My SO and I bought a house together one year ago for 375k. We put 20% down and have put in about 10k so far of prepayments (in addition to regular monthly mortgage). My thinking up until this point was to pay as much in prepayment as we can to build equity and cut down on interest. But now I’m starting to question that…
We love the house but we have long commutes and are a bit further from our friends and family than we would like. A house came on the market in our dream spot, for 360k. I called our lender and he ran our numbers and said we aren’t approved because our debt to income ratio is too high. We’d either need to sell our current house first or show we have 180k in liquid savings (we do not). I asked about HELOC – he said we don’t have enough equity yet (we bought at the height of the housing shortage in our area and probably overplayed by about 20k).
We’re going to stay put for now, but this makes me wonder whether it’s smarter to prioritize liquid savings or prepayments? (With the purpose of being able to wait for the right house to come up for sale before selling our current one.) Our mortgage is 5.5%, my HYSA is currently at 3%.
Other info in case it’s useful:
95k in liquid savings between both of us (including emergency fund)
Combined income is about 140k/yr
We both utilize 401k match and max out Roth IRA
Our only debt is my SO’s student loans which are deferred
We’re 39 and 41, No kids
EDIT: Adding a bit more context. It’s not that we want out NOW, but want to be able to stay out and purchase when the right home shows up. Say 5 years from now, would it have been better to prioritize liquid savings, prepayment, or something else?
Prioritize prepayment vs liquid savings?
byu/Distinct-Raise-8915 inpersonalfinance
Posted by Distinct-Raise-8915
3 Comments
Liquid savings seem more valuable in your situation since prepaying locked up cash you could’ve used actually jump on that dream house.
You just don’t qualify to purchase a “second” home, you will need to sell yours first.
1. List your home and put an offer on the new home with it being contingent on you selling yours – if it’s accepted, you schedule a same day close on both homes.
2. Sell your home, go rent, while you look for your new home.
3. For what you are wanting to do, exploring HELOC or any type of line of credit will NOT be beneficial, it will just further your DTI gap
If you know you want out of your home, increase your savings more than paying down your current mortgage IMO.
I hope you/SO are *legally* married.
But I’ll set that aside for a moment…
> this makes me wonder whether it’s smarter to prioritize liquid savings or prepayments?
Depends on what your priority is.
If you want a different house on a timeframe of “now-ish,” then you need to prioritize the allocation towards a down payment. Or work on selling the current house so you can raise the funds to buy the new house. Or accept that your offers are going to have a contingency clause which makes your offer relatively weaker depending on the market.