selling. But why? How is prepaying on a house you're planning on selling any different from a house you're planning on staying in?

I get that OP should handle other debts first. Let's say that isn't the case, and someone meets all of DisneySteve's criteria. Then what? Does it make a difference whether you're selling or not? You're still paying down debt.

There would be more factors to consider like your current interest rate. My interest rate is currently 2.625%. If I can invest my money and return more than my interest rate, I'm better off not paying down my loan early.

Paying off your home loan early is becoming outdated advice. If your interest rate is high, you may want to refinance while rates are good. Back in the history, banks could repossess your home until you paid it off in full - even if you made the monthly payments. Therefore everyone was paying of the home loan first. This is obviously no longer the case.

Tax deductions - you can deduct your interest payments on your taxes. Another reason to not pay off the home first.

Liquidity - pre-paying doesn't get you bonus points with the bank. If you hit a rough patch and can't pay your mortgage, you are in jeopardy of losing the house.

Now if your investing skill is poor, you may just want to pay down your house note.

[maat55]

Thanks mcfroggin.

Interest rates, tax deductions (assuming you itemize - I don't have a mortgage, but in the calculations I've done I'm better off taking the standard deduction anyway so this isn't applicable in my case at least, and I bet it's the same for many others), and liquidity certainly are strong arguments for not prepaying.

To quote Steve again:



I'm thinking this may come more from the liquidity perspective, and particularly for dealing with the costs associated with moving.

I think Steve was refering to the fact that the OP had other criteria to meet first with his additional funds.

[disneysteve]

I get that OP should handle other debts first. Let's say that isn't the case, and someone meets all of DisneySteve's criteria. Then what? Does it make a difference whether you're selling or not? You're still paying down debt.

I do think it makes a difference. If you are selling a home and buying another, there are a lot of small, or not so small, expenses that can crop up in the process. I'd rather keep the cash on hand in case I need it. Yes, I could save some money in interest by prepaying the existing mortgage but I don't think it is worth it. What if the home inspection turns up some repairs that you need to make before selling? What if the realtor recommends some staging things to help sell the place? What if you need to put belongings in storage for a time?

[disneysteve]

Excellent, thanks Steve. So it all comes down to having cash on hand for the transaction costs.

Of course, it also depends on your timeline. If you are planning to sell in one year, that may be different than if you are planning to sell in 5 years. In that case, I might go along with prepaying at least for the first 3-4 years of that period and then just piling up cash toward the end.