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Author
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Topic: Question about home equity and resale
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Chris Hipp
Phenomenal Film Handler
Posts: 1462
From: Mesquite, Tx (east of Dallas)
Registered: Jul 2003
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posted 09-24-2006 03:49 PM
As some of you know I bought a house last year. My plan is to live there until about 2009-10 and then sell it to buy a new house. I feel that I got the house below value, a few houses near me have sold for $5-10k more than what I paid (am paying) for mine and they are not in as good of shape. Plus, my house is one of only about five on the street with a two car garage.
My question is this, does the amount of equity I have built up in the house make any difference on the resale? Let's say I pay an extra $5k per year on the principal, so in five years I would end up with $25-30k equity and then I sell it for (random number) $20k over what my mortgage is for.
I am confusing myself here, but what I am basically wanting to know is would it be smarter for me to pay extra on the house and build up equity or spend the money on upgrades like a new AC, remodeling the kitchen and bathrooms, new floors, etc? Spending the money on upgrade would most likely increase the resale value, but it is not a guarantee.
I understand when I decide I want to settle down in a house for the long haul the it is smarter to get the principal down to save on interest.
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Barry Floyd
Phenomenal Film Handler
Posts: 1079
From: Lebanon, Tennessee, USA
Registered: Mar 2000
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posted 09-25-2006 09:55 AM
If you do any remodeling and/or upgrading, don't overbuild your neighborhood. If you have a $200k house and add $25k worth of improvements - you would assume you could get that back out of it when you sell. However, if all of the other houses in the neighborhood are selling for $200k - $210k, you're probably gonna get stuck with it.
A good example of that happened in my own neighborhood several years ago. Here in middle Tennessee (Wilson County)- depending on the neighborhood - $150k - 175k would buy you a 15-20 year old 2,100 sq. ft 3 bedroom ranch on 1 acre in an established neighborhood with mature trees in the yard, etc . about 3-4 years ago. That's what we have. Typically every house in our neighborhood fits that description. About 5 years ago, a guy bought the house and lot 4 lots down from ours and tore down the house and rebuilt a beautiful 4 bedroom, 2 story, all brick, 3,500 sq. ft. house with a 3 car detached garage, exposed aggregate driveway, etc. for alomost $250k+. His wife got sick and they went to sell the house. It sat on the market for a year because they were asking $280k for it. The house next to that one sold during that same time period for $152k, we bought ours for $155k, and finally, they ended up selling it for $171k.
Housing market in our area has now gone completely nuts and everything comparable is selling for over $225k.
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Chad Souder
Jedi Master Film Handler
Posts: 962
From: Waterloo, IA, USA
Registered: Feb 2000
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posted 09-26-2006 05:03 PM
Chris -
You are almost always better off paying the principle down as quickly as possible. Be very careful of advice to take the money you would pay real estate down with and invest it, which includes fixing up a place for resale. As a general rule, I don't believe it's a good idea to borrow to invest and not paying down a house so you can instead fix it up is basically the same as borowing from a paid-off house so you can do the same upgrade. I think getting completely debt free first is the safest, smartest approach and then you can build piles of cash to invest. It is a slower course, but lower risk. There are, of course, situations where people have borrowed money, fixed up a place, and resold it for a nice profit, but again, this is a risk and I think it is wiser to pay the place down. Many times you don't get out of it what you put in.
And another thing, don't always assume that house payments are a write-off on taxes. This only applies if you itemize your tax deduction and those itemizations exceed your standard deduction. Check with a tax person to be sure before assuming.
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Martin Brooks
Jedi Master Film Handler
Posts: 900
From: Forest Hills, NY, USA
Registered: May 2002
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posted 09-28-2006 10:03 PM
While it's important to not build negative equity and while it will protect you in a down market to pay down the mortgage (so you don't owe additional money on the house when you sell it), there's nothing wrong with a big mortgage as long as you can afford the monthly payments, especially if you're in a high tax bracket: as someone else posted, the interest on the mortgage is deductible.
So if you have a $200,000 variable mortgage and since interest rates are going up, it averages 9%, you're paying $20K a year. In the early years of the mortgage, it's almost all interest, so you have a $20K deduction. If you're in a combined Fed/State/Local 28% bracket, that will save you $5600 in taxes.
As far as improvements go, most of the already given advice is valid. However, you have to take inflation into account. I spent about $20K on a kitchen about 12 years ago. I don't think I would have gotten an additional $20K if I had sold my place over the past 12 years. However, over those 12 years, the price of an equivalent kitchen has risen to about $40K. So I could easily get $20K or more now incremental because of that kitchen and I've had the use of it for the last 12 years.
In a market where you're sure values are going up, it could even pay to take an interest only mortgage. I did that on the first place I bought because it required almost no closing costs and no paperwork. Although I didn't pay down the mortgage, I knew I would only be living there for a few years. So I paid interest only which was 100% deductible and sold the place for double what I paid four years later. So my ROI was well over 200% over four years (50% per year), far better than anything I've done in the stock market and I got a place to live in the bargain.
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